Clustering or Competition? The Foreign Investment Behaviour of German Banks

Clustering or Competition? The Foreign Investment Behaviour of German Banks

Nearly all developing countries actively seek capital and technology from the advanced countries. Although private direct foreign investment (mainly in the form of multinational enterprise) is viewed with ambivalence by many developing countries, it is nonetheless true that direct investment remains a substantial source of capital and is sometimes the only source of specific technologies. Indeed, given the slow growth in official external assistance, developing countries are becoming more, not less, dependent on direct foreign investment. While disbursements of official development assistance by the OECD countries rose 43% from 1961 through 1970, direct investment flows rose almost 90% over the same period. In the later year, the flow of direct investment was more than two-fifths of all official assistance, $3.2 billion compared to $7.8 billion.1 Furthermore, the United States and other major capital exporting countries would prefer, for economic as well as ideological reasons, to channel more of their capital outflows to developing countries through private investment. It is highly probable, therefore, that developing countries will continue to rely on direct foreign investment in the foreseeable future to carry out their development programs. It is against this background that the present study seeks to identify the empirical determinants of direct foreign-investment flows in the manufacturing sectors of developing countries. Our purpose is to select from the many economic, social, and political features of a developing country those features that are critical to making that country attractive or unattractive to private foreign investors. Available empirical studies are limited

Since its reform and opening-up, the scale of China’s utilization of foreign direct investment (FDI) has been expanding. Meanwhile, the “Belt and Road” initiative has opened up broader markets and trade opportunities for China. As a pillar industry supported by the state, the high-tech industry has also become an industry with more foreign investment. Therefore, based on the data of China’s high-tech industry from 2012 to 2021, this paper analyzes the technology spillover effect of foreign direct investment on the high-tech industry in the whole country as well as in the east, west, and northeast regions by using the C-D production function. The results show that in the eastern region, FDI has a positive spillover effect on the output and technological innovation of the high-tech industry; compared with the eastern region, FDI in the central and western regions inhibits technological innovation but has a positive effect on the output of the high-tech industry; in the northeastern region, FDI hampers the output of the high-tech industry but promotes the enhancement of the technological innovation capacity. The reason for this is that FDI is unevenly distributed in each region of China, and the absorption capacity of high-tech enterprises in each region is different from that of foreign direct investment. Finally, against the background of “Belt and Road”, this paper puts forward policy suggestions in light of the actual development situation of each region. China should strengthen the supervision of FDI to ensure the sustainability of foreign investment. All regions should give full play to their comparative advantages and deal with the balanced development of FDI and local factor inputs to realize the coordinated development of China’s regional economy.

Previous articleNext article FreePart I: Exchange RatesCapital Account Policies and the Real Exchange RateOlivier JeanneOlivier JeanneJohns Hopkins University and NBER Search for more articles by this author Full TextPDF Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinked InRedditEmailQR Code SectionsMoreI. IntroductionThere are debates about the extent to which emerging market and developing countries that have accumulated large amounts of foreign exchange reserves in the 2000s are doing so in order to undervalue their currency. However, we do not have a simple model of how a country can achieve persistent real exchange rate distortions through reserve accumulation. The main purpose of this paper is to present such a model and to use it to answer a few questions about undervaluation policies.Real exchange rate undervaluation is often presented, in policy debates, as the result of a monetary operation. For example, it is argued that the People's Bank of China (PBOC) has resisted the appreciation of the renminbi by pegging the nominal exchange rate and accumulating reserves. But pegging the nominal exchange rate is not the same thing as pegging the real exchange rate, and we know that in an environment without nominal frictions monetary policy has virtually no impact on real variables. It is unlikely, furthermore, that nominal frictions alone give monetary policy enough leverage to have a persistent impact on the real exchange rate. Standard estimates suggest that nominal stickiness is not persistent enough to induce large and persistent deviations of the real exchange rate from its flexible-price equilibrium value (Rogoff 1996; Chari, Kehoe, and McGrattan 2002). Thus, in order to achieve persistent real undervaluation, monetary policy must rely on something else than just nominal stickiness.I focus in this paper on the role of imperfect capital mobility. Imperfect capital