Foreign direct investment: the role of institutional and cultural determinants

Using panel data for 29 source and 65 host countries in the period 1995–2009, we examine the determinants of bilateral FDI stocks, focusing on institutional and cultural factors. The results reveal that institutional and cultural distance is important and that FDI has a predominantly regional aspect. FDI to developing countries is positively affected by better institutions in the host country, while foreign investors prefer to invest in developed countries that are more corrupt and politically unstable compared to home. The results indicate that foreign investors prefer to invest in countries with less diverse societies than their own.     

Democracy in the neighborhood and foreign direct investment

The determinants of foreign direct investment (FDI) have been extensively studied. Even though there is extensive research in the area, most of it is based on analyzing the effects of host country characteristics on FDI flows, and yet there is little research on how neighboring country characteristics play a role in facilitating FDI flows to host countries. This paper analyzes the association between the democracy level in neighboring countries and FDI flows to host countries. Using bilateral FDI flows from the OECD countries, with a large host country sample, we find that countries surrounded by democratic countries attract higher FDI flows. Furthermore, we find evidence that countries that are surrounded by neighboring countries with good institutions tend themselves to have better institutions, experience lower civil conflict, and have higher political stability and hence indirectly attract higher FDI flows. Our findings suggest that if neighboring countries act in such way as to become more democratic, FDI flows to these countries would be higher since not only does improving the quality of democracy attract more FDI inflows, but also being surrounded by neighboring advanced democratic countries will also lead to higher FDI flows to them.     

North–South Integration and the Location of Foreign Direct Investment

We investigate how North–South integration affects the location of foreign direct investment (FDI) between the two regions. The theoretical analysis suggests that integration affects the incentives of partner and nonpartner Northern countries to locate in the South differently and may lead to investment diversion from the Northern partner. We test our propositions using data from the North American Free Trade Agreement (NAFTA), the first major North–South integration scheme. We find that NAFTA partner FDI in Mexico has increased since the inception of NAFTA above what is implied by other determinants of FDI and the global upward trend during this time. Other countries have not increased their use of Mexico as an export platform. We also find no evidence that inward US FDI has been diverted. The results are robust to a number of different model and econometric specifications as well as the skill data used.     

Foreign direct investment and bilateral investment treaties: An international political perspective

This paper investigates the effect of the implementation of bilateral investment treaties (BITs) on the bilateral stocks of foreign direct investment (FDI). We argue that the understanding of how BITs affect FDI requires recognizing that multinational enterprises (MNEs) are not Stateless and that their investment return may well depend on the quality of political relations between the home and host countries. Using bilateral FDI data and event data to measure political interactions between countries, we show that the effect of the entry into force of a BIT crucially depends on the quality of political relations between the signatory countries; it increases FDI more between countries with tense relationships than between friendly countries. We also find evidence that BITs and good domestic institutions are complementary. BITs should therefore be understood as a mechanism for host governments to credibly commit not to expropriate investors in the future.     

Institutional difference and foreign direct investment location choice: Evidence from China

Resting upon an extensive data set on foreign invested enterprises (FIEs) in China, we investigate the role of institutional difference in determining the locational choice of foreign direct investment (FDI). Estimation results using firm-level discrete choice model suggest that FIEs from source countries that are more remote institutionally from the Chinese mainland exhibit a higher degree of sensitivity to regional economic institutions in their choice of FDI location. Furthermore, we find that FIEs coming from countries with better institutions than China are more sensitive to the institutional difference. Interestingly, we find that the deterrent effect of institutional distance on FDI entry is mitigated for FIEs coming from countries with more ethnic Chinese individuals in their overall populations.     

Corporate transparency, cream-skimming and FDI

We develop a simple information-based model of Foreign direct investment (FDI) flows. On the one hand, the relative abundance of “intangible” capital in specialized industries in the source countries, which presumably generates expertise in screening investment projects in the host countries, enhances FDI flows. On the other hand, host-country relative corporate-transparency diminishes the value of this expertise, thereby reducing the flow of FDI. The model also demonstrates that the gains for the host country from FDI [over foreign portfolio investment (FPI)] are reflected in a more efficient size of the stock of domestic capital and its allocation across firms. These gains are shown to depend crucially (and positively) on the degree of competition among FDI investors. We provide also some evidence on the effects of corporate transparency indicators, such as accounting standards, on bilateral FDI flows from a panel of 24 OECD countries over the period of 1981-1998.     

The Effect of Terrorist Incidents on Capital Flows

Previous work has shown that terrorism has significant negative impact on countries' economies. We explore this relationship in more detail. Using an unbalanced panel of more than 160 countries for up to 25 years and the Global Terrorism Database (GTD) we show a decrease in foreign direct investment (FDI) as a consequence of terrorism. We also find evidence that FDI flows are more sensitive to terrorism than either portfolio investments or external debt flows. Finally, we test the hypothesis that terrorism has negative spill‐over effects on FDI flows into neighboring countries and find evidence that cultural, but not geographical, closeness matters.     

