Does distance matter in foreign direct investment sub-national location choice? Evidence from China

Multinational enterprises (MNEs) make investment decisions according to the distance factors at a sub-national level. This paper made estimates using the gravity model with provincial foreign direct investment (FDI) data from 2000 to 2012 and employed three concepts of distance. Our empirical results indicate that geographic distance and cultural distance have significant negative effects on FDI flow, whereas economic distance has a significant positive effect. It suggests that FDI prefers to locate in regions that are geographically and culturally close but economically distant from the home country, which further implies that FDI in China is dominated by vertical FDI. Our findings suggest that Chinese provincial governments should place emphasis on attracting FDI from culturally close countries and provide institutional support to encourage and promote horizontal FDI.     

Do remittances spur economic growth? Evidence from developing countries

This paper provides original econometric evidence on whether international remittance transfers spur economic growth based on data for a sample of 49 developing countries during the period 2001-2013. Using Panel Smooth Transition Regression (PSTR), difference and system generalized methods of moment models, we find two main results. First, remittances have a positive and significant impact on economic growth in developing countries, while aid and foreign direct investments have insignificant impact. Secondly, as far as the nonlinear relationship is concerned, we find two extreme regimes with a sharp shift characterizing the remittance–growth relationship, with respect to conditional variables, where the remittances effects are positive and significant under the first regime and negative or insignificant under the second. Our findings suggest that the nonlinear relationship between remittances and growth mainly depends on financial development and investment, and less on remittance level and consumption.     

Foreign direct investment and entrepreneurship: Does the role of institutions matter?

Development economics, international business, and entrepreneurship literature suggest that foreign direct investment (FDI) has significant positive spillover effects for entrepreneurial activities of host economies. However, the findings of past research are mixed, and they do not always confirm this suggestion. We argue that the reason for conflicting findings may be because of an incomplete understanding of the factors that influence the FDI-entrepreneurship nexus in different contexts. Previous studies have carried out only limited exploration of the contingencies in the FDI and domestic entrepreneurship relationship that may depend on the host country’s institutional capacity. We argue that not all countries can reap the rewards from FDI equally. Rather, we hypothesize that countries need to have a sufficient degree of institutional capacity relevant to specific conditions and appropriate threshold levels to successfully capture the positive spillover effects of FDI on domestic entrepreneurship. Utilizing panel data from 2006 to 2016 for 97 emerging markets, developing and developed countries (at different income levels), and a System Generalized Method of Moments (SGMM) estimator that controls for instrument proliferation in dealing with endogeneity problems, we test this hypothesis. We find that FDI has a negative (crowding-out) effect on domestic entrepreneurship at below-threshold levels of institutional capacity, and a positive (crowding-in) effect at above-threshold levels of institutional capacity. The crowding-out effect diminishes as the institutional capacity changes or improves to meet mutating economic environment conditions. Our findings are robust across a wide range of aggregate and disaggregate measures of different types of institutions and alternative empirical strategies.     

How important is foreign direct investment for late industrialising countries?

While it has long been recognised that the process of development is necessarily linked to technology, the question of the efficiency of technological spillovers from foreign direct investment remains controversial. The following paper examines the theoretical background and then focuses on the case of Mexico, analysing the technological performance of multinational enterprises in that country.     

Does foreign direct investment promote institutional development in Africa?

Foreign direct investment (FDI) inflows into Africa have increased since the turn of the millennium, mainly due to FDI growth into African countries by multinational enterprises (MNEs) from developing economies. While African governments view this growth as a positive development for the continent, many governments in the West have raised concerns regarding the institutional impact of investments from developing economies. This paper examines the impact of FDI flows on institutional quality in African countries by distinguishing investments from developed versus developing economies. Previous empirical studies have found a significant relationship between FDI flows and institutional quality in African countries but regard the relationship as MNEs rewarding African countries for adopting institutional reforms. However, little attention has been paid to the reverse causality, i.e. that FDI can cause an institutional change in African countries. Using bilateral greenfield FDI flows between 56 countries during 2003?2015, we find no significant FDI effect from developed and developing economies on institutional quality in host countries. However, aggregate FDI flows from developed and developing economies have a significant positive effect on host country institutional quality but differ concerning the impact's timing. In contrast, we find no significant effect of FDI flows from China on host country institutional quality. Our results are robust to alternative measures of institutional quality.     

Does foreign direct investment really enhance China's regional productivity?