mobility can be defined, for the purpose of my analysis, as any friction inducing a deviation from Ricardian equivalence in capital flows.1 Imperfect capital mobility could result from "natural causes," such as financial frictions that prevent the private sector from borrowing abroad, or deviations from rational expectations that mitigate or delay the private sector's Ricardian response to reserve accumulation. Imperfect capital mobility could also be policy-induced and result from capital account restrictions that are imposed by the government. The fact that the country that has accumulated the most reserves in the 2000s, China, also imposes tight restrictions on its capital account suggests that the link between the two is worth looking at. Thus, this paper will focus on the question of how the real exchange rate is affected by capital account policies, defined in a broad way as the accumulation of foreign assets and liabilities by the public sector plus all the policies that affect the private sector's access to foreign capital. However, most of my results can be extended to the case where Ricardian equivalence fails because of frictions other than capital account restrictions.In order to simplify and streamline the analysis, I use a model that is entirely real-there is no money and no monetary policy. I consider a small open economy that consumes a tradable good and a nontradable good. The government accumulates foreign assets and imposes controls on capital flows. This combination of policies allows the government to effectively control the level of net foreign assets for the country as a whole. The other properties of the model then follow in a straightforward way. The government controls the current account balance (since it is the change in net foreign assets) and therefore the trade balance. The real exchange rate, then, has to be consistent with the trade balance. Other things equal, accumulating more net foreign assets will depreciate the real exchange rate.I then use the model to look at several questions related to capital account policies and real exchange rates. How can we detect in the data that these policies influence the real exchange rate? Are there limits to the impact of capital account policies on real exchange rates and how are they determined? If capital account policies can lead to real exchange rate undervaluation, how different are they from trade protectionism? What is the welfare cost from resisting to currency appreciation? I also look at the recent experience of China through the lenses of the model.The paper is related to several lines of literature. First, it is related to the literature on global imbalances, the "global savings glut," and the "upstream" flow of capital from relatively poor high-growth countries to relatively rich low-growth countries. The problem in that literature is to explain high saving rates in emerging market economies. One line of explanation is precautionary savings against idiosyncratic risk (see, e.g., Mendoza, Quadrini, and Ríos-Rull 2009; Carroll and Jeanne 2009; or Sandri 2010). Chamon and Prasad (2010) argue that precautionary savings against idiosyncratic risk is the most likely cause of the high saving rate in China. Precautionary savings could also be against aggregate risk, in particular the risk of sudden stop (Durdu, Mendoza, and Terrones 2009; Jeanne and Rancière 2011). Capital outflows from high-growth countries could also result from domestic financial frictions as in Caballero, Farhi, and Gourinchas (2008) or Song, Storesletten, and Zilibotti (2011). A common feature of these contributions is that the saving rate is determined by the behavior of the private sector. Reserve accumulation and capital account policies play no role and it is by hap-penstance that a substantial share of foreign assets ends up being accumulated as reserves.The evidence, however, suggests that the upstream flow in capital is linked to public flows and in particular reserve accumulation (Aguiar and Amador 2011; Gourinchas and Jeanne 2011). My model explains the link between reserve accumulation and net capital flows as more than a coincidence. In equilibrium, reserve accumulation must reduce net capital inflows by reducing saving (keeping investment constant). Another way of looking at the real undervaluation policy in my model, thus, is that the accumulation of foreign assets induces "forced saving" in the domestic economy. The capital controls prevent the domestic private sector from offsetting the public accumulation of foreign assets by borrowing abroad. The model thus provides a simple explanation for the high saving rate in countries such as China.2Second, the paper is related to the literature on exchange rate undervaluation. Dooley, Folkerts-Landau, and Garber (2004) argue that China and several other emerging markets and developing countries have been resisting the appreciation of their currencies in order to promote exports-led growth, a phenomenon that they dub "Bretton Woods II." An empirical literature has studied whether real exchange rate undervaluations increase growth (see, e.g., Rodrik 2008). Policy discussions often take for granted that a country can resist the real appreciation of its currency by accumulating reserves but the literature lacks a clear model of how this comes about. In a related contribution developed independently of this paper, Ghosh and Kim (2012) show the equivalence between capital account restrictions and trade restrictions in a two-period small open economy model.Third, the