The impact of foreign direct investment on the relative return to skill

Since the early 1980s, China has adopted favourable economic policies to attract FDI in order to facilitate technology development. Since inward FDI induces either sector‐ or factor‐biased technical progress, the impact of FDI on the distribution of income between skilled and unskilled labour is not trivial. This paper introduces vertical product differentiation to analyze the impact of FDI on the return to skill and concludes that, for a labour abundant country, this impact depends on whether the FDI‐induced technology transfer is skill‐ or labour‐biased, regardless of which sector receives FDI. The analysis shows that FDI with relatively labour‐biased technology will decrease the wage gap while FDI with relatively skill‐biased technology will increase the profit margin of the host country’s exports as well as its wage gap. The findings provide policy insights for FDI recipient countries in balancing wage growth between skilled and unskilled workers by managing inward FDI with relatively labour‐biased and skill‐biased technologies. This is particularly important for China given the expected further increase of inward FDI following its imminent membership of the WTO. JEL classification: F23, J31, P33.     

Mises’ democracy–dictatorship equivalence theorem: A critique

Ludwig von Mises argues that public opinion, not the form of government, is the ultimate determinant of policy. The implication is that, holding public opinion constant, democracies and dictatorships will have the same policies—a result I call Mises’ Democracy–Dictatorship Equivalence Theorem. According to Mises, dictators have to comply with public opinion or else they will be overthrown. I argue that he seriously overestimates the power of revolution to discipline dictators. Mises was perceptive to note that, in practice, “dictatorially imposed” policies are often democratically sustainable, but he neglected several mechanisms—all more plausible than the threat of revolution—capable of explaining this fact.

The Influence of Socioeconomic Factors on Economic Growth

The main goal of this paper is to analyse the relationship between social capital and economic growth taking into account the role of fiscal policy from theoretical and empirical points of view. To achieve this goal, “Human Capital and Public Capital Effects on Economic Growth” is focused on the effects of two traditional factors: human capital and public capital effects on economic growth. “Social Capital Effects on Economic Growth” considers qualitative variables introducing some socioeconomic effects on economic growth process analysis. In this case, social capital the main variable will be considered. “Empirical Analysis,” an empirical analysis is developed considering the case of European countries prior to the EU enlargement. Finally, in Conclusions,” the main conclusions will be resumed.      

FDI and environmental regulation: pollution haven or a race to the top?

Increasing foreign direct investment (FDI) flows accompanied with globalization have raised the concern of a “race to the bottom” phenomenon in environmental protection. This is because footloose investors of “dirty” industries tend to relocate to “pollution havens” of the developing world. However when pollutant is transboundary (as in the case of greenhouse gases), the source country’s incentive to relocate and the recipient country’s willingness to host such industries are not straightforward. This article studies the relationship between FDI and environmental regulation using a North–South market share game model in a two-country setting, when pollution is transboundary. Contrary to the pollution haven hypothesis, our model shows that if market sizes of the two countries are small, FDI will raise the emission standard of the host country, resulting in a “race-to-the-top” phenomenon; but if market sizes are large enough, FDI will not change the emission standard of the South (from its laxest form), a finding that is consistent with the “regulatory chill” argument. Equilibrium FDI is contingent on the fixed cost of FDI, as the traditional proximity–concentration tradeoff theory predicts.     

Bilateral FDI potentials for Austria

Trade economists have for long considered gravity models to estimate unexhausted potentials for bilateral trade. Similar to the discrepancy between “normal” and “actual” bilateral trade, one may ask the question about the difference between “normal” and actual bilateral multinational activity. However, with multinational activity, zero bilateral data and heteroskedasticity are very important, even more so than with trade data. Therefore, this paper suggests using generalized linear rather than log-linear models to specify “normal” FDI and obtain estimates of unexhausted FDI potentials. I use panel data on Austria’s bilateral multinational activity across 25 countries and 7 country-blocs, 4 sectors and 13 years to illustrate the disadvantage of log-linear model estimation at quasi-maximum likelihood estimation.     

FDI Effects on National Competitiveness: A Cluster Approach

Despite the close relationship between the activities of multinational enterprises (MNEs) and the competitiveness of host countries, few studies have linked these two subjects from a global perspective. Combining Porter’s approach and the work accomplished by international business economists provides a powerful analytical tool with which to review the recent empirical and theoretical literature on the effects of foreign direct investment (FDI) on national competitiveness. The contention is that FDI can indeed be a source of competitiveness but that previous studies have neglected the role of location, in particular the role of clustering on the absorptive capacity of the host State. The aim of this paper is to provide a comprehensive conceptual framework for assessing the effects of FDI on competitiveness to guide policy-makers as well as further research. This study is part of the research project entitled, “Multilateral Rules on Trade and Investment,” supported by the NCCR project “International Trade Regulation: From Fragmentation to Coherence,” World Trade Institute (WTI), Berne.     

FDI and growth in transition economies: Does the mode of transition make a difference?

