Welfare effects of competition for FDI between technologically asymmetric countries with varying trade costs

Given the traditional argument that host countries' excessive competition for FDI (foreign direct investment) deteriorates the host countries' welfare, this paper examines the impact of policy competition for FDI on social welfare considering varying trade costs. Based on a model where two technologically asymmetric countries compete for FDI, we determine an equilibrium where a multinational firm relocates to a less efficient country. Moreover, we demonstrate that the policy competition for FDI between less integrated economies might improve social welfare when the multinational firm relocates to a country with a lower technology and a less competitive market. Nonetheless, we show that the traditional argument can be true when the policy competition for FDI between highly integrated economies deteriorates host countries' welfare, as supported by the empirical evidences of moderated competition for FDI within EU member countries.     

Capital Market Openness and Output Volatility

In this paper, using data from 21 advanced and 81 developing countries during 1971–2010, we empirically examine the impact of capital market openness on output volatility. We find that opening of capital markets increases the output volatility of developing countries. Furthermore, we find that the main channel through which capital market openness increases volatility is currency and external‐debt crisis. Finally, we find that while Asian countries are less likely to experience a crisis, they become even more unstable than other developing countries once a crisis occurs. Our evidence strengthens the case for caution in developing countries' opening up of their capital markets.     

Macroeconomic,institutional, and sectoral determinants of outward foreign direct investment: Evidence from Japan

This paper empirically explores the determinants of outward foreign direct investment (FDI) in the Japanese manufacturing sector. We estimate a gravity model of FDI for 30 host countries covering the period 2005–2017, using Poisson pseudo maximum likelihood to tackle the issue of zero-value observations. The results indicate that Japanese overseas investments are not only driven by traditional factors, such as market size, the yen real exchange rate, trade openness, differences in perception of corruption, and financial instability, but also by industry characteristics. In particular, we find that low technological industries characterized by growing labour costs are more likely to be relocated abroad. Furthermore, we demonstrate nonlinearities in the determinants of Japanese overseas investments depending on the host country's development, the host country's region, and the category of FDI implemented (vertical vs horizontal).     

The interactions among foreign direct investment,economic growth,degree of openness and unemployment in Taiwan

The vector autoregression method of variance decomposition and impulse response function analysis are applied to analyse various relationships among foreign direct investment (FDI), economic growth, unemployment and degree of openness in Taiwan. The analysis results show that these five variables have a long-run equilibrium relationship; however, unemployment rate and FDI outflow have weak exogeneity. We also found that there exist three unidirectional causalities from FDI outflow to FDI inflow, from economic growth to degree of openness, and from economic growth to unemployment in short-run. Furthermore, the shocks of economic growth and degree of openness have positive effects on FDI inflow. On the contrary, the shocks in economic growth and FDI inflow have negative effects on unemployment rate.     

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.     

How Do Technical Barriers to Trade Influence Trade?

This paper empirically estimates the trade effects of technical barriers to trade (TBT) based on all TBT notifications from 105 World Trade Organization (WTO) countries during 1995–2008. The paper adopts a modified two‐stage gravity model to control for both sample selection bias and firm heterogeneity bias. It was found that a country's TBT notifications decrease other countries' probability of exporting, but increase their export volumes. The result can be explained by the TBT's differential effects on the fixed and variable cost of export, and consumer confidence. It was further found that (i) a developing country's TBT have significant effects on other developing countries' exports, but no significant effects on the developed countries' exports, (ii) a developed country's TBT have significant effects on the exports from both types of countries, and (iii) exports from developed countries are affected by a developed country's TBT more seriously than a developing country's TBT.     

Does good governance matter for FDI? New evidence from emerging countries using a static and dynamic panel gravity model approach

This paper assesses the impact of institutional factors on foreign direct investment (FDI) attractiveness using a pool of 25 emerging host countries (ECs) for the period 1996–2012. In particular, the paper aims to examine whether higher institutional quality and good governance do improve FDI attractiveness, and thereby to identify which institutional factors are the main drivers of FDI in ECs. Using a static and dynamic panel gravity model with various estimation techniques, we find that FDI is positively and significantly influenced by political stability, government effectiveness and regulatory quality. The remaining set of governance indicators is found to be statistically significant and negatively linked to FDI. Our findings also show that factors like a larger GDP per capita difference between investing partner and ECs, higher degree of trade openness and better infrastructure have positive and significant effects on FDI attractiveness. These results have important policy implications for ECs. Fostering FDI inflows into these countries requires policymakers to improve the quality of their institutions and business climate through implementing sound economic policies and regulations.     

