Relative Trade Preferential Margin and Aid for Trade Allocation

This article investigates the interplay between non-reciprocal trade preferences and Aid for Trade (AfT) by examining the extent to which relative preferential margins (RPM) enjoyed by recipient countries affect AfT flows supplied by donors. The empirical results suggest that the RPM exerts a significant and positive impact on the bilateral AfT inflows that recipient countries enjoy from donors. In addition, when this impact is lower, the higher the recipient countries’ level of economic development. Furthermore, the analysis indicates that the influence of RPM on AfT is dependent on non-AfT (i.e., the aid flows allocated to the non-trade sector) allocated to recipient countries.     

Aid for trade and export diversification in recipient‐countries

The Aid‐for‐Trade (AfT) Initiative was launched by the Members of the World Trade Organization (WTO) with a view to helping developing countries and the least‐developed countries (LDCs) expand their trade. The current paper contributes to the literature on AfT effectiveness by examining how AfT affects recipient‐countries' export product diversification. The analysis has been carried out on a sample of 104 AfT recipient‐countries over the period 2002–2015 and uses the two‐step system generalised methods of moments (GMM) approach. Results show that AfT flows are conducive to export product diversification in recipient‐countries. In addition, the analysis has shown a positive impact of the cumulative AfT flows on the export product diversification path of these countries. These results apply as well to the subsamples of LDCs and other developing countries. One policy implication of these results is that a scale‐up of AfT would help recipient‐countries to diversify their export products baskets and hence facilitate their greater integration into the global trading system.     

Aid for trade and trade policy in recipient countries

ABSTRACT

This article explores the impact of Aid for Trade (AfT) flows on trade policy in 123 recipient countries over the period of 2002 to 2015. It shows empirical evidence that AfT interventions are conducive to trade policy liberalization. These results apply to both the entire sample and to the sub-sample of least developed countries (LDCs). Additionally, the analysis shows that the lower the development level, the higher the positive impact of AfT inflows on recipient countries’ trade policy liberalization, although above the US$ 4,885.40 threshold of real per capita income, AfT inflows exert no significant impact on trade policy.     

Governance and Globalisation

Unlike the large literature on ‘democracy and trade’, there is a much smaller literature on the effect of the level of democracy in a nation on the level of its foreign direct investment (FDI) inflow. These few studies reveal mixed empirical results, and surprisingly only one study has examined bilateral FDI flows. Moreover, few of these studies use multiple governance indicators separating the ‘pluralism’ effect of democratic institutions from the ‘good governance’ effect, there are no studies on democratic institutions’ various effects on the level of FDI relative to trade, and there are no studies of democratic institutions’ various effects on the selection of countries into FDI. We focus on three contributions. First, we examine the simultaneous effects of the World Bank's (six) Worldwide Governance Indicators (WGIs) – which allow separating the effects of pluralism from those of five other good governance measures – on bilateral trade, FDI and FDI relative to trade using state‐of‐the‐art gravity specifications. Second, we find strong evidence that – after accounting for host governments’ effectiveness in various roles of good governance – a higher level of pluralism as measured by the WGIs’ Voice and Accountability Index reduces trade levels, likely by increasing the ‘voice’ of more protectionist less‐skilled workers, but not FDI levels. Moreover, we find qualitatively different effects of other WGIs – such as political stability – on trade versus FDI flows. Third, we account for firm heterogeneity alongside a large number of zeros in bilateral FDI flows using recent advances in gravity modelling. We distinguish between the (country) intensive and extensive margins and show that pluralism affects FDI inflows negatively at the intensive margin, but positively at the extensive margin.     

