The Linkages Between FDI and Domestic Investment: Unravelling the Developmental Impact of Foreign Investment in Sub‐Saharan Africa

While the recent increase in foreign direct investment (FDI) to African countries is a welcome development, the impact of these resource inflows on economic development remains in doubt. This article argues that a key channel is its effects on domestic factor markets, especially domestic investment, and analyses the two‐way linkages between FDI and domestic investment in sub‐Saharan Africa. The results suggest, first, that FDI crowds in domestic investment and, secondly, that private investment is a driver of FDI, implying that African countries will gain much from improving the domestic climate. Moreover, there are alternatives to resource endowments as a means of attracting foreign investment to non‐resource‐rich countries.     

FDI AND INCOME INEQUALITY: EVIDENCE FROM A PANEL OF U.S. STATES

This study employs state‐level panel data to explore the relationship between inward foreign direct investment (FDI) and income inequality in the United States. Using panel cointegration techniques that allow for cross‐sectional heterogeneity and cross‐sectional dependence, we find that, in the long run, FDI exerts a significant and robust negative effect on income inequality in the United States. This result for the United States as a whole does not imply that FDI narrows income gaps in each individual state. There is considerable heterogeneity in the long‐run effects of FDI on income inequality across states, with some states (21 out of 48 cases) exhibiting a positive relationship between FDI in income inequality.(JEL F21, D31, C23)     

Bilateral Investment Treaties and Foreign Direct Investment: Evidence of Asymmetric Effects on Vertical and Horizontal Investments

Bilateral investment treaties (BITs) are legal instruments used by developing and transition countries to provide investor protection and, by extension, promote higher levels of inward foreign direct investment (FDI). While the link between BITs and FDI has been extensively studied, little is known about the impact of the treaties on different forms of investment. Motivated by this observation, we examine the effects of BITs on vertical and horizontal FDI. We find that BITs are more positively related to vertical than to horizontal FDI. We also find that BITs tend to act as stronger substitutes for better institutions in the case of vertical relative to horizontal investments. The findings inform BIT strategies that are compatible with development objectives in developing and transition countries.     

FOREIGN DIRECT INVESTMENT AND COUNTRY‐SPECIFIC HUMAN CAPITAL

This paper exploits an international bilateral data set over the period 1963–1998 to investigate the relationship between foreign direct investment (FDI) and foreign‐educated labor in an FDI host country. Workers educated abroad acquire country‐specific human capital that is more productive in the host country of study. A foreign subsidiary sharing a parent firm's technology will invest more if it has more foreign‐educated labor, since it can utilize this labor more productively because of the country‐specific human capital. Consistent with our predictions, our empirical findings show that foreign‐educated labor accounted for a sizable portion of growth in FDI flows. (JEL F21, F10)     

Distributional Effects of FDI: How the Interaction of FDI and Economic Policy Affects Poor Households in Bolivia

This article provides a CGE analysis of the medium to long‐run impact of FDI inflows on poverty and income distribution in Bolivia. The simulation results suggest that FDI inflows enhance economic growth and reduce poverty. However, the income distribution typically becomes more unequal. In particular, FDI widens disparities between urban and rural areas. The Bolivian government may promote the growth‐enhancing and poverty‐alleviating effects by overcoming labour‐market segmentation and providing complementary public investment in infrastructure. But simulated policy reforms or alternative productivity scenarios are hardly effective in reducing the economic divide.     

FDI Contribution to Transition Development: Slovakia versus Slovenia

In general, scholars consider Foreign Direct Investment (FDI) as an important factor of development in transition economies, which are changing from former socialist economic forms to more recent capitalist ones. A typical, and very much quoted example, to that regard, is nowadays China. The opinion goes that FDI brings two badly needed elements to the input economic environment: capital and know-how. From the opposite point of view, also capital and knowledge are looking for such environments, because they find there cheap production factors to be mobilized, in order to get higher investment yields. But is such a simple equation entirely true? Examples can be found of countries, which were able to develop with less FDI, and predominantly by domestic efforts, for instance, Japan. The paper tries to find answers to this question not only theoretically, but also by taking into consideration examples from the field. Two transition economies Slovakia and Slovenia, also with similar names, have been taken into consideration and studied, which permitted to draw some interesting answers to the question formulated initially.     

Liberalization, FDI, and Growth in Developing Countries: A Panel Cointegration Approach

Using a panel cointegration framework, the article explores the two-way link between FDI and growth for a panel of 23 developing countries. In addition, it investigates the impact of liberalization on the dynamics of the FDI and GDP relationship. A long-run cointegrating relationship is found between FDI and GDP after allowing for heterogeneous country effects. The cointegrating vectors reveal a bidirectional causality between GDP and FDI for more open economies. For relatively closed economies, long-run causality appears unidirectional and runs from GDP to FDI, implying that growth and FDI are not mutually reinforcing under restrictive trade and investment regimes.     

Foreign direct investment in the former communist world: A key vehicle for technological upgrading?

