The impacts of PTA formation on small economies’ tax competition for FDI inflows

This paper examines why small economies are so eager to form or join preferential trade agreements (PTAs), as observed in the East Asia and the Central Europe, taking consideration of the strategic impacts of PTA formation on tax competition for foreign direct investment (FDI) inflows. Based on a simple model where three asymmetric countries compete for FDI inflows, we demonstrate that PTA formation provides a strategic advantage to a small member country of PTA in competing for FDI inflows not only with respect to a non-member country but with a large member country when the integrated market size is large enough. In addition, it is shown that it might be an out-of-equilibrium path strategy for a non-member small economy to exert efforts to induce FDI inflows, because the excessive subsidies to induce FDI inflows might outweigh the gains from the FDI inflows due to strategic disadvantage in tax competition after PTA formation. These findings explain why small economies are mainly driven by the expected economic benefits including FDI inflows from joining PTA.     

How Does Globalization Affect Income Inequality? A Panel Data Analysis

One of the major issues on the state of income inequality is the effect of globalization through foreign direct investment (FDI). It is well known that FDI inflows create employment opportunities for unskilled labor intensive countries. Hence, during recessionary (expansionary) periods, FDI outflows should cause an increase in a developing (developed) country’s unemployment rate, worsening income inequality. This study differs from the previous literature by employing the key variables FDI, trade volume, and GINI coefficient for a panel of three groups of countries (developed, developing, and miracle countries). We estimated panel cointegration coefficients via FM-OLS. Our results show that the effects of trade liberalization and FDI on income distribution differ for different country groups.     

The influence of international trade on labour productivity in services: The case of Brazil in the 1990s

In the developing world, services account for a rising share of domestic employment and international trade. Thus, it is important to know whether trade liberalization contributes to labour productivity in services. We explore this question, examining the 1990–2000 Brazilian trade liberalization. We find that growth of imports and exports strengthened labour productivity in services, but the contribution was smaller in subsectors with more college graduates, and this negative offset was larger in subsectors that received large foreign direct investment (FDI) inflows. Improved access to imported manufactured intermediate inputs raised downstream services' labour productivity and downstream manufacturing firms benefitting from tariff cuts enacted by trade partners generated spillovers that improved the labour productivity of upstream service subsectors. However, FDI inflows and investments in human and physical capital modified these downstream factors. We conclude that the Brazilian trade liberalization strengthened productivity in services, but unequally across subsectors.     

Fire‐sale FDI? The Impact of Financial Crises on Foreign Direct Investment

We analyze the evolution of foreign direct investment (FDI) inflows to developing and emerging countries around financial crises. We empirically examine the Fire‐Sale FDI hypothesis and describe the pattern of FDI inflows surrounding financial crises. We also add a more granular detail about the types of financial crises and their potentially differential effects on FDI. We distinguish between mergers and acquisitions (M&A) and greenfield investment, as well as between horizontal (tariff jumping) and vertical (integrating production stages) FDI. We find that financial crises have a strong negative effect on inward FDI in our sample. Crises are also shown to reduce the value of horizontal and vertical FDI. We do not find empirical evidence of fire‐sale FDI; on the contrary, financial crises are shown to affect FDI flows and M&A activity negatively.     

Foreign direct investment in OECD countries: a special focus in the case of Greece

Foreign Direct Investment (FDI) is considered as an important instrument for economic development all over the world. The aim of this paper is to examine the FDI inflows determinants for 24 OECD countries. To this end we employ annual data from 1980 to 2012 for a series of potential FDI determinants that have been identified as the most important by the relevant literature. Our empirical strategy employs both the standard fixed effects panel as well as a dynamic panel approach. The empirical findings highlight the importance of market size, trade openness, unit labor cost, schooling, taxation, gross capital formation, institutional variables, and ROA/ROE as significant FDI determinants. In the case of the dynamic panel model those FDI inflows determinants are not uniform for all country groups. Additionally, the results indicate that corporate tax rates clearly affect FDI attractiveness. This finding is robust when testing different countries subgroups. The present study has important policy implications indicating the factors that host economies should place emphasis on in order to attract FDI inflows. Policy makers should not only pay attention to the corporate tax rate level but they should also design a simple, stable and transparent taxation system that minimizes the relevant business risk.     

Revisiting Exports and Foreign Direct Investment in Vietnam

Since 1986, Vietnam has undertaken various reform measures in the trade and foreign investment area. This paper finds significant contributions of world trade, and competitiveness and liberalization effects to Vietnam's export growth over the period 1997–2008. Vietnam's exports became more competitive and better complemented the import demand of Vietnam's trade partners. In addition, dynamic comparative advantage became evident in many products, but significant room remains for improving export competitiveness. Foreign direct investment (FDI) inflows also increased and helped stimulate Vietnam's exports. FDI inflows have increased in both the short‐ and long‐term, yet are only of a limited magnitude. This necessitates more effective measures to enhance the linkages between FDI and domestic enterprises.     