The Role of Geography in Financial and Economic Integration: A Comparative Analysis of Foreign Direct Investment,Trade and Portfolio Investment Flows

The objective of this paper is to examine the role of geography in explaining the patterns of financial and economic integration among both developed and developing countries. Using a gravity model, we compare North‐North, North‐South and South‐North FDI, trade and portfolio investment flows to examine how geographical factors influence these bilateral flows. The results indicate that the impact of geography variables on FDI and portfolio are similar to their effect on trade. Geography variables have a statistically significant effect both on FDI and portfolio investment, but FDI is more sensitive to distance. We interpret the negative effect of distance as the existence of information costs in financial flows. Also bilateral FDI, trade and portfolio investment flows react to macroeconomic fundamentals in the same way, however, with different degrees of sensitivity. There are significant differences between North‐North and North‐South flows. Our results find support for the argument that most FDI among industrial countries are horizontal, whereas most FDI investment in developing countries is vertical. The fact that the significance of geographical variables on financial flows still remained even after controlling for the macroeconomic fundamentals, is in contrast with the standard capital market model. The results can, however, be reconciled if geographical factors can proxy for information costs, which may in turn explain why country portfolios are still home‐biased. The significant effect of distance on financial flows may also explain how idiosyn cratic shocks are spread (i.e. contagion) to other countries in the same region. Ultimately, the geographical location of a country may determine its economic and financial integration into the world economy.     

A global analysis of factors impacting the intensive and extensive margins of bilateral foreign direct investment

This study investigates determinants of bilateral foreign direct investment (FDI) on both margins, the extensive margin (whether to invest) and the intensive margin (how much to invest), based on the recent structural gravity model for FDI developed by Anderson et al. (Trade and investment in the global economy. National Bureau of Economic Research, Cambridge, MA, 2017). I examine a global data set comprised of 110 countries over 9 years, 2004–12. Apart from conventional gravity variables, the source country's technology capital shows a significant and positive impact on both FDI margins. Bilateral investment treaties play a significant role only in determining the extensive margin. Results on FDI stocks and FDI flows can lead to different conclusions; thus, research should consult both types of data series to find which variables have robust effects. Furthermore, breaking down the sample by country development levels reveals that FDI from less‐developed countries (LDCs) is not affected by many common variables, and thus, there is a need to develop more theories and empirical work to investigate the FDI from LDCs in particular.     

The Impact of Bilateral Free Trade Agreements on Bilateral Foreign Direct Investment among Developed Countries

Previous studies find that a trade treaty positively impacts foreign direct investment (FDI). But does a trade treaty always have positive effects on FDI? What is the effect of bilateral free trade agreement (FTA) on bilateral FDI among developed countries? Based on the Knowledge‐Capital model, I hypothesize that bilateral FTA has negative effects on bilateral FDI in developed–developed country pairs, but positive effects in developed–developing country pairs. To test this hypothesis empirically, I conduct the within estimator, the Difference‐in‐Difference estimator and the Arellano–Bond estimator with panel data of bilateral FTA and outward FDI in 30 OECD countries and 32 non‐OECD countries between 1982 and 2005. The result supports the hypothesis. The existence of bilateral FTA decreases bilateral FDI in the OECD–OECD country pairs but increases bilateral outward FDI in the OECD–non‐OECD country pairs. The finding of negative effects of bilateral FTA on FDI is robust to different country classifications by gross national income (GNI) per capita and secondary school enrolment. Hence, the results are consistent with what Carr et al. (2001) predicts about the effects of trade cost on FDI in developed–developed country pairs and in developed–developing country pairs.     

External Asymmetries in the Euro Area and the Role of Foreign Direct Investment

Soon after the introduction of the common currency, a divide emerged between two groups in the Euro area: one comprised of the North European countries achieving external surpluses and the other of the South European countries with large external deficits. This paper shows that different patterns of foreign direct investment (FDI) inflows across the Euro area countries contributed to this divergence. Our theoretical framework shows that if the economy is relatively capital‐intensive in the production of traded (non‐traded) output, FDI will be channelled in greater proportions to the traded (non‐traded) sector, thus improving (deteriorating) the trade balance. Focusing on ten Euro area countries over the period 1980 to 2009, we establish a positive (negative) long‐run effect of FDI inflows on the trade balance in the North (South). In the North, the positive effect stems from the traded sector FDI inflows that were significantly higher in comparison with the South, both before and after the EMU. In contrast, in the South, the increased FDI inflows in the post‐EMU era were dominated by investments in the non‐traded sector. When industry‐level data are employed, a positive (negative) long‐run effect of manufacturing (non‐manufacturing) FDI inflows on the trade balance in the North (South) is further established.     

