Migrant networks and foreign direct investment

Although there exists a sizeable literature documenting the importance of ethnic networks for international trade, little attention has been devoted to studying the effects of migrants on foreign direct investment (FDI). The presence of migrants can stimulate FDI by promoting information flows across international borders and by serving as a contract enforcement mechanism. This paper investigates the link between the presence of migrants in the US and US FDI in the migrants' countries of origin, taking into account the potential endogeneity concerns. The results suggest that US FDI abroad is positively correlated with the presence of migrants from the host country. The data further indicate that the relationship between FDI and migration is stronger for migrants with tertiary education.     

Intra-industry trade with multinational firms

Recent developments, including the analysis of firm-level adjustment to falling trade costs, have contributed to a revival of interest in intra-industry trade (IIT). Most empirical work still relies on the standard Grubel-Lloyd measure. This however refers only to international trade, disregarding income flows stimulated by repatriated profits of multinational firms. Given the overwhelming importance of the latter, this is a major shortcoming. This paper provides a guide to measurement and estimation of the determinants of bilateral IIT shares from the perspective of new trade theory with multinational firms. We develop an analytically solvable general equilibrium model to investigate the impact of investment costs, multinational activities and income flows from repatriated profits. We also discuss and quantify the bias of the Grubel-Lloyd index associated with repatriated profit flows of multinationals. Using bias-corrected versions of the Grubel-Lloyd index as the dependent variable, we demonstrate that the determinants motivated by our theoretical analysis offer important insights into variations in IIT shares.     

Offshoring along the production chain

Abstract In this paper, we analyze the offshoring decision of firms whose production process is characterized by a particular sequence of steps. International cost differences vary non‐monotonically along the production chain, and moving unfinished goods across borders incurs transport costs. We show that, in such a setting, firms may refrain from offshoring even if relocating individual steps would be advantageous in terms of offshoring costs, or they may offshore (almost) the entire production chain to save transport costs. Small variations in model parameters may thus have a substantial impact on offshoring activities.     

Regional economic integration and geographic concentration of multinational firms

A number of theoretical studies have predicted that preferential trade agreements (PTAs) raise outside multinationals’ incentive to invest in the participating countries, especially in those that are integrated with larger markets and have lower production costs. The hypothesis has, however, not been tested empirically. This paper addresses the issue by estimating the impact of PTAs on countries’ ability to attract multinationals. The evidence is broadly consistent with expectations. The formation of PTAs leads to an increase in FDI by outside multinationals, but the effect varies sharply with the size of integrated markets and countries’ comparative advantage. Countries integrated with larger markets experience a greater increase in total and export-platform FDI. Those with a higher labor endowment also attract more FDI especially in labor-intensive industries, but at the expense of their labor-scarce PTA partners.     

Foreign subsidiaries as a channel of international technology diffusion: Some direct firm level evidence from Belgium

The use of foreign direct investment as a channel of international spillovers is by now fairly established in the empirical literature on innovation and growth. It is often argued that subsidiaries of foreign multinational enterprises are a mechanism through which technological know-how flows across borders. For foreign subsidiaries to be channels of international spillovers, these subsidiaries need to source know-how internationally and transfer their know-how to the local economy. Using direct firm level evidence from the Belgian Community Innovation Survey on the occurrence of technology transfers, we find that foreign subsidiaries are indeed more likely to acquire technology internationally. But after controlling for the superior access to the international technology market that foreign subsidiaries enjoy, we find that these firms are not more likely to transfer technology to the local economy as compared to local firms.     

FDI in space: Spatial autoregressive relationships in foreign direct investment

There are a number of theoretical reasons why foreign direct investment (FDI) into a host country may depend on the FDI in proximate countries. Such spatial interdependence has been largely ignored by the empirical FDI literature, with only a couple recent papers accounting for such issues in their estimation. This paper conducts a general examination of spatial interactions in empirical FDI models using data on US outbound FDI activity. We find that estimated relationships of traditional determinants of FDI are surprisingly robust to inclusion of terms to capture spatial interdependence, even though such interdependence is estimated to be significant. However, we find that both the traditional determinants of FDI and the estimated spatial interdependence are quite sensitive to the sample of countries one examines.     

FINANCIAL CONSTRAINTS, GLOBAL ENGAGEMENT, AND FIRM SURVIVAL IN THE UNITED KINGDOM: EVIDENCE FROM MICRO DATA

Financial constraints have been found to play an important role on various aspects of firm behavior. Yet, their effects on firm survival have been largely neglected. We use a panel of 61,496 UK firms over the period 1997–2002 to study the effects of financial variables on firms' failure probabilities, differentiating firms into globally engaged and purely domestic. Estimating a wide range of specifications, we find that lower collateral and higher leverage result in higher failure probabilities for purely domestic than for globally engaged firms. This can be seen as evidence that global engagement shields firms from financial constraints.     

The spatial organization of multinational firms

Abstract Using six years of firm‐level data covering 224 regions of the enlarged European Union, we evaluate the importance to a firm of locating its activities (production, headquarters, R&D, logistics and sales) close together. We find that, after controlling for regional characteristics, being closely located to a previous investment positively affects firm location choice. However, the impact of distance is dependent on the type of investment (production or service). The impact dies out faster for service activities. Finally, we show that a surprisingly positive effect comes from locating a new production plant close to an existing production investment, but in another country.     

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.     

Intellectual property rights, multinational firms and economic growth

This paper develops a model of North-South trade with multinational firms and economic growth in order to analyze formally the effects of stronger intellectual property rights (IPR) protection in developing countries. In the model, Northern firms invent new higher-quality products, multinational firms transfer manufacturing operations to the South and the Southern firms imitate products produced by multinational firms. It is shown that stronger IPR protection in the South (i.e., the adoption and implementation of the TRIPs agreement) leads to a permanent increase in the rate of technology transfer to the South within multinational firms, a permanent increase in R&D employment by Southern affiliates of Northern multinationals, a permanent decrease in the North-South wage gap, and a temporary increase in the Northern innovation rate.     