Foreign direct investment (FDI) is a crucially important, though not unique, vehicle for technology transfer in the context of transition. Analysis of actual patterns of FDI does, however, reveal a serious danger—that FDI may be asset absorbing (shallow integration) rather than asset creating (deep integration), i.e. may simply exploit existing factor endowments, including technological capabilities, rather than upgrading them. While abuse of market power does occur with FDI, it should not be seen as a critical problem as long as genuine asset creation is going on. At present there is a serious mismatch between the S&T systems of the transition countries and the needs of foreign firms carrying out FDI. It would be unrealistic to expect FDI to drive the process of resolution if these mismatch.     

Policy Reform and Foreign Direct Investment in Africa: Absolute Progress but Relative Decline

Despite improvements in the policy environment, sub‐Saharan Africa's share of foreign direct investment (FDI) in developing countries continues to decline. This article provides an explanation for the deterioration in SSA's FDI global position. It argues that, although SSA has reformed its institutions, improved its infrastructure and liberalised its FDI regulatory framework, the degree of reform has been mediocre compared with the reform implemented in other developing countries. As a consequence, relative to other regions, SSA has become less attractive for FDI. An important implication of these results is that in a competitive global economy, it is not enough just to improve one's policy environment: improvements need to be made both in absolute and relative terms.     

International trade, foreign direct investment, and transaction costs in languages

We examine the roles of major trade languages in international trade and foreign direct investment (FDI) flows. Empirical results confirm that speaking a common language increases trade and FDI flows, yet the effect of major languages is more substantial in FDI than in international trade. In addition, we find evidence of a hierarchy in transaction costs of major languages in both trade and FDI.     

FDI Determinants: Case of Romania

Even if the FDI is important for all host countries, for those in the process of transition to a market economy the FDI presence is critical under many respects. Not all transition countries benefited from the very beginning from the FDI presence. Several determinant factors explain the differences. Romania was lagging behind regarding the interest of foreign investors during the first 9–10 years of transition. The situation has improved greatly. The aim of this paper is to identify the main factors determining the evolution in the FDI/GDP (%) as proxy for the FDI evolution. To this end, we used the method of factors analyses. The four resulted determinant factors are: Market size and potential, Reform progress, Business liberalization, and Labor cost. A linear regression model expresses the connections between dependent variable and the four determinant factors. The paper concludes with certain policy implications.

The Environment for Foreign Direct Investment and the Characteristics of Joint Ventures in China

Since China opened up to the world in 1979, it has tried hard to attract foreign direct investment (FDI) to develop an export-oriented economy. This study assesses the investment climate in China during the period 1979–1990 and analyses the characteristics of joint ventures, which have been the predominant form of FDI in China.     

PRODUCTIVITY GROWTH AND TECHNOLOGICAL DIFFUSION THROUGH FOREIGN DIRECT INVESTMENT

Foreign direct investment (FDI) has dramatically increased worldwide and is the most important form of all private capital flows to developing countries. Yet, it is an important empirical question whether FDI affects total factor productivity (TFP) positively. We investigate the effect of FDI on TFP growth in a large sample of countries in 1970–2000. Our econometric results indicate that FDI has a positive and direct effect on TFP growth. However, we do not find any evidence that the impact of FDI on TFP growth is only conditional on the recipient country's capability to absorb foreign technology. We carefully address the robustness of the empirical results . ( JEL O11, O40, O47, F21)     

KNOWLEDGE SPILLOVERS AND OUTPUT PER WORKER: AN INDUSTRY‐LEVEL ANALYSIS FOR OECD COUNTRIES

This study analyzes the impact of knowledge spillovers on output per worker at the industry level using a primal production function approach. The article makes three different contributions to the international spillovers literature: (1) it identifies trade‐related spillovers under alternative assumptions regarding the information transferred through imports; (2) it explores the importance of horizontal and vertical foreign direct investment (FDI) in knowledge spillovers; and (3) it looks at how institutional factors determine the impact of FDI‐related spillovers on productivity. The main findings of the study are: (1) international knowledge spillover is an important driver of industry output per worker, and the magnitude of this spillover effect varies with alternative assumptions about the information content embodied in imports, while high technology industries benefit significantly more from import‐related knowledge spillovers; and (2) the gains from FDI spillovers are primarily horizontal, but when institutional factors are considered, countries with stronger protection of intellectual property rights and a high “ease of doing business” tend to experience a substantial increase in the effectiveness of both horizontal and vertical FDI‐related spillovers. (JEL E24, F1, F6, O3, O4)     

Does FDI Guarantee the Stability of International Capital Flows? Evidence from Malaysia

The conventional wisdom is that crises are largely due to swings in short‐term capital. Economies that finance their current account deficits mainly via foreign direct investment (FDI) are therefore seen as being less susceptible to a crisis. The analysis in this article, backed up by some empirical evidence drawn from Malaysia, challenges the casual presumption that the switch towards FDI alone will automatically imply that extreme capital instability will become a thing of the past.     

