Precautionary demand for foreign assets in Sudden Stop economies: An assessment of the New Mercantilism

Financial globalization had a rocky start in emerging economies hit by Sudden Stops. Foreign reserves have grown very rapidly since then, as if those countries were practicing a New Mercantilism that views foreign reserves as a war chest for defense against Sudden Stops. This paper conducts a quantitative assessment of this argument using a stochastic intertemporal equilibrium framework in which precautionary foreign asset demand is driven by output variability, financial globalization, and Sudden Stop risk. In this framework, credit constraints produce endogenous Sudden Stops. We find that financial globalization and Sudden Stop risk can explain the surge in reserves but output variability cannot. These results hold using the intertemporal preferences of the Bewley–Aiyagari–Hugget precautionary savings model or the Uzawa–Epstein setup with endogenous impatience.     

Corporate transparency, cream-skimming and FDI

We develop a simple information-based model of Foreign direct investment (FDI) flows. On the one hand, the relative abundance of “intangible” capital in specialized industries in the source countries, which presumably generates expertise in screening investment projects in the host countries, enhances FDI flows. On the other hand, host-country relative corporate-transparency diminishes the value of this expertise, thereby reducing the flow of FDI. The model also demonstrates that the gains for the host country from FDI [over foreign portfolio investment (FPI)] are reflected in a more efficient size of the stock of domestic capital and its allocation across firms. These gains are shown to depend crucially (and positively) on the degree of competition among FDI investors. We provide also some evidence on the effects of corporate transparency indicators, such as accounting standards, on bilateral FDI flows from a panel of 24 OECD countries over the period of 1981-1998.     

Does FDI crowd out domestic investment in transition countries?

The aim of this paper is to empirically investigate the relationship between foreign direct investment (FDI) and domestic investment in a sample of 10 Central and Eastern European countries over the period 1995–2015. We find FDI to lead to a creative destruction phenomenon, with a short‐term crowding out effect on domestic investment, followed by a long‐term crowding in. Greenfield FDI develops stronger long‐run complementarities with domestic investment, while mergers and acquisitions do not show a significant effect on domestic investment. Financial development seems to mitigate crowding out pressures and even foster a crowding in for mergers and acquisitions.     

TARIFF JUMPING FOREIGN DIRECT INVESTMENT DECISION IN A QUALITY‐DIFFERENTIATED MARKET

Using a product differentiation model, this paper discusses the issue of transnational firms evading tariffs and investing directly in a host country (through foreign direct investment (FDI)). Where product quality is differentiated between foreign and host country firms and assuming a firm's quality requirement is a long‐term strategy and is not affected by a foreign firm's trade decision, we obtain the following findings. First, whether or not a host country firm produces high or low quality products, raising the quality requirement for foreign products will increase the possibility of a foreign firm choosing FDI instead of exporting a product to the host country. Second, raising the quality requirement for domestic products will lower the possibility of foreign firms choosing FDI without regard to the product's quality. Finally, given a competitor in the host country, in FDI, a foreign high‐quality product‐producing firm has an advantage over a low‐quality product‐producing firm. We also find that even when firms' quality decisions are affected by a foreign firm's trade decision, most of the above results will still hold.     

Antidumping duties, undertakings, and foreign direct investment in the EU

We study the effects of EU antidumping policy when foreign firms can ‘jump’ antidumping duties through foreign direct investment (FDI) in the EU. We show that duty jumping or duty pre-empting FDI occurs if the EU administration has broader objectives than protecting EU industry's profitability and if cost advantages of foreign firms are transferable abroad. The (expectation of) price undertakings reduces the incentives to engage in FDI and may even discourage FDI as long as products are not too differentiated. The results are consistent with recent empirical findings on antidumping jumping FDI.     

Foreign Direct Investment,Economic Growth,and the Human Capital Threshold: Evidence from US States*

The United States has experienced a dramatic increase in foreign direct investment (FDI) in recent years. While foreign firms bring immediate benefits of high‐paying jobs, data limitations have prevented detailed study on FDI's long‐term effects on the states receiving it. By creating a new stock measure of FDI based on employment, we are able to capture these long‐term effects. Results demonstrate that FDI has a greater impact on per capita output growth than domestic investment for US states that meet a minimum human capital threshold. Ironically, the most active states in the recruitment of FDI tend to fall below this threshold.     