Labor Training and Foreign Direct Investment

Evidence shows that most foreign direct investment (FDI) flows from developed to developed countries (North–North) in skilled labor‐intensive industries. This paper builds a model that incorporates labor training into the proximity–concentration tradeoffs to analyze the entry mode of multinationals to a foreign country. Production requires both skilled labor and unskilled labor.. A multinational pursuing FDI needs to provide training to some workers in the host country to equip them with skills that are specific to the production of the firm. Labor training and skill specificity lead to contract friction. It is shown that in skilled labor‐intensive industries, FDI increases along with the economic development level of the host country, whereas in unskilled labor‐intensive industries, the reverse is true. This paper provides a theoretical explanation for the empirical findings on the prevalence of North–North FDI in skilled labor‐industries and North–South FDI in unskilled labor‐intensive industries.     

Unbundling institutional determinants of multinational investments

Previous studies often examined how a broad-based institution affects foreign direct investment (FDI) flows across countries. However, analysis of differential impacts of two or more constituent institutions within a broad-based institution appears to be more useful for policy decision-making. There is a paucity of studies on how constituent institutions within a broad measure of institution affect FDI across countries. Our article constitutes the first attempt in bridging this gap. In this article, we examine the relative effects of property rights institution (PI) and contracting institution (CI) on investment flows. Our results show that PI is much more important than CI in determining the cross-border flows of FDI and affiliate sales. Moreover, PI is found to be more important for FDI than for affiliate sales, indicating that final goods are less of a concern for being expropriated by governments and powerful elites than capital goods. Through unbundling a broad-based institution and examining how the constituent institutions affect investments flows, our article provides practical location decisions for investments in FDI, mergers and acquisitions (M&A) and affiliate sales.     

THE POLITICS OF FDI EXPROPRIATION

I examine the role of political instability and fractionalization as potential explanations for the lack of capital flows from rich countries to poor countries (i.e., the Lucas Paradox). Using panel data from 1984 to 2014, I document that (i) developed countries exhibit larger inflows of foreign direct investment (FDI), (ii) countries subject to high investment risk (IR) receive low FDI inflows, and (iii) IR is higher in fractionalized and politically unstable economies. These findings suggest a negative relationship between political instability and FDI through the IR channel. I inspect the theoretical mechanism using a dynamic political economy model of redistribution, wherein policymakers can expropriate resources from foreign investors. The proceeds are used to finance group‐specific transfers to domestic workers but hinder economic growth by discouraging FDI. I show that the political equilibrium exhibits overexpropriation and underinvestment.     

Interregional Migration of Human Capital and Unemployment Dynamics: Evidence from Italian Provinces

Since the mid‐1990s interregional migration flows in Italy have dramatically increased, especially from the South to the North. These flows are characterized by a strong component of human capital, involving a large number of workers with secondary and tertiary education. Using longitudinal data for the period 2002–2011 at NUTS‐3 territorial level, we document that long‐distance (i.e., South‐North) net migration of high‐skill workers has increased the unemployment at origin and decreased it at destination, thus deepening North–South unemployment disparities. On the other hand, long‐distance net migration of low‐skill workers has had the opposite effect, by lowering the unemployment at origin and raising it at destination. Further evidence also suggests that the diverging effect of high‐skill migration dominates the converging effect of low‐skill migration. Thus, concerns for an ‘internal brain drain’ from Southern regions look not groundless.     

Agglomeration Effects in Foreign Direct Investment and the Pollution Haven Hypothesis

Does environmental regulation impair international competitiveness of pollution-intensive industries to the extent that they relocate to countries with less stringent regulation, turning those countries into “pollution havens”? We test this hypothesis using panel data on outward foreign direct investment (FDI) flows of various industries in the German manufacturing sector and account for several econometric issues that have been ignored in previous studies. Most importantly, we demonstrate that externalities associated with FDI agglomeration can bias estimates away from finding a pollution haven effect if omitted from the analysis. We include the stock of inward FDI as a proxy for agglomeration and employ a GMM estimator to control for endogenous time-varying determinants of FDI flows. Furthermore, we propose a difference estimator based on the least polluting industry to break the possible correlation between environmental regulatory stringency and unobservable attributes of FDI recipients in the cross-section. When accounting for these issues we find robust evidence of a pollution haven effect for the chemical industry.     

Sovereign defaulters: Do international capital markets punish them?

We empirically study whether countries that default on their debt experience a reduction in their capital inflows, as suggested by the literature. Our data contain information on (i) the defaulter countries and their creditors and (ii) bilateral foreign direct investment (FDI) flows. With these we can study how FDI flows are affected by sovereign default by distinguishing between those flows coming from defaulters' creditor countries and others. According to our estimations, this distinction is crucial since the decline of FDI in flows after default is markedly concentrated on those flows originating in defaulters' creditor countries. The decay in FDI flows is higher in the years closer to the default date and for countries that have defaulted more times. We do not find evidence that countries shut their doors to defaulters' investment abroad, which is also a cost of default suggested in the literature.     