Macro Determinants of FDI Inflows to Japan: An Analysis of Source Country Characteristics

This paper examines the source country determinants of FDI into Japan. The paper highlights certain methodological and theoretical weaknesses in the previous literature and offers some explanations for hitherto ambiguous results. Specifically, the paper highlights the importance of panel data analysis, and the identification of fixed effects in the analysis rather than simply pooling the data. Indeed, we argue that many of the results reported elsewhere are a feature of this mis‐specification. To this end, pooled, fixed effects and random effects estimates are compared. The results suggest that FDI into Japan is inversely related to trade flows, such that trade and FDI are substitutes. Moreover, the results also suggest that FDI increases with home country political and economic stability. The paper also shows that previously reported results, regarding the importance of exchange rates, relative borrowing costs and labour costs in explaining FDI flows, are sensitive to the econometric specification and estimation approach. The paper also discusses the importance of these results within a policy context. In recent years Japan has sought to attract FDI, though many firms still complain of barriers to inward investment penetration in Japan. The results show that cultural and geographic distance are only of marginal importance in explaining FDI, and that the results are consistent with the market‐seeking explanation of FDI. As such, the attitude to risk in the source country is strongly related to the size of FDI flows to Japan.     

Foreign Direct Investment in Mexico and Chile

Summary

Increased flows of Foreign Direct Investment (FDI) are a major source of capital for Latin American countries. This paper analyzes the experiences with attracting and the effects of FDI for two nations-Chile and Mexico. Clearly attempts to attract FDI through relaxed restrictions on profit remittances and other reforms have had an impact. However, while Mexico has succeeded in attracting investment to high productivity “greenfield” industries, Chile has seen most FDI go towards low productivity sectors such as mining and agriculture.     

Asymmetric effects of cultural institutes on trade and foreign direct investment

The purpose of a cultural institute is to improve international relations with other countries by promoting language familiarity and cultural awareness. In addition, cultural institutes can provide additional business opportunities that lead to positive economic side effects such as increases in trade and foreign direct investment (FDI). In this study, gravity models were used to analyse the data for the Goethe Institut (Germany), the Cervantes Institute (Spain) and the Confucius Institute (China) to identify any stylised international patterns of the documented economic effects. The study finds significant positive effects on bilateral trade and FDI outflows for all three programmes, along with two important (i) the effects are stronger for non‐advanced economies and (ii) the effects are substantially larger on FDI than on trade. These results suggest that cultural institutes can be an effective policy tool in promoting FDI outflows, with the strongest effect realised when a home country locates its cultural institutes in host countries with developing economies. Importantly, results also suggest that the Chinese government's approach to extend its soft power through rapid expansion of Confucius Institutes worldwide has not been as successful as the efforts by the German Goethe Institut in increasing trade and FDI.     

Trade Protection During the Crisis: Does it Deter Foreign Direct Investment?

This paper looks empirically at the implications that protectionist measures implemented during the current crisis may have had for a country’s ability to attract foreign direct investment. The research utilises data on such measures that are available from Global Trade Alert, combined with bilateral FDI data between OECD countries and a large number of partner countries for 2006 to 2009. This allows us to examine the short‐run effect that protectionist measures may have had on bilateral FDI flows. The verdict from this analysis is clear: a country that implements new protectionist measures may expect that this may result in lower foreign direct investment inflows into the economy. The point estimates from our preferred specifications suggest that, depending on the empirical model, the implementation of a trade protection measure is associated with about 40 to 80 per cent lower FDI inflows. Trade protection does not appear to have any implications for the country’s FDI outflows, however. The negative effect on FDI inflows does not appear to be due to direct investment measures but rather to actions related to intellectual property rights protection and other more trade‐related measures.     

Assessing the Benefits to Developing Countries of Liberalisation in Services Trade