While foreign direct investment (FDI) is widely recognized as one of major driving forces on promoting the regional economic growth in China, its impact on regional productivity is unclear and less systematically investigated. This article investigates the effect of FDI on regional productivity in China. Specifically, we adopt a newly developed measure of total factor productivity (TFP) to deal with the endogenous inputs choice accompanied with various measures of FDI, enabling to provide robust estimates on the TFP effect of FDI. Moreover, we examine the role of absorptive ability on the FDI-TFP nexus and explore the existence of FDI spillover effect on productivity across regions. The potential difference in productivity effect of FDI between coastal and non-coastal regions is also examined. Based on the province-level panel dataset over the period 1997–2006, the various estimates show that the overall productivity effect of FDI is significantly positive, while this effect depends heavily on the host region's absorptive ability. Technological gap is found to associate with a significantly negative coefficient along with the finding that FDI tends to exhibit a higher impact on productivity in coastal regions than their non-coastal counterparts, highlighting a widening income inequality between coastal and non-coastal regions in China.     

Does the spillover of China's economic growth exist? Evidence from emerging markets

This paper primarily investigates if China affects emerging markets economies triggered by its rapid economic growth and the trend of economic globalization over the world. Our results indicate that China's economic growth causes a significant spillover effect on the economic performances of emerging markets, varying across the detected structural break in 2006 and the degree of economic globalization between China and 25 emerging economies over the period 2000–2012. The results herein support the formation of an inseparable interdependence between China and those emerging economies.     

Does foreign aid mitigate the adverse effect of expropriation risk on foreign direct investment?

We construct a model of FDI, risk and aid, where a country loses access to FDI and aid if the country expropriates FDI. We show that: (i) the threat of expropriation leads to under-investment; (ii) the optimal level of FDI decreases as the risk of expropriation rises; and (iii) aid mitigates the adverse effect of expropriation risk on FDI. The empirical analysis employs data for 35 low-income countries and 28 countries in Sub-Saharan Africa, over the period 1983-2004. We find that risk has a negative effect on FDI and that aid mitigates but cannot eliminate the adverse effect of risk.     

Does foreign investment liberalisation enhance women's economic status? Micro‐evidence from urban China

This paper analyses the effects of inward foreign direct investment (FDI) on female earnings and women's economic status in households using Chinese Urban Household Survey data from 1997 to 2008. The identification exploits the substantial relaxation of foreign investment regulations immediately after China's accession to the WTO in 2002. The difference‐in‐differences estimation results show that FDI liberalisation has improved women's economic status significantly by increasing female earnings in sectors more exposed to FDI. Further analyses indicate that foreign investment liberalisation facilitates the promotion of female employees in their career ladders and increases their skill premium, which are two important channels through which women enhance their economic independence.     

Does national sentiment affect foreign direct investment,and if so,how? Additional evidence

Studies of foreign direct investment (FDI) decisions typically assume that decision makers and stakeholders act rationally. Drawing on studies conducted at the individual level, this study focuses instead on affect and explores theoretically and empirically how national sentiment influences FDI decisions. In particular, we develop a typology for understanding national sentiment along two axes—positive versus negative and accumulated versus transient—and investigate their separate influences on FDI. The results indicate that negative sentiment has a greater influence on FDI than positive sentiment and that accumulated sentiment has a greater influence than transient sentiment. This study complements conventional FDI research by demonstrating that national sentiment offers additional explanatory power beyond the variables known to influence FDI decisions. Moreover, our study shows that research conducted at the individual level can be useful for understanding the influence of affective elements on FDI decisions.     

Does it matter where you invest? The impact of foreign direct investments on domestic job creation and destruction

This study examines how foreign direct investment (FDI) affects domestic employment by using unique division-level data of Japanese firms. Contrary to most previous studies focusing on the effect of FDI on net employment growth, we decompose it into job creation (JC) and job destruction (JD) for each individual firm. We find that FDI destination plays an important role: FDI to Asia increases JC, whereas FDI to Europe/North America decreases it; furthermore JD decreases, regardless of FDI destination. A frictional search-and-matching model with heterogeneous jobs can explain the differential effects. The model provides additional predictions on JC and JD by job type, which are also empirically confirmed.     

Does founder ownership affect foreign investments? Evidence from India

We study the effect of founder ownership on foreign investments for Indian firms. We show that foreign investors underinvest in firms with higher level of founder ownership, since these firms are more vulnerable to information problems and expropriation risk. This effect is particularly stronger when founder ownership exceeds a threshold beyond which founders hold effective control on firms. We exhibit that information problems are the main cause of the relation between foreign investments and founder ownership. This is because the relationship is more pronounced in case of business group firms and firms that are engaged in more earnings management.     

