International Reserves and the Composition of Foreign Equity Investment

This paper studies the effect of central banks' international reserve hoardings on the composition of foreign equity investment. Specifically, it examines whether reserves affect the share of foreign portfolio equity investment (PEI) in total foreign equity investment, which includes both PEI and foreign direct investment (FDI). Foreign investors' decisions regarding the location and the type of equity capital investment might be influenced by a country's level of international reserves. In a simple theoretical model, it is shown that higher reserves, thanks to their ability to lower exchange rate risk, reduce the risk premium of PEI. Hence, higher reserves are expected to increase the inflow of PEI relative to FDI. This hypothesis is tested for a sample of 76 developing countries during the period 1980–2010 using different estimation methods, model specifications and data samples. The results suggest that higher levels of reserves are associated with a larger share of PEI relative to FDI. This result points to a collateral benefit of reserves that has been neglected so far. Reserves may contribute to develop domestic financial markets and facilitate domestic firms' access to foreign portfolio equity financing. In addition, this paper finds a strong negative effect of the global financial crisis beginning in 2008 on the share of PEI, which confirms the hypothesis that PEI is more crisis‐dependent than FDI.     

论国内金融市场在“外商直接投资和经济增长”中的传导渠道

21世纪以来有关外商直接投资(FDI)文献着重论述了国内金融市场在“FDI和经济增长”中的作用,弥补了以往FDI文献的空白。在此基础上,文章认为,国内金融市场是通过资本形成、就业增加、技术实现和投资效率提高等渠道诱使FDI促进经济增长的。     

Financial components of FDI and choice of capital structure: an analysis for 30 OECD countries

Even though the choice of capital structure depends on the three different financial components of foreign direct investment (FDI), previous research has regarded FDI as unidimensional rather than multidimensional. This study addresses new findings in the FDI area and investigates the relevant determinants of capital structure in 30 OECD countries from 2006 to 2014 within the framework of a simultaneous equation model. Our primary findings reveal that each component has its own deterministic features driven by relevant policy variables and risks in the market. While an increase or decrease in equity capital shows the ability of the host country to attract new investments, the subsequent components are mostly used to adjust the equity capital investment exposure.     

Financing investment in environmentally sound technologies: Foreign direct investment versus foreign debt finance

This paper develops a screening model to examine the relationship between alternative sources of private capital and investment in environmentally sound technologies (ESTs). In the model, a polluter (agent) must secure investment funds from the international financial markets in order to upgrade its production and abatement technology. The requisite capital can be obtained via either market loans (debt finance) or foreign direct investment (FDI). Under debt finance, the foreign financier supplies only capital and the relationship between the two parties is more ‘arms-length’. By contrast, under FDI, the investor delivers both capital and managerial skills. We use the model to derive the implications of debt finance for optimal investment decisions and compare them to those obtained under FDI. Investment incentives are more pronounced under debt finance.     

The long-run effect of foreign direct investment on total factor productivity in developing countries: a panel cointegration analysis

This paper examines the long-run effect of the level of foreign direct investment (FDI) on the level of total factor productivity (TFP) for 49 developing countries for the period 1981–2011 using panel cointegration and causality techniques. It is found that (i) FDI has, on average, a negative long-run effect on TFP in developing countries, (ii) long-run causality runs in only one direction, from FDI to TFP, (iii) in the short run, TFP has a negative effect on FDI, and (iv) the long-run effect of FDI of TFP differs between selected groups of countries: While the estimated long-run FDI–TFP coefficients are always relatively large, negative, and significant for countries with lower levels of human capital, financial development, and trade openness, the estimated effects are relatively small, insignificant, or even significantly positive for subgroups of countries with higher levels of human capital, financial development, and trade openness.     