paper is related to the literature about optimal capital account policies. One recent line of literature has studied the normative case for prudential capital controls aimed at smoothing the boom-bust cycle in capital flows (Bianchi 2011; Korinek 2011; Schmitt-Grohé and Uribe 2012). Another line of literature has studied the case for "mercantilist" real exchange rate undervaluations (Aizenman and Lee 2007; Korinek and Serven 2010). Costinot, Lorenzoni, and Werning (2011) study equilibrium capital account policies in a two-country model. By contrast with that literature, I take capital account policies as given and do not look at the reasons that real exchange rate undervaluation might be desirable from a welfare perspective.Fourth, the paper is a contribution to the literature on the impact of sterilized foreign exchange reserve interventions. The empirical literature until the 2000s was primarily focused on advanced economies and motivated in part by the apparent success of concerted interventions following the 1985 Plaza Accord (see Sarno and Taylor 2001 for a review). The focus of the attention has shifted more recently on how the sterilized accumulation of reserves can help emerging markets and developing countries deal with large capital inflows and resist the appreciation of their currency (see, e.g., Disyatat and Galati 2007; Adler and Tovar 2011). Adler and Tovar (2011) examine whether the impact of sterilized foreign exchange interventions for a panel of 15 economies (mostly in Latin America) covering 2004 to 2010. They find that interventions slow the pace of appreciation, but that (consistent with the model presented here) this effect is stronger for countries with more closed capital accounts. On the theoretical side, the Ricardian irrelevance result for sterilized interventions was stated by Sargent and Smith (1988), and Backus and Kehoe (1989) showed that it holds under more general conditions. However, it is possible to design realistic stochastic environments with incomplete markets in which sterilized interventions have real effects (Kumhof 2010). In the deterministic model presented here, sterilized interventions matter because of a simple policy-induced friction in international capital flows.The paper is structured as follows. Section II motivates the model by looking at the capital account policies of China. Section III presents the model. Sections IV through VII present various properties of the model and Section VIII goes back to the Chinese experience, this time examining it through the lenses of the model.II. Capital Account Policies of ChinaThe capital account is very restricted in China. On the side of inflows, foreign direct investment (FDI) is largely liberalized and even encouraged in some cases through tax incentives, but other inflows are constrained. Inward FDI in manufacturing is almost completely liberalized, with the exception of restrictions in some strategic sectors.3As for financial inflows, the financial assets that foreigners might want to invest in are equity, debt securities, and bank deposits, but their access to these assets is severely restricted. These assets are not scarce. Figure 1 reports the outstanding stocks of the different types of financial assets as shares of GDP. At $3,408 billion at the end of 2011, the Chinese stock market capitalization is significant even relative to that in advanced economies.4 The market for debt securities is less developed. The market for government bonds is not very large (about 17 percent of GDP at the end of 2010) and the local market for corporate bonds remains small and dominated by a handful of large state-owned institutions.Fig. 1. Outstanding stocks of Chinese financial assets: Bank deposits, bonds, and stock market (% of GDP, 2000–2010) Source: People's Bank of China, China Securities Regulatory Commission, Shanghai and Shenzhen Stock Exchanges.View Large ImageDownload PowerPointThe main vehicle for households' and firms' financial saving is bank deposits, which amounted to about 140 percent of GDP on average in the 2000s, and have been increasing over time. Most of those deposits are time and saving deposits that bear an interest rate.The access of foreign investors to Chinese financial assets is severely limited. For equity, two types of shares are traded in the Shanghai and Shengzhen stock markets-"A shares" that can be owned only by domestic investors, and "B shares" that can be purchased by foreigners. The value of B shares has never exceeded 3 percent of total stock market capitalization since 2000. Foreign investors can invest in financial assets other than B shares through the Qualified Foreign Institutional Investor (QFII) program. This program allows about one hundred selected foreign institutional investors to invest in a limited range of Chinese domestic financial assets. The overall quota allocated to this program has remained small and the range of investable assets limited (Lardy and Douglass 2011; Cappiello and Ferrucci 2008).5 Foreign investors cannot otherwise invest in domestic debt securities or hold bank deposits.Capital outflows are restricted too. The restrictions on outbound FDI were relaxed over the past decade as authorities have begun to view it as a valuable way to secure commodities and further integrate China into the global trading system. But Chinese investors cannot, as a rule, hold foreign financial assets. The Qualified Domestic Institutional Investor (QDII) program, introduced in 2006, allows selected domestic financial institutions