Does FDI improve economic development in North African countries?

This article examines the relationship between FDI inflows and welfare improvement in North African countries. Using net per capita FDI inflows and the United Nations Development Program’s Human Development Index as the principal variables, our analyses confirm the positive and strongly significant relationship between net FDI inflows and welfare improvement in North Africa, although we do find significant differences among the countries in the region. This relationship holds even after we control for government size, country indebtedness, macroeconomic instability, infrastructural development, institutional quality, political risk, openness to trade, education and financial market development. Hence, at the aggregate level, FDI contributes to economic growth in North Africa, in turn generating additional revenues for governments and populations in the region through fiscal policies and jobs creation. We also found that FDI received by countries in the region are mainly concentrated in very few industries (particularly extractive petroleum, services and tourism, construction and utilities); relatively fewer of these investments are directed towards the nonextractive primary industries, which are pro-poor sectors and highly labour intensive, or the manufacturing sector, with a high potential for spillover effects in the economy. This lack of diversification of FDI received in the region’s economies in part explains the differences observed in the link between FDI and welfare in these countries. It is therefore essential for governments in the region to continue investing in social infrastructures while improving the quality of their institutions and their governance; doing so will probably help avoid the type of unrest we have witnessed recently.     

Foreign Direct Investment Determinants in OECD and Developing Countries

In this paper we examine the foreign direct investment (FDI) inflow determinants in 24 Organisation for Economic Co‐operation and Development (OECD) and 22 developing (non‐OECD) countries over 1980–2012, using the standard fixed effects as well as a dynamic panel approach. The most robust finding is that lagged FDI, market size, gross capital formation and corporate taxation significantly affect FDI inflows in OECD countries. We also examine a group of developing countries, taking into consideration the increased share of world FDI inflows that developing countries have attracted, and compare the results. In this case, lagged FDI, market size, labor cost and institutional variables provide the most robust results. The empirical results have important policy implications indicating the factors that host economies should emphasize in order to attract FDI inflows.     

Manufacturing FDI and economic growth: evidence from Asian economies

Previous empirical studies on inward foreign direct investment (FDI) and economic growth generate mixed results. This article suggests that the ambiguous results might be caused by the use of total FDI. We study the heterogeneous effects of different sector-level FDI inflows on host country's economic growth. Data from 12 Asian economies over the period of 1987 to 1997 are employed. Strong evidence shows that FDI in manufacturing sector has a significant and positive effect on economic growth in the host economies. FDI inflows in nonmanufacturing sectors do not play a significant role in enhancing economic growth. Furthermore, without the decomposition of total FDI inflows, the effect of manufacturing FDI on host country's economic growth is understated by at least 48%.     

Growth effects of FDI in 80 developing economies: the role of policy reforms and institutional constraints

Theoretical and empirical literatures have identified several channels through which foreign direct investment (FDI) influences economic growth. This paper examines the impact of FDI on economic output growth per worker using aggregate production function augmented with FDI inflows, economic policy reforms and institutional constraints. The paper covers 80 developing countries over the period 1980–2006. We use panel data and employ fixed, random effects and GMM methods for estimation. Our results highlight the importance of FDI, policy reforms and institutional development for growth in developing economies. Finally, we demonstrate that irrespective of reforms and institutions, an increase in FDI affects output growth positively.     

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.     

Integration into Global Production and Distribution Networks through FDI: The Case of Poland

Technological progress has led to increasing importance of the international division of labour organized around global production and distribution networks. Multinational corporations have been a driving force behind these developments. This article studies the role of MNCs in integrating a host country into the international system of division of labour in the context of Poland. It provides evidence of Poland's increasing participation in global production and distribution networks that is taking place through FDI inflows. It concludes that, thanks to a large volume of FDI inflows, Poland's exports driven by production fragmentation will continue to expand at even faster rates than those observed in recent years.     

Do migrant and business networks promote international royalty receipts? Evidence from the U.S.

This study examines how migration and business networks affect the trade in intellectual property using bilateral data on the U.S. and OECD member countries. The analyses are distinct in that they comprehensively examine network effects by combining previous works on tangible trade–migration relationships together with the literature on trade–FDI relationships. We show that intellectual property exports are positively related to the number of immigrants residing in the U.S. and the U.S. direct investment stocks in trading partners. However, they do not have any relationships with U.S. emigrants and FDI inflows to the U.S. The result suggests that network effects vary depending on the direction of cross-border factor movements.     

分割生产、垂直型投资与产业内贸易

文章在Dixit-Stiglitz垄断竞争的框架下,分析了在产品的生产环节可以任意分割的条件下,跨国公司在国内外配置生产环节的决定因素,并分析了为分割生产而进行的垂直型投资对贸易和消费者福利产生的动态影响.研究结果表明,与对垂直型投资的传统研究不同,为分割生产进行的垂直型投资和贸易的动态关系始终是替代关系,跨国公司出于自身利益考虑的分割生产行为正好使消费者福利水平达到最大.     