The long-run effect of foreign direct investment on total factor productivity in developing countries: a panel cointegration analysis

This paper examines the long-run effect of the level of foreign direct investment (FDI) on the level of total factor productivity (TFP) for 49 developing countries for the period 1981–2011 using panel cointegration and causality techniques. It is found that (i) FDI has, on average, a negative long-run effect on TFP in developing countries, (ii) long-run causality runs in only one direction, from FDI to TFP, (iii) in the short run, TFP has a negative effect on FDI, and (iv) the long-run effect of FDI of TFP differs between selected groups of countries: While the estimated long-run FDI–TFP coefficients are always relatively large, negative, and significant for countries with lower levels of human capital, financial development, and trade openness, the estimated effects are relatively small, insignificant, or even significantly positive for subgroups of countries with higher levels of human capital, financial development, and trade openness.     

Oil consumption and economic efficiency: A comparative analysis of advanced, developing and emerging economies

This paper investigates the economic efficiency-oil consumption relationship in 42 countries during the period 1986-2006. In a first stage by using DEA window analysis countries' economic efficiencies are obtained. In a second stage an econometric analysis based on robust GMM estimators reveals an inverted ‘U’-shape relationship between oil consumption and economic efficiency. In order to capture heterogeneities among countries' development stages the analysis has been separated into two groups (advanced economies and developing/emerging economies). The results show that advanced economies have much higher turning points compared to emerging and developing economies. It appears that oil consumption increases countries' economic efficiency. In addition the consumption patterns of oil products and its derivatives have changed through years and among countries. The different turning points from the econometric analysis indicate the dependence of oil consumption in advanced economies (higher turning points) is driven mainly by household purchasing activities and their standards of living (transport, housing and water, food, etc.). Finally, it appears that oil consumption is the main driver behind the progress of industrialization and urbanization regardless of the country's development stage.     

In search of FDI-led growth in developing countries: The way forward

This paper challenges the widespread belief that FDI generally has a positive impact on economic growth in developing countries. It addresses the limitations of the existing literature and re-examines the FDI-led growth hypothesis for 28 developing countries using cointegration techniques on a country-by-country basis. The paper finds that in the vast majority of countries, there exists neither a long-term nor a short-term effect of FDI on growth; in fact, there is not a single country where a positive unidirectional long-term effect from FDI to GDP is found. Furthermore, our results indicate that there is no clear association between the growth impact of FDI and the level of per capita income, the level of education, the degree of openness and the level of financial market development in developing countries.     

Transaction costs and foreign direct investment in developing countries

Foreign Direct Investment (FDI) has been used by a number of developing countries to build a national competitive advantage in a global economy. Most of the literature on FDI in developing countries has focused on low-cost factors in these countries. But in a global economy where low cost factors are available at various locations around the globe, transaction costs related to the assumptions of "bounded rationality" and "opportunism" are becoming increasingly important in FDI decisions. These assumptions have been applied by researchers over the years to explain major changes in the organizational structure of corporations. This paper incorporates the assumptions of bounded rationality and opportunism to discuss factors that a firm considers in its decision to undertake FDI. A statistical analysis was carried out to test the validity of the arguments presented in the paper.     

FDI,Foreign Aid,Remittance and Economic Growth in Developing Countries

Using a dynamic spatial framework, this paper investigates how foreign direct investment (FDI), foreign aid and remittances impact the economic growth of 53 African and 34 Latin American and Caribbean countries. Previous growth studies examine how one factor or two of these factors impacts economic growth, which results in biased estimation because of the omitted variable(s). Separate estimation shows foreign aid and FDI affects economic growth in Africa, but when we control for all three factors, only FDI affects African economic growth. For Latin America and the Caribbean, foreign aid and remittances affect growth when estimated separately, while remittances affect growth when they are estimated simultaneously. Finally, both regions' results confirm spatial interdependence is important in explaining economic growth, as growth in one country depends on the growth of its neighboring countries.     

International Productivity Differences and the Roles of Domestic Investment,FDI and Trade

This paper calculates Theil's entropy index to measure the extent of productivity differences across 92 countries for the period from 1970 to 2003. While there is evidence of increasing differences in productivity across these countries, we observe different patterns when we group the countries by income levels. These differences seem to be decreasing among middle income developing and developed countries, whereas they seem to be widening among low and high income developing countries. The results of our multivariate time series analysis also suggest that FDI increases productivity differences among low and high income developing countries, whereas GDI reduces these differences among low income countries in the long-run. Granger causality test results indicate that while an increase in GDI leads to a decline in growth of trade, a higher growth of trade appears to be important for attracting FDI to middle income countries. Furthermore, a reduction in productivity differences and a higher FDI growth lead to higher growth of trade in developed countries.     

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.     