Spatial effects of foreign direct investment in US states

Abstract This paper estimates the aggregate productivity effects of Marshallian externalities generated by foreign direct investment (FDI) in US states, controlling for Marshallian externalities and other spatial spillovers generated by domestic firms. A regional production function framework models externalities and other spatial spillovers explicitly as determinants of total factor productivity. We employ a system generalized method of moments (GMM) estimator to account for the potential endogeneity of FDI and the presence of spatial lags. Using data for US states from 1977–2003, the results indicate that FDI generates positive externalities, while externalities from domestic firms are negative.     

Competition in taxes and performance requirements for foreign direct investment

Tax incentives offered to attract firms engaged in foreign direct investment are often tied to performance requirements such as domestic content restrictions or adherence to environmental standards. The tax competition literature has repeatedly shown that competition between municipalities for mobile firms tends to drive taxes to low levels. One would expect a comparable result for burdensome performance requirements. Despite this, the evidence suggests that while taxes have indeed been driven down, performance requirements are as popular as ever. We explain this seeming conundrum by showing that in the presence of spillovers, binding performance requirements can act as a coordination device for firms. In equilibrium, municipalities choose performance requirements, which maximize joint surplus from investment. Competition between municipalities then transfers this surplus to firms via tax subsidies.     

The Feldstein-Horioka puzzle in African countries: A panel cointegration analysis

This paper investigates the Feldstein-Horioka coefficients for 37 African countries using the recently developed Pooled Mean Group (PMG), Fully Modified OLS (FMOLS), and Dynamic OLS (DOLS) panel cointegration techniques. The empirical findings reported in this paper reveal that savings and investment are non-stationary and cointegrated series. The estimated coefficients using FMOLS, DOLS, and PMG are 0.38, 0.58, and 0.36, respectively, for the sample as a whole for the period from 1970 to 2006. These results confirm previous studies' findings that capital was relatively mobile in African countries compared to OECD countries. In addition, our study shows that there are marked differences in savings retention coefficients for different country groups in Africa (CFA franc zone and non-CFA franc zone countries, oil-producing and non-oil-producing countries, civil law and common law countries). These results have some policy implications.     

Trade costs, wage rates, technologies, and reverse imports

Abstract .  This paper explores the effects of transport costs, tariffs, and foreign wage rates on the domestic economy in the presence of reverse imports, with special emphasis on inter-firm cost asymmetry in an international oligopoly model. To serve the domestic market, a foreign firm produces in the foreign country, while two domestic firms produce either at home or abroad. Surprisingly, an increase in the foreign wage rate may increase the profits of a firm producing in the foreign country. Even if all firms produce in the foreign country, an increase in the foreign wage rate may improve domestic welfare.     

STAY OR LEAVE? CHOICE OF PLANT LOCATION WITH COST HETEROGENEITY

Using a two-country model, we examine location choices by two domestic firms when they serve only the domestic market and their cost structures differ. The findings indicate that whether the firm that has a greater incentive for foreign direct investment is more or less efficient depends on the differences in domestic and foreign marginal costs, trade costs, and the presence of fixed costs. Plant locations may not be uniquely determined. In particular, a small change in trade costs may reverse plant location. Moreover, a decrease in transport costs in the presence of foreign direct investment may deteriorate domestic welfare.     

Agglomeration,backward and forward linkages: evidence from South Korean investment in China

Abstract With a firm‐level data set, we study the location decision of South Korean multinationals across China's regions. Our conditional logit estimates confirm agglomeration effects along industry and along national lines. We add an upstream and downstream (backward and forward) linkage effect. We find that the presence of upstream and downstream South Korean affiliates significantly increases the likelihood that a South Korean multinational invests in a particular region. However, linkages that do not differentiate by nationality do not seem to matter much. As such, our analysis of investors' location choice brings together two perspectives: linkages and agglomeration along national lines.     

The demand for tax haven operations

What types of firms establish tax haven operations, and what purposes do these operations serve? Analysis of affiliate-level data for American firms indicates that larger, more international firms, and those with extensive intrafirm trade and high R and D intensities, are the most likely to use tax havens. Tax haven operations facilitate tax avoidance both by permitting firms to allocate taxable income away from high-tax jurisdictions and by reducing the burden of home country taxation of foreign income. The evidence suggests that the primary use of affiliates in larger tax haven countries is to reallocate taxable income, whereas the primary use of affiliates in smaller tax haven countries is to facilitate deferral of U.S. taxation of foreign income. Firms with sizeable foreign operations benefit the most from using tax havens, an effect that can be evaluated by using foreign economic growth rates as instruments for firm-level growth of foreign investment outside of tax havens. One percent greater sales and investment growth in nearby non-haven countries is associated with a 1.5 to 2% greater likelihood of establishing a tax haven operation.     

Systems GMM estimates of the Feldstein–Horioka puzzle for the OECD countries and tests for structural breaks

A systems GMM estimation method is used to estimate the Feldstein–Horioka equation from 1960 to 2007 with a panel of 13 OECD countries. It is found that the Feldstein–Horioka puzzle exists in a weaker form with a much reduced saving retention coefficient. The Bretton Woods agreement in particular seems to have weakened the Feldstein–Horioka puzzle by significantly improving international capital mobility. In comparison the Maastricht agreement seems to have improved capital mobility only by a small magnitude. The Blundell and Bond systems GMM method and structural break tests of Mancini-Griffoli and Pauwels are used in this paper.