Foreign Direct Investment Inflows,Economic Growth,and Trade Balances: The Experience of the New Members of the European Union

The study examines the role of foreign direct investment (FDI) on economic growth and trade balances of 10 emerging economies in Europe before they joined the European Union. This article uses the Granger causality test to investigate the link between FDI inflows and economic growth for the countries under study. The findings show that gross domestic product growth has a unilateral Granger-cause on FDI inflows for 9 of 10 emerging European economies. However, the results did not show FDI inflows Granger-causing the changes in economic growth of any of the 10 countries. Furthermore, FDI inflows had no or negative effects on trade balances of the majority of the emerging European nations. The policy implications of this study are that host governments in emerging economies must carefully evaluate spillover effects of FDI inflows on their economies before offering significant incentive packages to lure multinational enterprises into their countries.     

International Competitiveness and the Single Currency

This article puts together the results of a five-year comparative study of UK and Irish manufacturing exporters and discusses its implications for currency unions and particularly the Euro. Overall, the results indicate a positive linkage between exchange-rate stability and individual firms' competitiveness. Irish exporters have benefited from their government's approach to European Monetary Union (EMU) and will continue to do so. The research identifies changes in firm-level competitive activity that occur where the exchange rate is fixed, and argues that exchange-rate stability leads to sustained long-run competitive advantage for firms located within the currency area (over those that are not). European currency while existing Euro-zone countries will be assessing whether they have benefited from it. At the same time, countries elsewhere in the world may need to consider abandoning their independent currencies in favour of the dollar, the Euro, or the Yen.     

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.     

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.     

EMU and Trade Revisited: Long‐Run Evidence Using Gravity Equations

In this paper, we present evidence of the long‐run effect of the euro on trade for the twelve initial EMU countries for the period 1967–2008 from a double perspective. First, we pool all the bilateral combinations of trade flows among the EMU countries in a panel cointegration gravity specification. Second, we estimate a gravity equation for each of the EMU members vis‐à‐vis the other eleven partners. We apply panel cointegration techniques based on factor models that account for cross‐dependence and structural breaks. Whereas the joint gravity equation provides evidence on the aggregate effect of the euro on intra‐European trade, by isolating the individual countries, we assess which of the member countries have obtained a larger benefit from the euro. The results show that the euro has had a positive though small effect on trade. Belgium and Luxembourg, France and Italy are the countries more benefited from the introduction of the euro. The effects for exports to third countries are in general more moderate, and, with the exception of Greece, there is no evidence of diversion effects.     

Poland's Investment Development Path and Industry Structure of FDI Inflows and Outflows

ABSTRACT

This study explores changes in industry composition of FDI inflows to and outflows from Poland, using the conceptual framework of J. Dunning's model of the investment development path (IDP). The data time frame used (from 1996 to 2005) allows for identification of significant changes in FDI structure as Poland moves through stage 2 of her IDP. The leading position of the manufacturing sector in both FDI inflows and outflows is replaced by services (especially financial and trade). The last section presents policy implications focused on measures designed to redress the imbalance between the still much larger inflows than outflows of FDI.     

Why on Earth Should Foreign Banks Invest in Africa's Financial Services Sector? Evidence from Financial Multinationals in Ghana

While sub‐Saharan African countries have been able to attract some degree of resource‐seeking foreign direct investment (FDI) due to their abundant natural resources, financial FDI inflows have proved to be elusive for the region, in spite of the widespread financial‐sector adjustment programs that offer attractive incentive packages for financial multinational corporations (MNCs). Literature surrounding the determinants of FDI inflows has mainly focused on manufacturing and real production activity. We analyzed the root causes of the weak administrative and institutional framework in Africa's banking industry, using Ghana as a case in point. Focusing on two financial MNCs as case studies, this article validates the significance of a thorough qualitative investigation in evaluating the explanations as to why most foreign banks do not invest in sub‐Saharan Africa and why the few that do have relatively insignificant operations. The study also reveals that despite the far‐reaching reforms, there are several structural constraints and deficiencies placed on financial MNCs that affect the size of the business they can conduct and their future investment decisions. One of the major issues prior to the financial‐sector reforms in Africa was disintegration, and the restructuring was not designed to create an attractive location for foreign capital; hence, the low financial FDI inflows to Ghana in particular and Africa in general. © 2015 Wiley Periodicals, Inc.     

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.     