Foreign direct investment and exports The experiences of Vietnam1

We examined the implementation statuses of a total of 5,919 foreign direct investment (FDI) projects approved by the Vietnamese Ministry of Planning and Investment since 1988, and compiled a database of actually disbursed FDI in Vietnam. The database covers FDI flows into Vietnam from 23 countries from 1990 to 2004. Using the data, we analyzed the impact of FDI on the exports of Vietnam with gravity equations. The empirical results demonstrate that FDI is one of the major factors driving the rapid export growth of Vietnam. It has significantly facilitated the expansion of Vietnam's exports to FDI source countries. In particular, the empirical analysis shows that a 1 percent increase in FDI inflows will be expected to give rise to a 0.13 percent increase in Vietnam's exports to these countries.     

Location factors of FDI and the growing services economy1

Foreign direct investment (FDI) has increasingly shifted toward the service sector. This change in the industrial composition of FDI and the non‐tradable nature of services may have altered the importance of location factors for investment decisions. To capture potential changes in FDI determinants, a contrasting sectoral analysis is performed. Based on FDI stock data from eight new EU member states for the period 1998–2004, we implement a dynamic panel approach allowing the speed of adjustment to the equilibrium investment level to vary across sectors. Results support our assumption that investment into the service sector, which is characterized by low installation costs, adjusts much faster to its desired level than manufacturing FDI. Thus, government interventions to attract FDI are likely to boost the service sector immediately while having a slower impact on manufacturing FDI. Furthermore, as services are mostly non‐tradable, FDI into this sector is largely based on market‐seeking motives while FDI in the manufacturing sector is also driven by international price competitiveness measured by real unit labour costs.     

Privatization, strategic foreign direct investment and host-country welfare

Recent evidence shows that developing countries and transition economies are increasingly privatizing their public firms and at the same time experiencing rapid growth of inward foreign direct investment (FDI). We show that there is a two-way causality between privatization and greenfield FDI. Privatization increases the incentive for FDI, which, in turn, increases the incentive for privatization compared to the situation of no FDI. The optimal degree of privatization depends on the cost difference of the firms, and on the foreign firm's mode of entry.     

Foreign direct investment,heterogeneous workers and employment security: Evidence from Germany

We analyze how foreign direct investment (FDI) affects employment security using administrative microdata for German employees. Measuring FDI intensity at the industry level enables us to take into account the sum of direct effects at multinationals as well as indirect effects of FDI throughout the affected industry. We find that both inward and outward FDI significantly reduce employment security. This is particularly the case for inward FDI coming from the western part of the European Union as well as for outward FDI going to Central and Eastern Europe. The effects are sizeable for older and low‐skilled workers.     

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.     

FDI and productivity growth: the role of inter‐industry linkages

Abstract There is a large literature on the effects of foreign direct investment (FDI) on productivity through inter‐industry economic linkages. This paper contributes to the literature by focusing on the developed economy of Canada. It finds that FDI generates strong effects on total factor productivity (TFP) growth through both forward and backward inter‐industry linkages, and increase in an industry's absorptive capacity raises the effects of FDI on TFP growth through forward inter‐industry linkages. For R&D intensive industries, the effects of FDI on TFP growth through inter‐industry linkages are small, but imports turn out to be an important source for TFP growth.     

The composition of foreign direct investment and protection of intellectual property rights: Evidence from transition economies

While existing literature examined the impact of intellectual property protection on the volume of foreign direct investment (FDI), little is known about its effect on the composition of FDI inflows. This paper addresses this question empirically using a unique firm-level data set from Eastern Europe and the former Soviet Union. It finds that weak protection deters foreign investors in technology-intensive sectors that rely heavily on intellectual property rights. Moreover, the results indicate that a weak intellectual property regime encourages investors to undertake projects focusing on distribution rather than local production.     