FOREIGN TAKEOVERS AND NEW INVESTMENTS IN THE UNITED STATES

This study is unique in several respects. First, it reviews the characteristics of the top 10 industries targeted for foreign direct investment (FDI) activity in the United States between 1979 and 1987. It analyzes both overall FDI activity and new plant and expansion FDI activity. The study summarizes and tests alternative hypotheses regarding the determinants of FDI in the United States by all countries, by the United Kingdom, by the European Community, by Japan, and by Canada.
Large and growing product markets in an expanding economy have attracted FDI in the United States. Exchange rate movements have prompted opportunistic decisions to invest in U.S. production facilities. Investors' superior management skills appear to have prompted takeovers, while efforts to realize technological advantages of new physical capital and of relatively large operating plants have fostered plant and expansion investments.
Evidence exists that a desire to circumvent current—but not potential—trade restrictions has motivated foreign direct investment. FDI activities are not associated with concentrated or heavily unionized industries. Highly protected industries have attracted heavier equity FDI by Japan and heavier new plant FDI by all sources and Canada. No evidence exists that FDI in the United States by Japan or anyone else is targeted to undercut union-dominated firms or to arrest the spread of protectionist trade policies.     

When do Heuristics Matter in Global Capital Markets? The Case of the BRIC Acronym

ABSTRACT

Several recent publications have argued that the use of heuristics by financial investors can distort global capital flows, but scholars have paid little attention to the scope conditions that determine when heuristics become influential (and when they don’t). Building on work in economic sociology and behavioural finance we suggest that the degree to which investment heuristics can bias aggregate capital flows depends on the levels of uncertainty and self-referentiality that structure the environments under which investment decisions are being made. Applying these insights to the two principal global markets for corporate investment, we argue that the institutional structure of markets for short-term portfolio equity investments (PEI) is far more conducive to trigger the mimetic adoption of a specific heuristic than in markets for long-term foreign direct investments (FDI). To test this hypothesis, we leverage the high level of arbitrariness of the selection of Brazil, Russia, India and China into the BRIC acronym and empirically examine the impact of its remarkable rise to prominence among communities of financial investors in the mid-2000s on global capital flows to emerging economies. In line with the theoretical argument, we find robust evidence of a strong BRIC-bias in markets for PEI but not FDI.     

FOREIGN TAKEOVERS AND NEW INVESTMENTS IN THE UNITED STATES

This study is unique in several respects. First, it reviews the characteristics of the top 10 industries targeted for foreign direct investment (FDI) activity in the United States between 1979 and 1987. It analyzes both overall FDI activity and new plant and expansion FDI activity. The study summarizes and tests alternative hypotheses regarding the determinants of FDI in the United States by all countries, by the United Kingdom, by the European Community, by Japan, and by Canada.
Large and growing product markets in an expanding economy have attracted FDI in the United States. Exchange rate movements have prompted opportunistic decisions to invest in U.S. production facilities. Investors' superior management skills appear to have prompted takeovers, while efforts to realize technological advantages of new physical capital and of relatively large operating plants have fostered plant and expansion investments.
Evidence exists that a desire to circumvent current—but not potential—trade restrictions has motivated foreign direct investment. FDI activities are not associated with concentrated or heavily unionized industries. Highly protected industries have attracted heavier equity FDI by Japan and heavier new plant FDI by all sources and Canada. No evidence exists that FDI in the United States by Japan or anyone else is targeted to undercut union-dominated firms or to arrest the spread of protectionist trade policies.     

Opening services markets within Europe: Modelling foreign establishments in a CGE framework

Foreign direct investment (FDI) in services is often more important to supply foreign markets than cross-border trade. A complete analysis of services liberalization therefore requires the modelling of FDI. This paper presents the treatment of FDI in our CGE model WorldScan based on the ideas of Petri [Petri, P.A., 1997. Foreign direct investment in a computable general equilibrium framework. Paper Prepared for the Conference, Making APEC work: Economic Challenges and Policy Alternatives, March 13–14. Keio University, Tokyo] and Markusen [Markusen, J.R., 2002. Multinational Firms and The Theory of International Trade. MIT Press] that firms which establish affiliates abroad also transfer firm-specific knowledge. Consequently, capital owned by suppliers from home and foreign countries are not perfect substitutes. We apply this model to the proposals of the European Commission to open up services markets. Even when FDI in services could increase by 20% to 35%, the overall economic impact is limited. Our assessment suggests that GDP in the EU25 could increase up to 0.4%. These effects could be up to 0.8% higher if foreign capital also increases the overall productivity of the services sector.     