CAFTA-DR Effects on FDI Inflows,Growth, and Distribution of the Workforce in Costa Rica: A System Dynamics Approach

As regional trading arrangements have spread, enlarged, and deepened over the last decades, the study of the relation between trade agreements and foreign direct investment (FDI) still presents difficulties due to the multi-dimensional character of such relationships. This article attempts to shed new light on how some of the Central American Free Trade (CAFTA) policies will impact FDI inflows on the manufacturing and agricultural sectors in Costa Rica. Specifically, we look at how the growth and distribution of the workforce is affected by the treaty. The results show that the agreement provisions will have a positive effect on FDI. From these results it is possible to estimate that in the long run, the implementation of CAFTA has a higher probability of generating the intended benefits. System dynamics modeling is used in this article.     

External causes of Euro zone inflation differentials

Whether the Economic and Monetary Union (EMU) satisfies the criteria of an optimum currency area (OCA) has been the subject of much debate. Probably the greatest consensus exists on the trade criterion. In general authors conclude from the high levels of intra-EU trade that the European countries are closely interlinked. In that sense, they would constitute an optimal currency area. In this light, recent empirical evidence that external factors such as exchange rates and oil prices are able to explain inflation differentials between EMU countries is surprising. This paper re-examines the evidence using new and revised data and comes to the opposite conclusion.     

Trade in Services and TFP: The Role of Regulation

What determines total factor productivity (TFP) growth in services: is it services trade or services–trade regulation? To respond to this question, we use four indicators of international trade in services since 1990 to 2005, namely foreign direct investment (FDI) inward stock, services imports, domestic sales of foreign affiliates (FATS) and FDI inflows, to examine what type of services trade forms a direct determinant. Subsequently, we analyse what type of sector‐specific regulation has played an inhibiting effect on services TFP growth. Such analysis contrasts with former studies in which mainly factor inputs and economy‐wide regulation are used to explain services TFP. This paper provides evidence that neither trade nor entry barriers are robust determinants to explain cross‐country differences. Instead, regulations on operational procedures affecting the variables costs structure of the firm seem to play a more important role in explaining TFP growth between countries, particularly in combination with information and communication technology (ICT) capital.     

Bilateral Trade and the Eurozone: Evidence from New Member Countries

The question of whether and how much currency unions increase bilateral trade among their members has garnered much attention since Rose’s seminal article. The answer is as pertinent now as ever for both the Eurozone’s existing and future members as the financial crisis shook the very foundations of the European Monetary Union (EMU) and brought its shortcomings into the spotlight. This paper analyses the issue using the gravity equation with country pair and time fixed effects. For a sample of the four new members of the EMU – Slovakia, Slovenia, Malta and Cyprus – which has, to the author’s knowledge, not been studied thus far due to their recent joining, and controls drawn from the European Union, this paper finds a positive relationship between joining the EMU and trade with EMU partners but not with non‐EMU partners.     

Effects of aid for trade on extensive and intensive margins of greenfield FDI

Using a panel dataset of 105 developing countries for the period 2003–15, this paper assesses the effects of Aid for Trade (AfT) on greenfield FDI flows to the aid‐recipient countries. Particularly, this paper classifies the total dollar value of greenfield FDI flows to each recipient country in terms of four different layers: the extensive and intensive margins of projects as well as the extensive and intensive margins of source countries. Applying the system GMM estimator, this paper finds that AfT not only increases the dollar value of FDI flows to the recipient countries but also helps diversify the greenfield projects and source countries. In addition, this paper finds that AfT has a greater effect for greenfield FDI from donor (developed) countries than from non‐donor (developing) countries. Among the three components of AfT, aid for trade‐related infrastructure and aid for trade policy regulations are found to have positive links with greenfield FDI, irrespective of source‐country groups, yet their effects are larger for developed source countries. In contrast, aid for building productive capacity hinders greenfield FDI flows from non‐donor countries, while it promotes greenfield FDI from donor countries. We offer some explanations for this finding.     

Asymmetric effects of oil price changes on the balance of trade: Evidence from selected African countries

The main new contribution of this study was to delve into the asymmetric impacts of changes in oil prices on the trade balance in the framework of six major African economies. To tackle this topic carefully, we employ three measures of external balances—oil, non‐oil and total trade balances, and assess the asymmetric response of the external balances of those six economies to oil price changes in the short and long run. Like most previous studies, we first assume the impacts of oil price fluctuations to be symmetric and employ the linear autoregressive distributed lag (ARDL) method to explore the topic. We then separate oil price hikes from oil price plunges and implement the non‐linear ARDL method to reveal that the price of crude oil has a vital role to play in the trade balances for those six African economies. Further, there is evidence of significant asymmetric impacts of oil prices typically on the oil trade balance of Africa's top oil producing countries. For the non‐oil and total trade balances, in contrast, there is little evidence of the asymmetry of oil price changes.     