Do regional trade agreements stimulate FDI? Evidence for the Agadir,MERCOSUR and AFTA regions

The integration of emerging markets into the global economy is heavily promoted by foreign direct investment (FDI ) inflows. Among the factors explaining the location of FDI , regional trade agreements (RTA s) can be relevant for emerging markets, as they can promote economic integration and increase the attractiveness of the region for foreign investors. This paper investigates the impact of South–South trade agreements on the FDI decision of multinationals, where the Agadir, mercado comun del sur (MERCOSUR), and ASEAN free trade area (AFTA) agreements are considered. Three panels of countries are defined, where the members joined a specific agreement or not. Non‐Gulf Arab states are compared to better performing regions in Latin America and Southern and Eastern Asia. The analysis provides evidence that openness to foreign trade and financial markets are among the main catalysts to attract FDI , provided that business‐friendly institutions exist in the host country. Other variables, like the size of the industrial sector, urbanization rates, and external debt appear to be important in some cases. The integration of China into the world economy is a specific trigger for FDI to Asian destinations. Since RTA s influence the market size by reducing barriers to trade, their impact operates via GDP growth and openness. Gains from the agreement are striking for Latin America and Asia, but not for Arab states. To attract more FDI , business‐friendly institutional reforms and mechanisms to support new firm foundation should be implemented in this region.     

Trade-related spillovers and industrial competitiveness: Exploring the linkages for OECD countries

This study examines how trade-related spillovers impact the OECD countries' industrial competitiveness; with an emphasis on China's innovative efforts and reintegration into the global economy. In comparison with the major R&D countries, benefits attributable to spillovers are found to be more sizable for the rest of the OECD countries.This result is consistent with the observed convergence of competitiveness between the two groups of countries during 1990–2009.Moreover, our empirical results suggest China's trade-related spillovers can produce both positive and negative effects on OECD countries' industrial competitiveness. The persistence of the spillover effects is found even after controlling for trade openness creating possible spurious association. Finally, our finding TFP growth as the competitiveness driver stresses the consequential role of STI (science, technology, and innovation) policies in supporting sustainable and balanced growth.     

Energy consumption,economic growth and environmental degradation in OECD countries

The interdependence among energy consumption, economic growth and environmental degradation has become an important public policy priority among OECD countries. Yet, the related literature provides conflicting results when describing the dynamic nature of such a relationship and the way it affects countries' development path. Using a sample of 35 OECD countries over the period 2000–2014, we find that economic growth and energy consumption patterns contribute to the enhancement of countries' environmental performance levels. In contrast to a large stream of empirical research, our findings highlight that countries' economic development path and their energy consumption patterns have started to align with their environmental policies. The results are robust since we utilize different aspects of countries' environmental degradation such as carbon dioxide emissions, ecological footprints and countries' environmental performance levels. Finally, the analysis of the dynamic interrelations among countries' energy consumption, economic growth and environmental degradation levels, reveals the necessity to promote sustainable development through a coexistence rather than through a trade-off mechanism.     

Microeconomic consequences and macroeconomic causes of foreign direct investment in southern African economies

The authors use a new data set on firms in 13 countries of the Southern African Development Community (SADC) and comparators from other regions to identify the benefits and determinants of FDI in this region. Foreign Direct Investment (FDI) has facilitated local development in the SADC. Foreign-owned firms perform better than domestic firms, are larger, and locate in richer and better-governed countries and in countries with more competitive financial intermediaries. They are also more likely to export than domestic firms and evidence suggests that they might have positive spillover effects on domestic firms. Based on a standard empirical model, the SADC is attracting the inward FDI per capita that the region's level of income would predict. But this means that there are less capital inflows per capita to the region than there are to wealthier parts of the developing world. Moreover, the SADC is attracting less FDI than comparators for reasons that are possibly more fundamental than current income, namely, countries’ past growth record, demographic structure and the quality of physical infrastructure. Interestingly, inward FDI is less sensitive to variation in income within the SADC than in other parts of the world, but is more responsive to changes in country's openness to trade.     

FDI Policy,Greenfield Investment and Cross‐border Mergers

This paper examines a multinational's choice between greenfield investment and cross‐border merger when it enters another country via foreign direct investment (FDI) and faces the host country's FDI policy. Greenfield investment incurs a fixed plant setup cost, whereas the foreign firm obtains only a share of the joint profit from a cross‐border merger under the restriction of the FDI policy. This trade‐off is affected by market demand, cost differential, and market competition, among other things. The host country's government chooses its FDI policy to affect (or alter) the multinational's entry mode to achieve the maximum social welfare for the domestic country. We characterize the conditions shaping the optimal FDI policy and offer intuitions on FDI patterns in developing and developed countries.     

Foreign Direct Investment and Labor Quality in Developing Countries

The quality of local labor is an important factor in a multinational corporation's (MNC) decision to set up production operations in a developing country. It is often observed that developing country governments attempt to attract MNCs by enhancing labor quality. This paper studies the interaction between an MNC and a local government which has superior information on local labor quality. The local government has an incentive to enhance the labor quality and share that information with the MNC because it increases both its net tax revenue and profit of the MNC. The paper provides an explanation for recent findings of FDI in developing countries: the bulk of FDI has been directed toward a limited number of countries and human capital plays an increasingly important role in attracting FDI.