to invest abroad using a structure similar to that of QFIIS, but the quota allocated to this program has remained small. The state-controlled policy banks do the bulk of China's external lending, often to accompany the FDI of state-owned enterprises.Obviously, the Chinese capital controls are not perfectly tight and there have been leakages. Chinese banks can draw down their overseas claims on international banks and the corporate and household sector can take advantage of the more liberalized current account through leads and lags in trade payments and remittances. However, the large and persistent spread between the onshore yield on the renminbi and its offshore counterpart suggest that China's existing official capital controls on inflows have been binding, especially after 2002 (Ma and McCauley 2008; Cappiello and Ferrucci 2008). Furthermore, the composition of China's capital flows and external assets and liabilities reflects the constraints imposed by the capital account restrictions. As shown in figure 2, which reports the breakdown of Chinese foreign assets and liabilities at the end of 2010, most of the foreign liabilities are accounted for by FDI and most of the foreign assets take the form of foreign exchange reserves.Fig. 2. Composition of Chinese foreign assets and liabilities (%, 2010) Source: State Administration of Foreign Exchange (SAFE).View Large ImageDownload PowerPointIt should be noted that inward FDI is not completely liberalized as it is subject to authorizations from the Chinese authorities. In principle, thus, the Chinese authorities can influence the level of FDI inflows. However, it is unlikely that this influence is used for macroeconomic fine-tuning as most of the decision-making power regarding the screening and approval of FDI is held by local governments. This being said, even if it takes FDI inflows as given, the central government can still influence total net capital inflows through reserve accumulation as long as a change in international reserves is not offset one-for-one by a change in FDI inflows. The Chinese authorities could in this way indirectly control the current account balance-a key feature of the model presented in the next section.III. ModelThe model aims at capturing in the most simple possible way the essential features of the Chinese capital account documented in the previous section. The model is deterministic and in continuous time. It features a small open economy populated by an infinitely-lived representative consumer who consumes a tradable good and a nontradable good. The utility of the representative consumer is given by where ct = c(cTt, cNt) is a function of the consumption of the tradable good, cT, and the consumption of the nontradable good, cN, which is homogeneous of degree 1. I denote by pt the price of the nontradable good in terms of the tradable good, and by qt the price of the tradable good in terms of domestic consumption. I will call qt the real exchange rate (an increase in q is a real depreciation) and by an abuse of language that is common in the literature, I will sometimes call the tradable good "dollar."The domestic consumer receives exogenous flows of nontradable and tradable goods. The budget constraint of the domestic consumer is where at and at* are the consumer's holdings of bonds, respectively, denominated in consumption good and tradable good; yTt and yNt are the country's endowments of the tradable good and nontradable good; and zt is a lump-sum transfer from the government. I will call at and at* the private sector's holdings of "domestic bonds" and "foreign bonds," respectively. The assumption that the output of tradable good and non-tradable good are endowments can be interpreted as the fact that labor is not mobile between the two sectors. I will assume, to simplify the analysis, that the consumer's psychological discount rate is equal to the interest rate, ρ = r*, but this assumption can easily be relaxed.The budget constraint of the government is where bt* and bt are the government's holdings of bonds denominated in dollars and in domestic consumption good, respectively. I call bt* "international reserves." If the government accumulates foreign assets by issuing domestic liabilities, bt is negative and -bt is the government's domestic debt.Government policy consists in the announcement of paths for public assets, (bt*, bt), that satisfy the transversality condition,The impact of government policy crucially depends on the extent of capital mobility between the country and the rest of the world. With perfect capital mobility, government policy has no effect on the domestic economy and the real exchange rate (Ricardian equivalence). This result is well known, but going through the proof will allow us to make some points that are useful for future reference.First, adding the budget constraints for the representative consumer and the government, (2) and (3), using interest parity rt = r* + qt/qt as well as the fact that the consumption of nontradable good is equal to its supply in each period, cNt = yNt, one derives the consolidated budget constraint for the country as a whole,where nt* denotes the country's net foreign assets,Second, using the first-order condition, qt = ∂ct/∂cTt, and again cNt = yNt, the real exchange rate can be written in reduced form as a function of cTt and yNt,The equilibrium under perfect capital mobility is then characterized by the following two conditions,The first equation says that the marginal utility of consuming the tradable good must