The impact of civil war on foreign direct investment flows to developing countries

We investigate the impact of civil war on foreign direct investment (FDI) flows to developing countries. We employ a new data-set that disaggregates FDI inflows to primary, secondary and tertiary sectors. Second, we control for a richer set of economic and institutional variables that could determine FDI inflows including population, gross domestic product (GDP) per capita, the degree of trade openness, exchange rate variability, inflation, the governance structure of the host country using International Country Risk Guide data and its regime type using the POLITY autocracy–democracy data. We also address the reverse causality between FDI and conflict and the potential endogeneity of explanatory variables by employing dynamic system generalised method of moments (GMM) techniques in estimation. Our results indicate that primary sector FDI flows to developing countries are not significantly affected by civil war, whereas secondary and tertiary sectors FDI are more sensitive to such outbreak, potentially leading to reversals of existing FDI. Among institutional variables, government stability and control of corruption are more significant compared to regime type, law and order, and bureaucratic quality.     

Exchange Rates and Competition for FDI in Asia

This paper argues that relative exchange rates between the host countries of foreign direct investment affect their competition for FDI. Specifically, if the host country currency appreciates against the source country's currency more than that of its rival, FDI inflows of the host country will decrease, while FDI inflows increase in the rival country. Using the data of Japanese FDI in nine Asian manufacturing sectors from 1981 to 2002, the paper examines the hypothesis in the context of the competition between China and ASEAN‐4 (Indonesia, Malaysia, the Philippines and Thailand). Empirical results show that the relative exchange rate is a statistically significant factor that determines the relative inflows of Japanese FDI for manufacturing as a whole, and for such sub‐sectors as textiles, food, electronics, transportation equipment, and others. Exchange rate policies of China and ASEAN‐4 played a critical role in dynamically reshaping the geographic distribution of Japanese FDI in Asia.     

Who Supports the ECB? Evidence from Eurobarometer Survey Data

This paper studies the determinants of the support for the European Central Bank (ECB) in the member countries of the European Monetary Union (EMU) and their evolution from 1999 to 2015. Our contribution is to examine micro‐level sociodemographic characteristics from the Eurobarometer surveys jointly with macroeconomic indicators of trust in a central bank in order to evaluate econometrically their relative importance over time. Pseudo‐panel logit estimates reveal that the former have a dynamically stable, and generally stronger influence taken altogether, when compared with the latter. Interestingly, we find that while expected inflation becomes a positive determinant of trust in the ECB after the global financial crisis (GFC), actual inflation gets no statistical significance. Having taken centre stage in the monetary policy debate in the Euro‐area post‐GFC and especially since 2013, excessive disinflation and risk of deflation attracted strong attention by the public and have consequently affected its perceptions about the ECB. Accordingly, our results emphasise forward lookingness of the EMU population with regard to ‘deflation scares’ in determining trust in the ECB, in addition to disentangling the contributions of the key individual‐level sociodemographic factors, and can duly inform ECB's communication strategy.     

Revisiting FDI-led growth hypothesis: the role of sector characteristics

Does foreign direct investment (FDI) lead to higher growth? What type of FDI really works? In this paper, we disaggregate FDIs based on their technological characteristics and investigate which kind of FDI leads to output growth. The results for the sample of OECD countries during the period 1985–2012 indicate that FDI inflows to Information and Communication Technologies (ICTs) using and producing manufacturing and service sectors (ICT-based), non-ICT using and producing manufacturing and service sectors (non-ICT-based) and other sectors (non-ICT-other) play no role in contributing to economic growth. However, we provide evidence that absorptive capacities of host countries work through ICT-based FDI inflows. Only if the host countries have sufficient level of human capital, financial resources and technological infrastructure, ICT-based FDI will foster economic growth. The results are robust to controlling missing values, studying the subsample of emerging market economies and consideration of endogeneity.     

Reforming Property Rights Institutions in Developing Countries: Can FDI Inflows Help?

This paper analyses factors that can facilitate property rights institutions reform in developing countries (DC). Inspired by the works of North and Weingast (Journal of Economic History, 49, 1989, 803) and Acemoglu et al. (American Economic Review, 95, 2005a, 546; 2008) relating to the process of institutional reforms in England during the seventeenth century, I assume that FDI inflows could contribute to property rights reform in DC that are initially endowed with a minimum of effective institutions of constraints on the executive (i.e. effective institutions of checks and balances). Using five‐year panel data over the period 1970–2005 with a sample of 80 DC, and after correcting for endogeneity, I find that conditioned on the initial level of constraints on the executive, the effect of FDI inflows on the probability of reforming property rights is positive and significant. The minimum level of constraints on the executive necessary for the catalytic role of FDI inflows in reforming property rights institutions is 3.6. Only 20 out of the 80 DC in the sample have this minimum level of constraints on the executive. Among the 20 countries five are in sub‐Saharan Africa.