STRUCTURAL CHANGE IN A SMALL OPEN ECONOMY: AN APPLICATION TO SOUTH KOREA

This paper develops a dynamic general equilibrium model and studies structural change in a small open economy with two tradable sectors, agriculture and manufacturing, and a non‐tradable sector, services. In addition to obtaining results for a falling employment share of agriculture and a rising share of services, we demonstrate analytically the hump‐shaped share of manufacturing by identifying two countervailing effects: the productivity effect and the Balassa–Samuelson effect. The first effect, arising from differential rates of productivity growth among sectors, increases the share of manufacturing; the second effect, together with low rates of substitution between products, enhances the service sector and eventually draws labour from the manufacturing sector. At the aggregate level, however, the economy maintains a constant rate of growth. We calibrate the model with data from South Korea and find that the calibration fits the country's historical path of structural change.     

Transportation Costs and US Manufacturing FDI

In empirical models of foreign direct investment (FDI), distance is most often used to proxy for transportation costs and other pure‐trade costs. Given that distance is time invariant but transportation costs are not, this approach is less than satisfactory when actual transportation costs rise and fall over time.The contribution of this work is to explicitly control for transportation costs and thereby better understand their impact on FDI. We explore the impact of shipping costs on total US FDI stocks abroad, manufacturing stocks and service stocks using measures of sea‐shipping and air‐shipping costs in a Hausman–Taylor model that controls for endogeneity and allows for time‐invariant variables such as distance. We find that transportation costs have a positive and statistically significant relationship with US total and manufacturing FDI, suggesting a substitute relationship between FDI and trade flows consistent with horizontal MNE activity. As one would expect, these costs are insignificant for service stocks.     

FDI,SECTORAL OUTPUT AND REAL EXCHANGE RATE DYNAMICS UNDER FINANCIAL OPENNESS

This paper adopts an alternative approach to the study of the impact of capital inflow on the real exchange rate by foremost, analysing the effect of FDI inflow on the ratio of tradables to nontradables, and then estimating the relationship between the tradable‐nontradable ratio and the real exchange rate, while accounting for the role of financial openness. Based on data for a group of developing countries, the findings show that an increase in FDI inflow is associated with a decrease in the tradable‐nontradable ratio, and that an increase in the tradable‐nontradable ratio leads to a depreciation of the real exchange rate; this effect being greater with an increase in financial openness. This suggests that an increase in FDI inflow could result in an expansion of the nontradable sector, which would be associated with a greater appreciation of the real exchange rate under a higher level of financial openness.     

Foreign Capital,Spillovers and Export Performance in Emerging Economies: Evidence from Indian IT Firms

The role of foreign capital inflow, foreign direct investment (FDI) and foreign portfolio investment (FPI), on export behavior of both recipients and non‐recipient competing firms in the same sector often guides economic development policy. By using panel data of Indian IT firms over 2000–2006, we show that FDI reduces the sunk costs of entering foreign markets and therefore positively effects both the decision to export and the export propensity of recipient firms. Foreign portfolio investment has no effect on the decision to export, but it does marginally increase the volume of exports. Further, these positive FDI and FPI recipient effects do not spill‐over to non‐recipients.     

Growth of business services: A supply‐side hypothesis

This paper aims to explain why and how the service sector may grow faster than manufacturing. It develops a two‐sector, closed‐economy model, having a manufacturing sector and a service sector. Accumulation of human capital serves as the basis of growth. The analysis focuses on business services, while household services are also considered. It is argued that differences in returns to scale between the two sectors and employment frictions in manufacturing explain why the growth rate of the service sector may be higher. The model also features that within the service sector the business services sub‐sector may grow faster than household services.     

The potential impact of China–US BIT on China’s manufacturing sectors

This article finds that the overall effect of the foreign direct investment (FDI) and thereby the China–US bilateral investment treaties (BIT) on Chinese manufacturing sector is positive, which raises the productivity and profitability of the firms, using various econometric models and other evidence. The manufacturing sector as a whole has already opened up to the world economy and needs to continue this process. The industries in the manufacturing sector do not need to be protected, except for in limited fields related to national security, scarce natural resources and well-defined strategic sectors. Gradual lifting of the protection may be needed in the short-run for a small number of vulnerable sectors. A moderate relaxing of the current restrictions will increase FDI in manufacturing from all countries by 4–8% under different assumptions. This effect will be small when only considering FDI from the USA. Domestic firms need to update their technology, reduce costs and learn management skills from their foreign competitors, while using the national treatment terms in BIT to enter the fields that are not open to domestic firms under current regulations. Domestic firms also need to set up firm-level global strategies and reallocate firms’ resources according to the changing investment environment, taking advantage of profit opportunities outside the domestic markets.     