be constant over time (since the dollar interest rate is equal to the consumer's psychological discount rate). The second equation is the country's intertemporal budget constraint. Together, these conditions pin down the path for the consumption of tradable good, (cTt)t≥0, and through the country's budget constraint (5), the path for the country's total net foreign assets, (nt*)t≥0, but they do not determine the individual components of foreign assets.6 In particular, an open market operation in which the government purchases reserves by issuing domestic debt has no impact on the domestic economy. This is clear if the government makes the transaction with foreign investors, since in this case nothing changes for the domestic private sector. This is also true if the government's debt is not traded internationally and must be sold to the domestic private sector. In this case, the domestic private sector simply finances the purchase of domestic government debt by selling foreign assets (or issuing foreign liabilities) to foreign investors. Government policy is irrelevant if the domestic private sector is connected to the international financial market through the frictionless trade of one asset or liability.7The situation is quite different if the access of the domestic private sector to foreign borrowing and lending is restricted. To simplify, let us consider the extreme case where the government is the only agent in the economy that can enter into financial relationships with the rest of the world Denoting by (a closed capital account).8 Let us assume that domestic government debt can be held only by the domestic private sector (at + bt = 0) and that foreign assets can be held only by the government (at* = 0). This assumption is meant to capture Chinese-style capital account policies in which the access of foreign investors to domestic financial assets and the access of domestic private investors to foreign assets are very limited. Then, the country's net foreign assets are equal to its reserves and its consolidated budget constraint can be written,By setting the path for reserves, , the government completely determines the paths for the consumption of the tradable good, , and for the trade balance, . It also determines the path for the real exchange rate, .This result is, as a matter of accounting, obvious. If the government can determine the country's total net foreign assets, then it can also determine the current account balance (the change in the country's net foreign assets) and the trade balance (the change in the country's net foreign assets minus the return on these assets). In particular, the government can induce "forced saving" in the domestic economy by forcing the private sector to buy domestic debt and by using the proceeds to buy foreign assets. With a closed capital account, the domestic private sector cannot undo this operation by selling assets to-or borrowing from-the rest of the world. Denoting by cT(q, yN) the level of tradable good consumption when the real exchange rate is q, we have the following result.Proposition 1. With a closed capital account, the government can implement any real exchange rate path, (qt)t≥0, satisfying the country's external budget constraintProof. See discussion above.Inequality (8) is binding if the stock of reserves satisfy the transversality condition as an equality,But the left-hand side of (9) could be strictly positive if the government lets the rest of the world play a Ponzi game with domestic reserves (which is equivalent to "throwing away" a fraction of the reserves, as in Korinek and Serven 2010).A realistic application of the model is the case where the government uses capital account policies to resist a real exchange rate appreciation resulting from a takeoff in the tradable good sector. One can capture this case in the model by assuming that the endowment of tradable good, yTt, increases over time. This could lead to a trade deficit if the consumption of tradable good, reflecting the anticipation of higher future tradable income, exceeds the endowment.I will assume that (for a reason outside of the model), the government tries to smooth the trade balance by limiting trade deficits, or even maintaining a surplus. This is possible if the government closes the capital account and accumulates reserves. More formally, I will define an episode of "resistance to real exchange rate appreciation" as follows.First, I denote with tilde the values of the variables in the undistorted equilibrium (with free capital mobility). For example, is the path for the consumption of tradable good when the domestic consumer has unrestricted access to foreign borrowing and lending, and is the path for foreign exchange reserves that is consistent with the undistorted equilibrium (assuming that reserves are the only foreign assets). An episode of resistance to appreciation is when the government depreciates the real exchange relative to the undistorted level by purchasing reserves.Definition 2. There is resistance to real exchange rate appreciation between time 0 and time t if:• The government closes the capital account between time 0 and time t.• The government accumulates more reserves than in the undistorted equilibrium while the capital account is closed: for 0 < s ≤ t.• The initial real exchange rate is depreciated relative to its undistorted value: .The difference is a measure of the initial real exchange rate undervaluation. Note that the resistance to appreciation is assumed to last a finite time t, after which there is free capital mobility and Ricardian equivalence applies. After time t, the economy follows its undistorted path conditional on the init