This paper discusses the potential impacts of services trade liberalisation on developing countries and reviews existing quantitative studies. Its purpose is to distill themes from current literature rather than to advocate specific policy changes. The picture emerging is one of valiant attempts to quantify in the presence of formidable analytical and data problems yielding only a clouded image of likely impacts on trade, consumption, production and welfare emerging to the point that the policy implications of results are not always clear. A central intuition would seem to be that with genuine two‐sided (OECD/non‐OECD) liberalisation in services that are seemingly considerably labour‐intensive in delivery, the potential should be there for significant developing country gains from global liberalisation allowing full cross‐border delivery. However, this picture is neither fully endorsed by available studies, neither is it explicitly contradicted. This seems to be the case for a number of reasons. One difficulty with the studies is that the conceptual underpinnings of what determines trade in services and how this trade differs analytically from that of trade in goods (if at all) is an issue prior to assessments of impacts of liberalisation of trade in services on developing countries being discussed. Key issues here are the treatment of mobility for service providers (both firms and workers), and the differing analytical structures needed to analyse individual service items (banking, insurance, telecoms, etc.). Some recent analytical work suggests that liber‐alisation in some service items, such as banking, need not always yield gains, and this contrasts with quantitative studies where analytical structures mirror conventional trade in goods treatments. The discussion and measurement of barriers to service trade in both developed and developing countries is also problematic. One is talking of domestic regulation, entry barriers, portability of providers, competition policy regimes more so than only barriers at national borders, as with tariffs. Both representing and quantifying such barriers raise major difficulties, and these are also spelled out in the paper. Which barriers actually restrict trade, and which do not because they are redundant is one issue, for instance. It is also often misleading to represent barriers in simple ad valorem equivalent form. As a result, numerical modelling work on the effects of service trade barriers which is based on ad valorem equivalent modelling is often not fully convincing. In addition, individual country results vary considerably across studies in ways that it is frequently hard for outsiders to understand. Studies do, however, point towards a tentative conclusion that effects are small and positive for developed and most developing countries if FDI flow changes accompanying service trade liberalisation are excluded from the analysis, but much larger and more variable across countries if they are present. This could be taken to suggest that mode 3 GATS liberalisation (roughly captured in some studies) might be important for developing countries; but mode 4 GATS liberalisation could be even more important given large barriers to labour flows across countries. Thus, if service trade liberalisation is thought of primarily as a surrogate for improved functioning of global factor markets in which more capital flows to developing countries and more labour flows from them to developed countries, then developing countries could benefit in a major way from genuine two‐sided (OECD/non‐OECD) liberalisation. Developing countries fear, however, that in global negotiations on services liberalisation where there is an asymmetry of power that largely one‐sided liberalisation may be the outcome, and their gains will be correspondingly limited. The paper concludes by evaluating econometric studies on linkage between services liberalisation and country growth rules, and briefly discusses some key sectoral issues in health services and transportation.     

外国直接投资与双边贸易关系中的国别差异

外国直接投资对国际贸易的影响一直是学术界普遍关注的问题。本文采用引力模型,对14个主要投资国1984年至2004年对华投资与双边贸易的关系进行了实证分析,发现我国引进的外国直接投资总体上促进了贸易的增长,但是各国直接投资对双边贸易的影响却有着明显差异。日本、美国、韩国、德国、我国台湾地区和我国香港地区的外国直接投资是贸易促进型的,我国澳门地区、马来西亚、加拿大、法国、澳大利亚、荷兰、英国和新加坡的外国直接投资是贸易替代型的。     

Impact of Openness on Growth in Different Country Groups

This paper evaluates the impact of openness on growth in different country groups using a panel of 79 countries over the period 1970–98. It distinguishes itself from many existing studies in three aspects: Firstly, both trade and FDI are included as measures of openness. Secondly, countries are classified into high‐, middle‐ and low‐income groups to compare the roles of trade and FDI in these groups. Thirdly, the possible problems of endogeneity and multicollinearity of trade and FDI are carefully dealt with in a panel data setting. The main findings are as follows. Total trade has a general positive impact on growth in all country groups, although the impact from imports is not significant in high‐income countries. FDI has a positive impact on growth in high‐ and middle‐income countries, but not in low‐income countries. With the existing absorptive capabilities, low‐income countries can benefit from both exports and imports, but not from FDI. These findings suggest that trade and FDI affect growth through different channels and under different conditions. The paper also discusses important policy implications.     