The countries of Central and Eastern Europe are a unique group of countries. In the process of transformation to market economies, some of them adopted the “shock therapy” while others the “gradualism” mode. Foreign Direct Investment (FDI) plays an important role in economic growth through the addition of physical capital, technological know-how, management skill and marketing network. This paper empirically demonstrates that the mode of transformation definitely affects the effectiveness of FDI in promoting growth. (JEL: P3, P33)     

Policy mix and debt sustainability: evidence from fiscal policy rules

This paper characterizes rules-based fiscal policy setting for G-3 and large EMS countries. We set up a simple fiscal policy rule and then infer on the policymakers’ reaction coefficients by testing with GMM. Our results qualify existing evidence on systematic fiscal policy in two respects. First, fiscal policy usually stabilizes public debt; and there is indeed substantial interaction between fiscal and monetary policies via the policy mix or the debt channel. Second, sustainability is achieved with a “stop–go” cycle of consolidation. Unless debt ratios are high, consolidation does not come at the cost of less cyclical stabilization.     

Harvesting in an integrated general equilibrium model

Harvesting of prey biomass is analyzed in an integrated ecological-economic system whose submodels, a predator–prey ecosystem and a simple economy, are microfounded dynamic general equilibrium models. These submodels are interdependent because the ecosystem responds to harvesting—through the reactions of optimizing individual organisms—by changing the provision of public ecosystem services to consumers. General analytical results are derived regarding the impact of harvesting policies on short-run equilibria of both submodels, on population dynamics, and on stationary states of the integrated model. A key insight is that prey biomass carries a positive ecosystem price which needs to be added as a tax mark-up to the economic price of harvested biomass to attain allocative efficiency. Further information on the dynamics is gained by resorting to numerical analysis of the policy regimes of zero harvesting, laissez-faire harvesting and efficient harvesting.

It “... is a matter of weighing costs and benefits of taking action, whether the action is the “inert” one of leaving resources alone in order to conserve them, or whether it involves exploiting a resource ... for so-called material ends”. Pearce (1976, p. 320)

Helpful comments from an anonymous referee are gratefully acknowledged. Remaining errors are the authors’ sole responsibility.     

Economic policy making in evolutionary perspective

Economic policy making is discussed from three different angles: the political economy of actual policy making (“what policy does do”), the analysis of policy instruments for given ends (“what policy could do”), and the debate on policy goals and their legitimization (“what policy ought to do”). Center stage in the evolutionary perspective is new, positive and normative knowledge which is unfolding during the policy making process and in its aftermath. It is argued that this implies regularities and constraints which extend and modify the comparative-static interpretations of public choice theory, economic policy making theory, and social philosophy. RID="*" ID="*" The author should like to thank three anonymous referees of this journal and the editor for helpful comments on an earlier version of the paper.     

Evaluating active labor market programs in Romania

Using unusually rich (for transition economies) follow-up survey data and propensity score matching techniques, this paper seeks to increase our knowledge on what active labor market programs (ALMPs) work in South-East European countries by providing estimates of the effects of four ALMPs implemented in Romania in the late 1990 s. We find that three programs (training and retraining, self-employment assistance, and public employment and relocation services) had success in improving participants’ economic outcomes. In contrast, public employment was found detrimental for the employment prospects of its participants. Our sensitivity analysis also finds evidence that, in the case of training and retraining, self-employment assistance, and public employment and relocation services, operators “cream off” the most qualified candidates among the unemployed; whereas public employment seems to be used as a regional policy by “bringing work to the workers”, that is, creating jobs in high unemployment regions.     

On the growth and welfare effects of monopolistic distortions

The most fundamental proposition about growth and competition is that there is a tradeoff between static welfare and long-term growth. This paper reconsiders this basic proposition in an expanding variety endogenous growth model with competitive markets for “old” innovative products and for a traditional good. We shed light on some implications of monopolistic distortions which tend to be ignored by standard models. First, no growth may be better than some growth, since modest positive growth potentially requires sizeable static welfare losses. Second, the economy may converge to a steady state with zero growth, even though a locally saddle-point stable steady state with positive growth exists if the initial share of “cheap” competitive markets is sufficiently high, as this implies a relatively low demand for “expensive” innovative goods. Third, such a “no-growth trap” may happen in a world economy made up of several countries engaged in free trade with each other. The policy implications are that growth-enhancing policies may be misguided and that quick deregulation as well as quick trade liberalization can lead to stagnation in the long term.      

Rationality,constitutions, and the ethics of rules

It seems clear that individuals stand to mutually benefit, in a wide variety of situations, from structuring their interactions in terms of constitutional practices. But a commitment to treat the rules defining such practices as setting real constraints on choice—a commitment to what could be characterized as an “ethics of rules”—is hard to reconcile with the standard, consequentialist theory of rational choice, which requires, in effect, that individuals regard any rule as providing no more than a “maxim” for choice. Such a theory of rational choice, then, constrains individuals to settle for a second best outcome in which choice is aligned with practice rules by means of strategies of precommitment and threats. The outcome is second best because such methods yield only partial alignment, and involve the expenditure of scarce resources, as well as a sacrifice of flexibility and freedom. To say this, however, is to identify the corresponding theory of rational choice as havingconsequentially unacceptable implications. A modified theory of choice is presented, which is still consequentially oriented, but which assesses consequences in a more holistic manner. It is then argued that this modified theory can provide a rational choice grounding for the needed “ethics of rules.” The author would like to thank three anonymous referees for their very helpful comments and suggestions.     