Do bilateral investment treaties attract foreign direct investment? The role of international dispute settlement provisions

This paper studies the effects of the strength of bilateral investment treaties (BITs) on foreign direct investment (FDI) activity. We develop an index for the strength of international dispute settlement provisions included in BITs in order to examine the role the content of BITs plays in attracting FDI. To this end, we make use of data from UNCTAD's International Investment Agreement Mapping Project and measure the provision strength of 2,571 BITs. Using panel data of bilateral and total FDI inflows and inward FDI stocks, we study the effect of BITs on FDI. Our main finding indicates that stronger international dispute settlement provisions in BITs are indeed associated with positive effects on FDI activity.     

A race to the bottom? Employment protection and foreign direct investment

A common critique of globalization is that it leads to a race to the bottom. Specifically, it is assumed that multinationals invest in countries with lower regulatory standards and that countries competitively undercut each other's standards in order to attract foreign capital. This paper tests this hypothesis and finds robust empirical support for both predictions. First, a reduction in employment protection rules leads to an increase in foreign direct investment (FDI). Furthermore, changes in employment protection legislation have a larger impact on the relatively mobile types of FDI. Second, there is evidence that countries are competitively undercutting each other's labor market standards.     

Economic creativity and innovation implementation: the entrepreneurial drivers of growth? Evidence from 63 countries

This paper examines the effect of culture on national innovation and prosperity. Because culture shapes the way people think about and behave in regard to risk, opportunities, and rewards, it should influence the nature of entrepreneurial activity and, by extension, economic outcomes. Using structural equation modeling on a sample of 63 countries, we propose and test a comprehensive explanation of how culture as an umbrella construct (as opposed to an analysis of its constituent parts) affects innovation and national prosperity. We propose a two-stage model of innovation, and find support for our hypothesized relationship that “economic creativity” influences “innovation implementation.” At the national level, we find that culture does indeed influence economic creativity. We also find that innovation implementation explained some of the variation in prosperity across countries. By establishing that “big picture” culture matters to innovation, the door has opened for researchers to evaluate this relationship using data from any one of a number of rival culture frameworks. Moreover, these empirical finding buttress the theoretical arguments that culture powerfully shapes the character of national innovation.     

Does financial development reduce income inequality and poverty? Evidence from emerging countries

The objective of this paper is to examine whether bank and stock market development contributes to reducing income inequality and poverty in emerging countries. Using dynamic panel data methods with an updated dataset for the period 1987–2011, we assess the finance–inequality–poverty nexus by taking the separate and simultaneous impacts of banks and stock markets into account. Mixed explanatory findings on panel studies suggest that although financial development promotes economic growth, this does not necessarily benefit those on low-incomes in emerging countries. For the finance–poverty link, we find that neither banks nor stock markets play a significant role in poverty reduction.     

Does ownership type matter for innovation? Evidence from China

According to the institution-based view, ownership type is a key variable affecting environment-strategy configurations. This study configures the mechanism in which ownership types (as an institutional factor) moderate the effect of innovation strategies on firms' innovation performance. An empirical analysis was conducted on Chinese hi-tech manufacturing firms, using information related to the innovation activities of 303 firms. The empirical results suggest that ownership type affects the positive relationship between three sources of innovation (internal R&D activities, partnering with alliance partners, and partnering with universities) and innovation performance, as well as the negative relationship between external contracting and innovation performance (product or process innovation). The results imply that organizations doing business in China must be aware of the business environment that they intend to enter, especially if the intention is to develop new products or innovate current business processes.     

Does foreign direct investment stimulate new firm creation? In search of spillovers through industrial and geographical linkages

This paper examines the spillover effects of inward foreign direct investment (FDI) on the entrepreneurial activities of new firm creation through both industrial and geographical linkages. Using a dataset of 44,434 newly created small firms in 234 regions of South Korea in 2000–2004, this study finds that while the spillover impacts of FDI in the low-tech industry are positive and significant across almost all four possible combinations of the intra-/inter-regional and intra-/inter-sectoral channels, the impacts in the high-tech industry are largely intra-sectoral within the host region and across neighboring regions. Moreover, all statistically significant spillover effects follow an inverted ‘U’-shaped curvilinear trend.     

Does Foreign Direct Investment Promote Exports? Evidence from African Countries

This paper empirically examines the effect of foreign direct investment (FDI) inflows on exports in Africa. Using the system‐generalised method of moments estimator for linear dynamic panel data on a sample of 53 African countries and five‐year periods from 1970 to 2009, the paper finds that higher FDI inflows are positively and significantly linked with higher exports of goods and services. A large part of the FDI effect is driven by its spillover effects on exports. The paper also finds the lagged value of exports, a competitive currency, as well as increases in domestic investment and physical infrastructure, to be factors stimulating African exports.