Prospects for the Greek Economy in the Post‐enlargement Era

This paper examines the consequences for Greece of the EU enlargement eastwards. The analysis is based on an evaluation of the Greek economy competitiveness relative to the economies of the acceding and candidate countries during the last decade. Using data disaggregated up to the third digit, the magnitude of Greek inter‐ and intra‐industry trade with the above countries is determined and contrasted to the corresponding trade with the EU. Other issues examined are the effects from factor movements such as the FDI flows and migration, and the macroeconomic effects from the reallocation of EU funds. Enlargement is expected to exert positive trade and FDI effects on the Greek economy, a negative effect on future economic growth as a result of budgetary reductions and an uncertain effect on labour markets from migration. A non‐exploited trade potential of Greece with the Balkan countries creates further opportunities for regional development.     

Source Country Characteristics and the Inflow of Foreign Direct Investment into Saudi Arabia

The paper examines the impact of source country characteristics on the inflow of FDI into Saudi Arabia using a gravity‐type model including economic, distance and socio‐political variables. A unique database listing all new investments involving foreign ownership is used to construct a panel of 33 countries in the period 1980–2005. To account for many country–year observations with zero FDI, the negative binomial regression, the Tobit regression and the Heckman selection procedure are used. The conclusions drawn from the analysis employing panel‐based techniques differ from the results obtained from pooled regression models. Also, the determinants of FDI differ depending on whether foreign investment is measured in terms of investment expenditure or the number of individual foreign projects. The Heckman selection results reveal that there are a large number of factors affecting the decision to invest in Saudi Arabia, compared with relatively few determinants of the actual size of investment. Traditional size and distance characteristics hold to a great extent but the relationship between FDI and bilateral trade is unclear and there is some evidence that the countries that export to Saudi Arabia do not invest there. In terms of scope for possible spillovers, there is mixed evidence on whether the investment comes from more technologically advanced economies but volume‐wise important investments originate from countries characterised by high income per capita.     

Similarities and differences among cross-border M&A and greenfield FDI determinants: Evidence from Asia and Oceania

Firms choose either cross-border M&A or greenfield foreign direct investment (FDI) when expanding their operations overseas. In this study, by focusing on Japanese firms pursuing FDI in emerging countries in Asia and Oceania, we provide empirical evidence of the similarities and differences in cross-border M&A and greenfield FDI determinants. We derive the following four main conclusions. First, an increase in host-country population size and decreases in per capita income and corporate tax rates generally attract both inward cross-border M&A and greenfield FDI to the host country. Second, however, a home-country firm tends to choose cross-border M&A rather than greenfield FDI when the host country sufficiently implements shareholder rights laws and the firm tends to choose greenfield FDI rather than cross-border M&A when the host country adequately enforces intellectual property rights laws. Third, a firm tends to choose greenfield FDI when the firm already has regional networks in the host country and choose cross-border M&A when the purpose of the firm's overseas operations is to establish sales distribution channels. Finally, a firm pursuing cross-border M&A experiences higher cumulative abnormal returns in its stock prices following the investment, while a firm pursuing greenfield FDI experiences increases in its stock prices immediately before the investment.     

Reverse importing and asymmetric trade and FDI: a networks explanation

This paper considers the impact of business and social networks on international trade and FDI. I propose that differences in the strength of network effects across countries can produce asymmetric trade and investment flows that may lead to trade friction. A firm from a country with strong network effects has a cost advantage in selling to buyers from its own country. This advantage results in lower inward FDI, lower total imports but larger volumes of reverse imports into the country with strong network effects. The model’s predictions match observed asymmetric trade and investment flows that sometimes lead to US-Japan trade friction.     

The Relationship between Political Tensions,Trade and Capital Flows in ASEAN Plus Three

We estimate the effects of political tension on trade and capital flows in ASEAN Plus Three countries in the framework of a gravity model. We quantify political tension through text‐parsing software reading daily Reuters’ articles from 1990 to 2013 and exclude Brunei and Laos due to sparsity of news coverage. Regarding bilateral trade, we find that political conflict, measured by negative reports in Reuters’ articles, seems to only affect bilateral trade between countries that are not both members of the World Trade Organization (WTO). For these countries, a 1 per cent rise in the tension score results in a 0.05 per cent decline in trade. There is weaker evidence that improvement in bilateral relationship, measured by positive reports in Reuters’ articles, is associated with more trade. As for capital flows, while long‐term capital flows, measured by foreign direct investment, appear to be unaffected by short‐term tensions, both a non‐democratic government and a history of war negatively affect FDI.