Determinants of foreign direct investment: empirical evidence from EU accession candidates

This study examines bilateral foreign direct investments (FDI) between the members of the European Union and eight central and east European candidate (CEEC) economies in transition, awaiting accession into the European Union (EU). Cross-section data were obtained for Bulgaria, Czech Republic, Estonia, Hungary, Poland, Romania, Slovak Republic, and Slovenia for 1997. Once the main characteristics of FDI recipient and donor nations are identified in a bilateral framework, it will be feasible to predict future FDI inflows. This study reveals that the key determinants of FDI inflows in CEECs are size of the host economy, host country risk, labour costs in host country, and openness to trade. Countries that are receiving fewer foreign investments could make themselves more attractive to potential donor nations by focusing on some of the key determinants identified by this study.     

The effects of economic freedom on FDI inflows: an empirical analysis

There is a regular emphasis on the significant role of inward Foreign Direct Investment (FDI) in promoting economic growth. This favourable relationship has induced many governments to adopt policies intended to increase FDI inflows and, thereby, to create conducive business and economic conditions for Multinational Enterprises (MNEs). This paper examines the effects of Economic Freedom (EF) and its sub-components reflecting the Quality of Institutions (QIs) on FDI inflows, using indices derived from the Fraser Institute and from the Heritage Foundation. The empirical analysis is carried out for a panel dataset using different econometric methodologies and empirical specifications. The results underline positive effects of EF on FDI inflows. They reveal that EF sub-components have varying impacts on FDI inflows, where rule of law, market openness, and less-restrictive regulatory environment stand out as the major FDI-promoting institutional factors. Also, there is an empirical evidence that the effects of EF sub-components on FDI inflows exhibit variations through the economic characteristics of the host countries and across geo-economic regions. The results suggest that governments should pursue EF-improving policies, which should be tailored according to the economic and geo-economic characteristics of the host countries, to increase FDI inflows.     

How does immigration affect modes of foreign market access: trade and FDI?

This article presents a study of the effects of immigration on trade and FDI. Our analysis is distinct from previous work because it systematically examines the interactions between immigration, trade and FDI. Previous studies treated FDI–immigration relationships as being independent of the modes of foreign market access. Using bilateral data of Japan and 28 other economies for the period 1996–2011, our analysis shows that FDI inflows become more dominant compared to imports when skilled immigration flows increase and less dominant when unskilled immigration flows increase. The results suggest that the relevant policy instruments as regards the promotion of trade, FDI and immigration should vary depending on economic goals, such as current account balances and labour shortages.     

Welfare Effects of Foreign Direct Investment: Cost Saving vs. Signaling

We compare the effects of two types of foreign direct investment (FDI) (viz., FDI for trade cost saving and FDI for signaling foreign cost of production) on consumer surplus, profit of the host-country firm and host-country welfare. We show that the effects are dramatically different. If the reason for FDI is to save trade cost, FDI (compared to export) always makes the consumers better off and the host-country producer worse off, while the effect on host-country welfare is ambiguous. However, if the FDI is to signal the foreign cost of production, FDI (compared to export) always makes the host-country producer better off and increases host-country welfare, while it makes the consumers almost always worse off.     

Assessing the Impacts of Capital Inflows on Domestic Economy across the Sub-Saharan Africa Countries

Using GMM models, this paper analyzes the impacts of capital inflows on domestic investment in 44 Sub-Saharan Africa (SSA) countries from 2003–2012. It is found that foreign direct investment across the SSA remains to be the largest percentage share, accounting for 35% of the total capital inflows. FDI inflows have significant positive impacts on domestic investment across the SSA in both short term and long term. Other key macroeconomic factors such as age dependency ratio, domestic economic growth, terms of trade, real effective exchange rate and trade openness also play vital roles in determining domestic investment.     

Predicting FDI inflows: Exploring a nonlinear relationship between peace years,oil wealth,and the rule of law

Despite previous studies investigating the impacts of various factors such as peace years, natural resources, and the rule of law on foreign direct investment (FDI), empirical findings remain inconclusive. Therefore, this study investigates the interplay between these factors in shaping host country conditions that facilitate FDI inflows. Using generalized additive models, we examine the simultaneous effects of peace years, oil wealth, and the rule of law on FDI inflows in a sample of non-OECD countries from 1970 to 2009. Our results reveal that established peace is a critical factor in attracting FDI inflows for both oil-exporting and non-oil-exporting countries. However, the effects of the rule of law vary depending on oil wealth. Oil-exporting countries receive more FDI inflows when they have a weak rather than a strong rule of law, while non-oil-exporting countries tend to receive more foreign investments when they have a moderately strong rule of law. We argue that countries with oil wealth combined with a moderately weak rule of law provide an environment that is conducive to multinational corporations (MNCs) in extractive industries seeking monopoly rents. Conversely, countries without oil wealth should create stable yet efficient environments that protect property rights and promote labor market flexibility to appeal to non-resource-seeking MNCs.