Preferential trade agreements and manufactured goods exports: does it matter whom you PTA with?

This article explores two questions. First, do preferential trade agreements (PTAs) affect manufactured goods exports of developing countries? Second, does it matter for developing countries whom they sign the PTAs with? We find that the answer to both questions is yes. Using bilateral manufactured goods exports data from 28 developing countries during 1978–2005; we find that South–South PTAs have a significantly positive effect on manufactured goods exports. In contrast, no such effect is detected in the case of South–North PTAs. We confirmed the robustness of these findings to estimation methodology, sample selection, time period, zero trade flows and multilateral trade resistance.     

A Solution to Two Paradoxes of International Capital Flows

International capital flows from rich to poor countries can be regarded as either too small(the Lucas paradox in a one-sector model)or too large(when compared with the logic of factor price equalization in a two-sector model).To resolve the paradoxes,we introduce a non-neoclassical model which features financial contracts and firm heterogeneity.In our model,free trade in goods does not imply equal returns to capital across countries.In addition,rich patterns of gross capital flows emerge as a function of financial and property rights institutions.A poor country with an inefficient financial system may simultaneously experience an outflow of financial capital but an inflow of FDI,resulting in a small net flow.In comparison,a country with a low capital-to-labor ratio but a high risk of expropriation may experience an outflow of financial capital without a compensating inflow of FDI.     

(NON‐)RESILIENCY OF FOREIGN DIRECT INVESTMENT IN THE UNITED STATES DURING THE 2007–2009 FINANCIAL CRISIS

We study the contraction of foreign direct investment (FDI) flows in the United States during the recent financial crisis and show their unusual non‐resiliency, which depends in part on the global nature of the economic recession, but also on the increases in the cost of financing FDI in the economies in which the flows originate. To formally study the effects of external financial conditions on FDI in the United States, we exploit the three dimensions of a panel of US inward FDI flows organized by recipient US industries, source countries and years for the recorded flows. Changes in the cost of finance in the source countries have little or no effect on total inward flows (the sum of equity, debt and reinvested earnings) over the 2006–2010 period. However, US industries characterized by more financial vulnerability experience statistically significant variations in the debt and equity components of inward FDI flows in response to the changes in the cost of capital that occurred in the source countries during the crisis.     

Assessment of regional trade and virtual water flows in China

The success of China's economic development has left deep marks on resource availability and quality. Some regions in China are relatively poor with regards to water resources. This problem is exacerbated by economic growth. Flourishing trade activities on both domestic and international levels have resulted in significant amounts of water withdrawal and water pollution. Hence the goal of this paper is to evaluate the current inter-regional trade structure and its effects on water consumption and pollution via ‘virtual water flows’. Virtual water is the water embedded in products and used in the whole production chain, and that is traded between regions or exported to other countries. For this assessment of trade flows and effects on water resources, we have developed an extended regional input-output model for eight hydro-economic regions in China to account for virtual water flows between North and South China. The findings show that the current trade structure in China is not very favorable with regards to water resource allocation and efficiency. North China as a water scarce region virtually exports about 5% of its total available freshwater resources while accepting large amounts of wastewater for other regions' consumption. By contrast, South China a region with abundant water resources is virtually importing water from other regions while their imports are creating waste water polluting other regions' hydro-ecosystems.     

Bilateral portfolio dynamics during the global financial crisis

There has been considerable bilateral variation in the pattern of portfolio capital flows during the global financial crisis: for a given destination, investors from different countries adjusted their holdings to different degrees. We show that the size of the initial bilateral holding, geographical distance, common language, the level of trade and common institutional linkages help to explain the pattern of adjustment. These bilateral factors are more important for equities than for bonds and for investors from developing countries than for investors from advanced countries.     

Evolution of FDI flows in the global network: 2003–2012

As one type of international capital flow, FDI maintains its important role in globalization. This article attempts to investigate the evolution of the FDI flows from a network perspective. Based on the bilateral FDI flows data between countries from 2003 to 2012, we construct the global FDI flows network for each year and thus quantify network measures (such as flow volumes and connections); further by analysing the tendency and changes of these network measures during the past 10 years, we delineate the features and dynamics of the FDI flows in the global network. We have the following findings: (a) the flows network changes during and after the crisis, i.e. flow volume fallen down and recovered, and flow connection restructured with more diversity; (b) the global FDI flows network is getting more loosely connected; (c) individual countries vary in different patterns.     

The impact of foreign direct investment on productivity: New evidence for developing countries

We provide new empirical evidence on the relationship between inward foreign direct investment (FDI) and total factor productivity (TFP) growth using cross-country data for 51 developing countries over the period 1984–2010. Our results suggest a weak direct effect of FDI on TFP growth but, after accounting for the roles of human capital and institutions as contingencies in the FDI-TFP growth relationship, we find a robust FDI-induced productivity growth response dependent on these ‘absorptive capacities’. However, the relevance of the human capital contingency effect diminishes when the effect of institutions is also considered, which suggests that improving institutions is relatively more important than human capital development for developing countries to realise productivity gains from FDI.