Getting help from abroad: The macroeconomics of foreign direct investment in infrastructure in low‐income countries

Infrastructure financing needs in most low‐income countries are substantial, but funding for such needs is only partly covered by national governments and aid donors. This paper introduces foreign direct investment (FDI) through public–private partnerships as a source of infrastructure financing in low‐income countries. A two‐sector open economy model is developed to assess the macroeconomic performance of FDI in infrastructure. With efficient foreign investment, an increase in revenue‐generating infrastructure investment boosts productivity and spurs private investment while stabilizing domestic prices. A direct comparison between infrastructure financed by domestic versus foreign investment shows that foreign investment creates higher output growth and welfare gains and is preferable to domestically sourced investment, irrespective of the underlying financing instrument the domestic economy is employing. FDI in non‐revenue‐generating infrastructure is also analyzed and discussed.     

Foreign direct investment and inequality in developing countries: Does sector matter?

Scholars have studied the relationship between inward foreign direct investment (FDI) and within‐country income inequality in cross‐national contexts, but have not empirically investigated how FDI in different sectors might affect inequality in different ways. We use error correction models to analyze sectoral FDI data compiled from UNCTAD investment reports in 60 middle‐income countries from 1989 to 2010, arguing that FDI in services is more likely to be associated with inequality than FDI in other sectors. We argue that skill biases and changes in employment patterns associated with service sector investments can help explain these findings.     

Spillover effects of FDI inflows on output growth: An analysis of aggregate and disaggregated FDI inflows of 13 MENA economies

This paper examines the effect of foreign direct investment (FDI) inflows on overall growth, as well as its sector-specific spillovers in the Middle Eastern and North African region during the period from 2000 to 2020. Our major innovation is our ability to disaggregate FDI into primary, secondary and tertiary and examine their individual impact on growth, as well as their sector-specific spillovers by using dynamic panel GMM methodology. We find prima facie evidence that total FDI significantly stimulates growth. However, when we turn to the disaggregated FDI data, primary sector FDI adversely affects the gross domestic product (GDP) growth in the service sector and overall GDP growth. On the other hand, secondary FDI has a ‘double-edged’ effect, benefiting its own sector (the service sector's GDP growth), but not other sectors. In contrast, service sector FDI stimulates GDP growth in mining, manufacturing and service sectors, thereby enhancing overall economic growth. Our findings have important policy implications regarding the incentives provided by governments to encourage FDI, which need to be fine-tuned to attract certain types of FDI (tertiary), with less focus on the primary sector     

对我国服务业FDI影响因素的实证分析

在经济服务化的背景下,服务业已逐步取代制造业,成为世界外国直接投资结构中的主流.创造吸引国际服务业FDI的有利环境,从而实现对服务业国际产业转移的顺利承接对于促进我国服务业的进一步增长、结构优化升级具有着重要作用.针对我国服务业FDI主要的影响因素进行了实证分析,并给出了相应的政策性启示.     

The Financial Resource Curse*

In this paper, we present a model of the financial resource curse (i.e., episodes of abundant access to foreign capital coupled with weak productivity growth). We study a two‐sector (i.e., tradable and non‐tradable) small open economy. The tradable sector is the engine of growth, and productivity growth is increasing with the amount of labor employed by firms in the tradable sector. A period of large capital inflows, triggered by a fall in the interest rate, is associated with a consumption boom. While the increase in tradable consumption is financed through foreign borrowing, the increase in non‐tradable consumption requires a shift of productive resources toward the non‐tradable sector at the expenses of the tradable sector. The result is stagnant productivity growth. We show that capital controls can be welfare‐enhancing and can be used as a second‐best policy tool to mitigate the misallocation of resources during an episode of financial resource curse.     

Declining US output volatility and its effect on labour flow volatility: an MGARCH analysis

This article examines the impact of the level and volatility of the real exchange rate on UK foreign direct investment (FDI) inflows from the seven major countries of origin of the investment over the period 1975–2001. We use both fixed effects and dynamic generalized methods of moments (GMM) panel estimation techniques, and manufacturing data disaggregated by high and low R&D content of the sector of destination. Our results provide strong evidence that exchange rate volatility has a negative impact on FDI flows into the UK, irrespective of the sector of destination of the investment. On the other hand, the level of the real exchange rate is found to have a statistically insignificant effect on FDI after controlling for endogeneity of the regressors.     

Foreign direct investment in services and manufacturing productivity: Evidence for Chile

This paper examines the impact of substantial foreign direct investment (FDI) inflows in producer service sectors on the total factor productivity (TFP) of Chilean manufacturing firms. Positive effects are obtained in firm fixed effects instrumental variables regressions and show that forward linkages from FDI in services explain 7% of the observed increase in Chile's manufacturing users' TFP. Our findings also suggest that service FDI fosters innovation activities in manufacturing. Moreover, we show that service FDI offers opportunities for laggard firms to catch up with industry leaders.     