The Relationship Between Growth,Total Investment and Inward FDI: Evidence from Time Series Data

This paper explores the causal relationship between growth, total investment and inward FDI in 47 countries. Using error‐correction model, the significance, direction and sign of long‐run and short‐run causal effects between GDP, capital stock and FDI stock are investigated. The miscellaneous results echo the divergent theoretical viewpoints and the mixed empirical results of previous works. However, the evidence found in this study suggests that there are differences in growth mechanism between developed and developing countries, between various developing regions, and between oil‐exporting and non‐oil‐exporting countries. The main policy implication is that capital investment is essential for growth while FDI’s effect is uncertain in developing countries. FDI as well as total investment enhances growth only under some conditions.     

Does the Single Currency Affect Foreign Direct Investment?*

Does the creation of the euro partly explain the sharp increase in European investments? To address this question, we derive a simple gravity‐like model for bilateral foreign direct investment (FDI). Using this model, we find that the Economic and Monetary Union (EMU) has increased intra‐EMU FDI stocks on average by around 30 percent. This effect varies over time and across EMU members. It is found to be larger for the outward investments of the less‐developed EMU members. Moreover, contrary to early expectations of FDI diversion effects, EMU countries have invested more in non‐EMU countries since the launch of the euro.     

Sovereign defaulters: Do international capital markets punish them?

We empirically study whether countries that default on their debt experience a reduction in their capital inflows, as suggested by the literature. Our data contain information on (i) the defaulter countries and their creditors and (ii) bilateral foreign direct investment (FDI) flows. With these we can study how FDI flows are affected by sovereign default by distinguishing between those flows coming from defaulters' creditor countries and others. According to our estimations, this distinction is crucial since the decline of FDI in flows after default is markedly concentrated on those flows originating in defaulters' creditor countries. The decay in FDI flows is higher in the years closer to the default date and for countries that have defaulted more times. We do not find evidence that countries shut their doors to defaulters' investment abroad, which is also a cost of default suggested in the literature.     

The benefits to domestically owned plants from inward direct investment: the role of vertical linkages

Abstract The paper estimates the effects of the U.S. direct investment in Canada upon productivity in domestically owned plants. We distinguish between FDI in the industry of domestically controlled plants and FDI in the industries linked through supply or use of intermediate inputs. We find that an increase in supplier FDI increases productivity growth in domestically controlled plants. The positive productivity effects of FDI are more pronounced for plants that buy more intermediates and who purchase science‐based intermediate inputs (i.e., electronics, machinery and equipment, and chemicals). Productivity of domestic plants also benefits from larger‐scale and higher rates of advanced technologies adoption.     

Price undertakings, VERs, and foreign direct investment: the case of foreign rivalry

Abstract.  Antidumping (AD) petitions are often withdrawn in favour of voluntary export restraints (VERs) and price undertakings. This paper compares these policy options in the presence of protection-jumping foreign direct investment (FDI), with special emphasis on rivalry between foreign firms. We show that a VER is less likely to induce FDI than a price undertaking or AD. As a result, by settling AD cases with VER agreements, the importing country can pursue a more protectionist policy without triggering FDI. In this sense the GATT ban on VERs following the proliferation of AD uses was a sensible decision.     

Determinants of foreign direct investment

Empirical studies of bilateral foreign direct investment (FDI) activity show substantial differences in specifications with little agreement on the set of included covariates. We use Bayesian statistical techniques that allow one to select from a large set of candidates those variables most likely to be determinants of FDI activity. The variables with consistently high inclusion probabilities include traditional gravity variables, cultural distance factors, relative labour endowments and trade agreements. There is little support for multilateral trade openness, most host‐country business costs, host‐country infrastructure and host‐country institutions. Our results suggest that many covariates found significant by previous studies are not robust.     

3D printing,international trade,and FDI

We analyze the relationship between 3D printing technology, the volume of trade, and the structure of foreign direct investment (FDI). We present a standard trade model with firm-specific heterogeneity into which we include 3D printing as a technology choice for foreign direct investment. The model generates three predictions. First, 3D printers are introduced in areas with high economic activity that face high transport costs. Second, technological progress in 3D printing leads to FDI dependent on traditional techniques gradually being replaced by FDI based on 3D printing. Third, with wider adoption, further technological progress in 3D printing leads to a gradual replacement of international trade. Empirical evidence focusing on the sectors with the highest rates of adoption supports the first hypothesis, while evidence from a case study supports the second and third. Our results suggest that the traditional strategy of poor countries for export-led industrialization is threatened by the widespread adoption of 3D printing that replaces international trade.