Foreign Capital,Spillovers and Export Performance in Emerging Economies: Evidence from Indian IT Firms

The role of foreign capital inflow, foreign direct investment (FDI) and foreign portfolio investment (FPI), on export behavior of both recipients and non‐recipient competing firms in the same sector often guides economic development policy. By using panel data of Indian IT firms over 2000–2006, we show that FDI reduces the sunk costs of entering foreign markets and therefore positively effects both the decision to export and the export propensity of recipient firms. Foreign portfolio investment has no effect on the decision to export, but it does marginally increase the volume of exports. Further, these positive FDI and FPI recipient effects do not spill‐over to non‐recipients.     

Financial Development, Foreign Direct Investment, and the Efficiency of Capital Allocation in China

We study the roles of local financial development and foreign direct investment, and more importantly, their interaction with one another, in local capital allocation, based on Chinese industrial and regional data. Our main finding is that, although local financial development and FDI each individually tended to improve the efficiency of local capital allocation during the sample period, they tended to compete and crowd out each other’s effect, so that one impaired the individual function of the other. In particular, there exists a threshold value for local financial development, above which an increase in FDI reduces the efficiency of local capital allocation, rather than improve it. On the other hand, there exists a threshold value for FDI, above which further development in the local financial system lowers the efficiency of local capital allocation, rather than increase it. Our estimations suggest that the levels of FDI and local financial development in some relatively more developed Chinese regions have already surpassed such threshold values. We provide some interpretations of our findings and we discuss potential policy implications.     

The links between openness and productivity in Mediterranean countries

We examine the relation between the international trade, the foreign direct investment and the total factor productivity of the Mediterranean partner countries of Europe within the framework of a cointegrated panel model. The results, obtained from data on seven Mediterranean partner countries of Europe (Algeria, Egypt, Israel, Jordan, Morocco, Tunisia, Turkey), show that FDI and human capital are complementary in the acquisition of productivity gains. We identify the threshold level of human capital from which the received foreign investments generate beneficial effects. In a more general way, the improvement of the total factor productivity via the international openness results only from the indirect effects related to the transfer of technology.     

Do regional trade agreements stimulate FDI? Evidence for the Agadir,MERCOSUR and AFTA regions

The integration of emerging markets into the global economy is heavily promoted by foreign direct investment (FDI ) inflows. Among the factors explaining the location of FDI , regional trade agreements (RTA s) can be relevant for emerging markets, as they can promote economic integration and increase the attractiveness of the region for foreign investors. This paper investigates the impact of South–South trade agreements on the FDI decision of multinationals, where the Agadir, mercado comun del sur (MERCOSUR), and ASEAN free trade area (AFTA) agreements are considered. Three panels of countries are defined, where the members joined a specific agreement or not. Non‐Gulf Arab states are compared to better performing regions in Latin America and Southern and Eastern Asia. The analysis provides evidence that openness to foreign trade and financial markets are among the main catalysts to attract FDI , provided that business‐friendly institutions exist in the host country. Other variables, like the size of the industrial sector, urbanization rates, and external debt appear to be important in some cases. The integration of China into the world economy is a specific trigger for FDI to Asian destinations. Since RTA s influence the market size by reducing barriers to trade, their impact operates via GDP growth and openness. Gains from the agreement are striking for Latin America and Asia, but not for Arab states. To attract more FDI , business‐friendly institutional reforms and mechanisms to support new firm foundation should be implemented in this region.     