Interaction between foreign financial services and foreign direct investment in Transition Economies: An empirical analysis with focus on the manufacturing sector

This paper studies the nexus between financial and non-financial foreign direct investment in Transition Economies, which are members of the EU. Three questions, which are pointed out in the theoretical literature, are discussed in the paper. We use a dataset for nine Transition Economies over the period 1996–2007, for most regressions we apply GMM and for one regression 2SLS. The empirical results lead to three important statements: non-financial FDI is positively affected by financial services FDI and by market potential. Foreign banks in the EU Transition Economies are mainly driven by non-financial FDI and the capital intensity of a country. FDI crowds out domestic investment in the manufacturing sector.     

The regional distribution of foreign investment in Russia

This article conducts a plant‐level study of the factors affecting foreign direct investment (FDI) inflow to a large opening economy endowed with specific factor advantages. We conclude that the distribution of FDI in Russian regions depends on market access and can be most notably described by the knowledge‐capital framework. Factor endowments built by natural resources are more successful in explaining the location decisions of export–platform affiliates. The impact of natural resources depends on how the availability of these resources is measured. The results reject the crowding out effects of resource FDI and prove co‐location mode, when service investments are attracted to resource‐rich regions. Labour cost advantages better explain the preferences of non‐trading service affiliates.     

A Tale of Two Sectors: Why is Misallocation Higher in Services than in Manufacturing?

Recent empirical studies document that the level of resource misallocation in the service sector is significantly higher than in the manufacturing sector. We quantify the importance of this difference and study its sources. Conservative estimates for Portugal in 2008 show that closing this gap, by reducing misallocation in the service sector to manufacturing levels, would boost aggregate gross output by around 12 percent and aggregate value added by around 31 percent. Differences in the effect and size of productivity shocks explain most of the gap in misallocation between manufacturing and services, while the remainder is explained by differences in firm productivity and age distributions. We interpret these results as stemming mainly from higher output-price rigidity, higher labor adjustment costs and higher informality in the service sector.     

Must improved labor standards hurt accumulation in the targeted sector? Stylized analysis of a developing economy

This paper analyzes a stylized small open economy that consists of two tradable output-producing sectors: a manufacturing sector and a (mainly tourism-related) services sector. Assuming sectoral differences based on stylized facts, we explore the impact of higher labor standards in the manufacturing sector on the long-term prospects of the economy using comparative dynamic exercises to analyze changes in relative prices, foreign capital flows, and the sectoral distribution of investment and output. We find, in particular, that imposing higher standards across the manufacturing sector could, under certain conditions, shift the structure of the domestic economy in favor of that sector. This result is driven by changes in relative profitability in the presence of learning-by-exporting.     

Foreign Direct Investment and Technology Transfer Under Uncertainty in a Liberalizing Host Economy

This paper tackles the issue of investment and optimal ‘choice’ of market structure for a foreign multinational enterprise (MNE) in a newly liberalized economy under uncertainty and in the presence of sunk costs. A minimalist duopolistic model is developed whereby a foreign investor's subjective belief about the probability distribution of policy uncertainty is endogenized as a function of the aggregate output in the tradable goods sector. The main propositions derived from the model are consistent with some unconventional empirical findings in the literature on Foreign Direct Investment (FDI), technology transfer to and crowding out of domestic firms in LDEs.     

China’s Outward FDI: An Industry-Level Analysis of Host-Country Determinants

We use disaggregated data by country and industry to empirically analyze the host country determinants of Chinese outward foreign direct investment (FDI) for the years 2003 to 2011. Our results suggest that the host-country determinants of Chinese FDI differ between high- and low-income countries. While all Chinese FDI is invariably market seeking, other motivations stand out for differing sectors in specific country groups. The resource seeking motivation is relevant for manufacturing FDI to high-income countries with relatively high fuel abundance, and to low-income countries with primary resource abundance (other than fuels). Differently, the strategic-asset seeking motivation, measured by the level of R&D spending on GDP, only positively and significantly affects Chinese manufacturing and service FDI to OECD countries, while higher education levels are an attraction factor for all investing firms. Natural resource is an important attraction factor for Chinese FDI, not only in resource-related sectors, but also in manufacturing and service sectors. Finally, Chinese FDI tends to follow exports (rather than foster them), especially in service sectors.     

Export Spillovers of FDI on China's Domestic Firms

This paper examines the horizontal and vertical export spillovers of foreign direct investment (FDI) on China's manufacturing domestic firms by using firm‐level census data over the period of 2000–03. Based on a Heckman two‐step procedure combining first differencing and instrumental variable regression techniques, it is found that FDI has had a positive impact on the export value of domestic firms mainly through backward technology spillovers and a positive impact on the export‐to‐sales ratio of domestic firms through horizontal export‐related information spillovers. After decomposing FDI by different market orientation and domestic firms by different ownership, the paper finds that the positive impact on domestic firms' export values is mainly from the nonexporting and the exporting foreign‐invested enterprises while the positive impact on domestic firms' export‐to‐sales ratios is mainly from the high‐exporting foreign‐invested enterprises. Both types of export spillovers are mainly diffused to domestic non‐state‐owned enterprises.