Local Transportation Policy and the Environment

The paper introduces a simple framework for analyzing the environmental effects of local transportation policies, and it reviews some evidence. In several cases, subsidies for local public transportation have led to substantial reductions in road transportation and have thereby reduced externalities. Some but not all estimates suggest positive overall welfare effects of such policies. In the rare cases where road pricing has been applied, it has helped to reduce automobile transportation, and it has led to environmental improvements. The experience with specific driving restrictions like “days without cars” and “low emission zones” has been mixed. Local transportation policy can have a useful role to play as a complement to national policy instruments, but neither efficiency nor effectiveness can be taken for granted.     

Do brain drain and poverty result from coordination failures?

The bidirectional causal links between high-skilled emigration and poverty can give rise to multiple equilibria and coordination failures. Two countries sharing identical characteristics may end up in either a “low poverty-low brain drain” equilibrium or in a “high poverty-high brain drain” equilibrium. In this paper, we build a model which endogenizes high-skilled emigration and economic performances in order to derive the conditions under which multiplicity occurs. After identifying country-specific parameters, we find that in the majority of developing countries, the best equilibrium is selected and that the observed brain drain is inevitable. In 22 small developing countries however, the worse equilibrium prevails, implying that poverty and brain drain are increased by coordination failure. These countries require appropriate development policies, such as a temporary subsidization of the repatriation of their high-skilled expatriates. Our results are robust to the inclusion of a brain gain mechanism.     

Economic Growth and (Re-)Distributive Policies in a Non-cooperative World

Many models show that redistribution is bad for growth. This paper argues that in a non-cooperative world optimizing, redistributing (“left-wing”) governments mimic non-redistributing (“right-wing”) policies for fear of capital loss if capital markets become highly integrated and the countries are technologically similar. “Left-right” competition leads to more redistribution and lower GDP growth than “left-left” competition. Efficiency differences allow for higher GDP growth and more redistribution than one's opponent. Irrespective of efficiency differences, however, “left-wing” governments have higher GDP growth when competing with other “left-wing” governments. The results may explain why one observes a positive correlation between redistribution and growth across countries, and why capital inflows and current account deficits may be good for relatively high growth.     

WHAT ATTRACTS FOREIGN MULTINATIONAL CORPORATIONS TO CHINA?

After adopting the open-door policy, China experienced a boom of inward foreign direct investment (FDI) by multinational corporations. This article attempts to assess effects of location characteristics and government policies on FDI flows during the period 1987–98. A model of FDI determinants is specified and estimated with cross-section and panel data. The estimates indicate that China's huge market size, liberalized FDI regime, and improving infrastructure are attractive to multinationals. The regional distribution of FDI within China is influenced largely by FDI incentives and historical-cultural links with foreign investors, along with other location factors.     

Agreeing on generalized Darwinism: a response to Geoffrey Hodgson and Thorbj?rn Knudsen

I thank Geoffrey Hodgson and Thorbj?rn Knudsen for their thought-provoking response to my latest generalization of Darwinism, and welcome their proposal to cooperate, after many years of our independent searches. I agree with them that our searches contain more similarities than both they and I had previously seen, but consider our remaining differences—especially in the terms employed and in the definitions of the terms we both employ, including “information,” “instructions,” “programs,” and “Lamarckism”—more important than they do. Their response also exaggerates or distorts some of my arguments. All this needs to be clarified before our cooperation can start.     

Constitutional Foundations of Economic Freedom: A Time-Series Cross-Section Analysis

Using time-series cross-section analysis, we provide additional empirical validation for the principal-agent model developed by Adserà et al. (2003). In our innovation, efficient economic policy is proxied by “economic freedom” from the Fraser Institute database and constitutional “political institutions” are proxied by variables from the Database of Political Institutions. Our results suggest that the more credible the threat of removal from office, the more government officials will pursue efficient economic policies. The authors are grateful to Alan Hamlin and an anonymous referee for their highly valuable input to the development of this paper. Tel.: +1-604-291-4167     

Liberty and Economic Growth in Adam Smith’s Possible World

Constitutional economics proposes and pursues a solution to public-policy problems, one that supplies rules designed to narrow the opportunity set of rational politicians. This work proposes and pursues “rational policy” as a complementary strategy to solve public-policy problems, where rational policy is public-policy that actualizes Adam Smith’s simple system of natural liberty. When individuals pursue their objectives by means of exchange in Smith’s simple system of natural liberty, they foster the growth of per-capita income. By contrast, all limitations on liberty limit the growth of per-capita income. The paper concludes by presenting two implications that follow from these conclusions. JEL classification: B31, H1