Main Determinants of Foreign Direct Investment in the Southeast European Countries

The growth of foreign direct investments (FDI) in the world has been significant in recent years. Between 1990 and 2000 worldwide FDI inflows increased more than five times, and since 2000 they have declined. During the period of FDI expansion, growth was especially strong from 1997 onward. However, most of the FDI transactions were between the developed countries. The distribution of FDI is unequal and less-developing countries face difficulties in attracting FDI. Despite the fact that FDI is increasingly important to developing countries, over the past few years the share of the developing countries in worldwide FDI inflows has been declining. The paper analyses geographical and sector distribution of FDI in the Southeast European countries (SEEC) and compares its amount with that in Central East European countries. According to economic theory, FDI towards developing countries flows for labor-intensive and low-technology production, while towards developed states, it flows for high-technology production. Identification of determining factors of FDI is a complex problem which depends on several characteristics specific for each country, sectors, and companies. All those factors could be grouped in three broad categories: economic policy of host country, economic performance, and attractiveness of national economy. On the desegregated level, FDI depends on size and growth potential of a national economy, natural resources endowments and quality of workforce, openness to international trade and access to international markets, and quality of physical, financial, and technological infrastructure. An important question is how SEEC can attract more foreign investment. To find the answer, this paper uses data on FDI inflows to SEEC to determine the main host country determinants of FDI and provides regression-based estimation of determinants of FDI. Using a sample of SEEC and panel data techniques, the determinants of FDI in this part of Europe are investigated. The paper researches the relationship between FDI, GDP, GDP per capita, number of inhabitants, trade openness, inflation, external debt, and information and communication technology sectors. For SEEC, FDI inflows are largely dependent on the completion of the privatization process and in this paper we include the level of private sector and privatization as explanatory variables. Our findings suggest that certain variables such as privatization and trade regime, as well as the density of infrastructure, appear to be robust under different specifications. A positive significance of the agglomeration factor is also observed, confirming the relevant theoretical propositions. However, certain differential variables, such as the privatization, could not be fully captured due to the statistical homogeneity of the sample.     

The Importance of Foreign Capital for the Economic Stability of Serbia

For Serbia diminishing of current account deficit is a prerequisite for the regular repayment of external debt. It is necessary to attract a bigger amount of foreign direct investment when the process of privatization is finished. Motivation for investing in Serbia has to be intensified by the creation of attractive and stimulating environments. Until now, FDI was mostly directed to purchase of Serbian companies. Economic and institutional factors should be directed to create a framework, which is important for FDI inflow. Every measure contributing to reduce dollarization and strengthen the local currency is a step in the right direction. The success in attracting foreign investments will depend primarily on objective factors, such as the size of national markets, the availability of appropriate inputs, infrastructure and manpower skills.     

CLIMBING TO THE TOP? FOREIGN DIRECT INVESTMENT AND PROPERTY RIGHTS

This article operates at the interface of the literature on the impact of foreign direct investment (FDI) on host countries and the literature on the determinants of institutional quality. We argue that FDI contributes to economic development by improving institutional quality in the host country. This proposition is tested within a large panel data set of 70 developing countries for the period 1981–2005. We show that FDI inflows have a positive and highly significant impact on property rights. Results are very robust and not affected by model specification, different control variables, or estimation technique. To our knowledge this is the first article to empirically test the FDI—property rights linkage. (JEL F23, O43, P48)     

Which Domestic Firms Benefit from FDI? Evidence from Selected African Countries

The existing literature on the effects of FDI inflows on domestic firms' performance offers ambiguous evidence. Macro‐level studies suggest that the characteristics of inward FDI and the ‘absorptive capacity’ of the host economy matter in determining the sign (or the mere existence) of these effects. Studies based on micro‐level data have so far mostly focused on finding a nexus between FDI inflows and the productivity of domestic firms, suggesting that the effects might be highly heterogeneous. This article, using a recent firm‐level survey conducted by UNIDO in 19 sub‐Saharan African countries, explores the channels through which multinational enterprises may exert an impact on local firms: products’ market, input availability and costs, access to finance and export opportunities, and analyses the strategic reactions of domestic firms induced by the presence of foreign affiliates.     

INTELLECTUAL PROPERTY PROTECTION AND THE INDUSTRIAL COMPOSITION OF MULTINATIONAL ACTIVITY

In a North‐South model with endogenous foreign direct investment (FDI), we examine the impact of Southern intellectual property rights (IPR) protection on the mode and industrial composition of international technology transfer. A novel feature of the model is that, due to technological reasons, industries differ with respect to their susceptibility to imitation. In equilibrium, licensing occurs in industries where the risk of imitation is low and FDI where it is of intermediate magnitude. Stronger IPRs in the South (1) alter the industrial composition of multinational activity toward licensing at the expense of FDI; (2) reduce local imitation; and (3) increase licensing and, to a lesser extent, FDI. (JEL F10, O34)