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.     

The coevolution of trade agreements and investment treaties: Some evidence from network analysis

Regional trade agreements (RTAs) and bilateral investment treaties (BITs) are expected to promote trade and investment relationships. One critical feature of such agreements is the network, so the multiplex coevolution of RTAs and BITs should be captured by the dynamics of their two networks. Although many studies have examined the roles of RTAs and BITs, most studies do not account for crucial network properties. This study explores how RTAs and BITs coevolve by applying a stochastic actor-oriented model of multiplex network evolution. In particular, we examine the roles of (i) cross-network dyadic interinfluences and (ii) within- and cross-network preferential attachments to discuss the dynamic relationships between RTAs and BITs. The results are as follows. First, our estimation supports cross-network dyadic interinfluences. Countries that sign a BIT are willing to establish an RTA, while those that sign an RTA are reluctant to establish a BIT. Second, concerning preferential attachments, countries prefer to sign BITs with partners that have more RTA and BIT links. However, countries tend to form RTAs with partners that have more BIT links but are reluctant to form RTAs with those that have more RTA links. We discuss possible justifications for these results, including arguments regarding the benefits and costs associated with the formation of RTAs and BITs.     

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.     

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.     

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)     

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.     

FDI’s Impact on Transitional Countries, Serbia as a Rational Choice: The FIAT-ZASTAVA Case

The privatization process and foreign direct investments (FDI) are among the most important economic issues in transitional countries. FDI has enormous influence on transitional countries that need serious structural changes. In this paper we will study FIAT’s decision to invest in the Serbian automotive industry. We will try to rationalize FIAT’s decision because Serbian car manufacturer ZASTAVA was not the only alternative for FIAT to invest in the Balkans. In order to justify FIAT’s decision we will apply the Mullins model of horizontal and vertical FDI, examine the importance of the cooperating history between two car manufacturers and compare macroeconomic conditions and Global Competitiveness of Serbia and Romania, which was the main alternative for FIAT. Finally, we will also try to explain why FIAT decided to announce the investment at the end of political campaign in Serbia when pools gave anti-European parties higher chances for victory, instead of waiting to see the outcome of the elections.

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)     

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)     

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.

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,Services Trade Negotiations and Development: The Case of Tourism in the Caribbean

This article examines whether and how developing countries can use services trade negotiations to increase the amount of inward FDI conducive to development. It reviews how services trade rules can affect inward FDI, and employs panel data analysis with innovative use of instrumental variables in the tourism sectors of 9 Caribbean countries during 1997–2003. It argues that Caribbean countries may want to signal openness to inward FDI in GATS, while maintaining a degree of flexibility in the use of policy measures; in the current negotiations with the EU on Economic Partnership Agreements, the focus could be on emphasising the development dimension.     

Investment and Competition Policy in the WTO: Issues for Developing Countries

This article uses the case of trade‐related investment measures (TRIMs) to examine the liberalisation of investment and its potential impact on developing countries. Very few developing countries actually use TRIMs to any appreciable degree, but, when taken in conjunction with the broader liberalisation of investment, the 1994 TRIMs Agreement has significant implications that will constrain governments’ policy options and require issues of competition policy to be addressed. Multilateral competition policy would be difficult to agree and implement and the article considers alternative strategies that developing countries could adopt.     

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.     

Foreign Direct Investment in the Caribbean

This article addresses the question of whether the Caribbean is particularly attractive or unattractive to foreign investors, and if it has specific characteristics that attract or deter FDI. An econometric analysis of data from 135 countries for 1980‐2002 shows that the Caribbean does not suffer from low inflows of FDI; on the contrary, Caribbean countries receive more FDI than comparable countries in other regions. This reflects two contradictory effects. On the one hand, FDI inflows may be particularly sensitive to political instability in the region; on the other hand, the absence of regulation appears to have been a particularly beneficial factor in attracting FDI to the Caribbean.     

Effects of Macroeconomic Uncertainty on Investment and Economic Growth: Evidence from Pakistan

The relationship between macroeconomic uncertainty, investment and economic growth is an empirical issue in developing countries. This paper investigates the effects of macroeconomic uncertainty on investment and economic growth in Pakistan for the period 1975–2008 by using the accelerator model of investment and endogenous growth model. The conditional variances, directly estimated through the Generalized Autoregressive Conditional Heteroscedasticity (GARCH) model is utilized for erecting the uncertainty variables related to fiscal policy, openness and foreign capital inflows. The results clearly indicate that the macroeconomic uncertainty have significant negative effects on investment and per capita income of Pakistan. We conclude that a reduction in macroeconomic uncertainty through appropriate fiscal and monetary policy, stability in capital inflows and improved trade performance could result in high investment and sustainable economic growth in the country.     

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.     

LEARNING ABOUT EDUCATION

Limited human capital investment is a common characteristic of low‐income countries despite the fact that estimated returns to educational investment in low‐income countries are generally higher than those in high‐income countries. Empirical evidence suggests that income and credit constraints can only account for a part of this underinvestment. Recent experimental evidence shows that families' misperceptions about the returns to education play a role in their low‐investment levels. This paper builds a heterogeneous‐agent model of human capital and growth that incorporates an adaptive learning mechanism to capture the way agents form perceptions about returns to education. We find natural conditions guaranteeing existence of stable equilibria. Along transition paths, agents' misperceptions about returns to education depress realized returns, which serves to reenforce and perpetuate low human‐capital investment. If human capital investments have both private and public returns, we find multiple stable equilibria, including those which are characterized by low investment and low returns. (JEL D83, O10, I25)     

Economic growth and welfare: How Foreign Direct Investment contributes to improving social order in less developed countries

Abstract

Does Foreign Direct Investment (FDI) promote development? And does it change social order? The attempt to answer these questions will always be controversial, because, first, the effects differ from context to context, and second, it is highly difficult to measure the (positive) spillovers of know-how and technology etc., as well as of contributions to enhancing social responsibility and improving the standards of living in the host country. The outcome will very much depend on how state governments, international bodies, the business world and non-governmental organizations collaborate. Likewise, interdisciplinary collaboration is required to research the issue, between well-trained economists, investment theory specialists, sociologists and ethicists. For this, our article combines a large number of arguments on market and investment theory, business ethics, John H. Dunning’s eclectic paradigm, etc. It examines whether there is practical evidence to support the assumption that doing business through FDI improves social conditions in less developed countries, and whether the logic for this to happen is rooted in ethical theory. The article contributes to insights from the appropriate sub-stream of the development, FDI and poverty/bottom of the pyramid literature, and to highlighting which trends should be followed in academic research. However, there are limitations to the article, which lie with the limitations of ethics frameworks, as these are often only constructed based on certain moral appeal, and only very few of them examine the incentive compatibility of such constructs.     

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.