跨国公司在华研发与地区经济增长的实证分析——以苏州市为例

中国改革开放取得了长足的进步，毋庸置疑，这和实施开放政策息息相关，而这其中引人关注的莫过于外商直接投资所带来的效应。显然外商直接投资（FDI）对中国经济的腾飞发挥了重要的作用，但是FDI对东道地区的技术提升却是仁者见仁，智者见智，分歧颇大。本课题选取了改革开放以来经济活跃的江苏作为研究样板，考察了苏州在近20年来的发展中，外资对于当地技术进步的作用。笔者通过大量计量方法，力求做到客观公正，对外资作了简单分类后，考察了各部分以及整体对苏州技术进步的影响。     

Beyond natural resources: horizontal and vertical FDI diversification in Sub-Saharan Africa

This article uses firm-level data to analyse the drivers of Foreign Direct Investment (FDI) to the manufacturing and services sectors of 30 Sub-Saharan African countries. It shows that improving the investment climate helps to attract aggregate FDI. By analysing disaggregate FDI data, the article establishes that there is considerable contrast in behaviour between vertical FDI (foreign firms producing for export) and horizontal FDI (foreign firms producing for local markets). In particular, the latter firms are attracted to areas with higher trade regulations, highlighting their interest in protected markets. Furthermore, horizontal FDI is more affected by financing and human capital constraints and less affected by infrastructure and institutional constraints than vertical FDI is.     

How China is Reorganizing the World Economy*

We analyze the impact of China's integration into the global economy on other countries, Asian countries in particular. We first examine how the growth of China's exports is affecting the exports of other countries in Asia and the rest of the world. Our innovation is to distinguish exports of capital goods, consumer goods, and intermediates and to disaggregate textiles and consumer electronics, the most visible sectors where China's presence is felt. We next look to the impact of China on direct foreign investment flows. Here our innovation is to distinguish vertical and horizontal foreign direct investment (FDI) and to consider how they are affected by supply‐chain relationships. We then look more closely at factors influencing the articulation of these supply chains, the fragmentation of production, and the emerging international division of labor, focusing on two industries, electronics and autos, that exhibit very different responses. The results suggest that countries specializing in the production and export of components and raw materials feel positive effects from China's growth, while countries specializing in the production of consumer goods feel negative effects. Similarly, countries that compete with China for horizontal FDI find it more difficult to attract foreign investment as a result of that country's emergence, while countries that are potentially attractive destinations for vertical FDI find it easier to attract foreign investment as a result of trade links, especially in components and intermediates, that allow them to take advantage of supply chains involving their large and dynamically growing neighbor.     

Foreign direct investment in Turkey: regional determinants

The uneven regional distribution of foreign direct investment (FDI) in Turkey poses an interesting question from the perspective of multinational firms (MNFs) and policy-makers alike. This paper focuses on the factors governing the location decisions of MNFs within Turkey with specific reference to policy implications. Using a conditional logit model, it is found that agglomeration, depth of local financial markets, human capital, and coastal access dominate location decisions for the aggregate sample of foreign investors in Turkey. This study reveals no evidence that public investment is successful in attracting MNFs to particular regions. Also importantly, the location determinants vary dramatically by broad industrial category, investment composition, and origin-country characteristics, including income category and region.     

International Factor Mobility,Wages and Prices

This paper analyzes the joint influence of migration inflows and outward foreign direct investment (FDI) on wage bargaining. Labor migration and offshoring supported by FDI affect wage deals by changing the outside options of workers and firms. Unemployed workers may find alternative jobs either in the legal or in the illegal labor markets. Wages in this latter case are highly affected by migrants crowding this segment more than any other market. Firms may have the option of moving production partly or entirely to foreign low‐cost countries. A wage curve is designed theoretically, reflecting cross‐border labor and capital mobility, and estimated on panel data for 13 European countries over the period 1995–2013. The theoretical predictions of a joint negative effect on wages of FDI outflows and labor migration inflows are confirmed with some novel results.     

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 Capital and Urban Congestion in Emerging Markets

Traditional literature emphasizes the role of foreign capital, especially foreign direct investment (FDI) in explaining the high growth rates that many emerging economies have enjoyed during 1990s and 2000s. The present paper accepts this conventional wisdom but argues that the FDI has also created problems of urban sprawl and congestion that would not be so intense if economic development had primarily come from domestic sources. This is because the FDI is typically concentrated in urban areas that abound in manufacturing and it neglects the rural areas where agriculture predominates. The paper suggests that a small tax on foreign capital tends to mitigate the side effects of foreign investment.