The role of state policy in the industrialization of Third World nations has become the subject of increasing interest in recent years. In the past, the debate over economic development has either focused on the traditional modernization approach' or the dependency theory of underdevelopment.2 Dependency theorists base their model of development on the belief that foreign investment from core countries is harmful to developing nations' long-term economic growth. Economic relationships between the core and the periphery are structurally detrimental for the latter because of the inherent dynamics of international capitalism. Yet, despite the claims of dependency theory, the recent experience of the East Asian newly industrialized countries suggests a wider range of development possibilities which include government policies specifically designed to attract foreign investment. These countries appear to have structured their domestic economies in order to mitigate the pernicious effects of dependent relationships with core countries. This raises new questions about the development process and the role of policy and foreign investment in the economic transactions between core and peripheral countries. Dependency theory, a neo-Marxist predecessor of world-systems research, claims that First World nations become wealthy by extracting surplus labor and resources from the Third World. Capitalism perpetuates a global division of labor which causes the distortion of developing countries' domestic economies, declining growth, and increased income inequality.3 Those countries on the periphery cannot become fully modernized as long as they remain in the capitalist world

Many developing and developed countries alike are striving to attract foreign direct investment because of its impact on economic development, transferring expertise, and development of mechanisms for the business models of the host economy. This research drives at studying foreign investments by analyzing their inflows and their relative importance to Egypt; identifying as well, the reasons that prevent outmost and optimal benefit by drawing on the experiments of some countries. The research also aims to examine foreign direct investment in the field of clean energy in Egypt, to study the patterns of joint cooperation between foreign investments and the various ministries and agencies in the energy field; studying as well, the obstacles that prevent some of the memorandums of understanding signed with foreign companies from being implemented. The practical side of the study is explained through the applied study by analyzing the data issued by the Ministry of Planning and Economic Development using descriptive statistical and inductive measures to test the relationship between the study variables. The results of the study showed through statistical analysis when testing the hypotheses that there is a positive significant effect between foreign direct investment and the real economic growth rate, and that it contributes to development but in a small amount due to the nature of these investments and their sectoral distribution. There is a positive non-significant impact between foreign direct investment and total exports and imports as a percentage of the gross domestic product. Its impact is negligible and poor, given that the majority of it flows into the petroleum sector. There is also a positive significant impact between foreign direct investment and total human capital as a percentage of the gross domestic product in a small percentage given that the majority of foreign investments do not require large labor. There is a negative significant effect between foreign direct investment of the inflation rate due to its sector distribution which is mostly focused in the petroleum sector and between tourism and real estate.

PurposeThe main aim of this paper is to verify whether the modern mainstream economic theory of multinational enterprise that explains foreign direct investment (FDI) from developed countries is also able to account for investment decisions of multinational enterprises (MNEs) from emerging economies.Design/methodology/approachUsing Knowledge-And-Physical-Capital (KAPC) model as an analytical framework and Poisson-pseudo maximum likelihood estimation technique, the authors identify determinants of FDI flows from emerging economies. The data set consists of 38 home and 134 host countries during the period 2000–2012. Empirical evidence supports high explanatory power of KAPC model. Further, compared with the earlier Knowledge-Capital (KC) model, results confirm the importance of physical capital.FindingsThe estimation results confirm the hypothesis that mainstream economic theory can explain FDI flows from the emerging economies by highlighting the roles of total market size, skilled-labor abundance, investment and trade costs and geographical distance between two countries.Research limitations/implicationsThis study casts doubt on the alternative way that the KAPC model suggests to distinguish between horizontal and vertical FDI. The argument that horizontal MNE headquarters would be relatively more abundant than vertical MNE headquarters in countries that are abundant in physical capital relative to skilled labor seems reasonable but the idea of variable specification in the estimated equation should be revised.Practical implicationsFirms should be allowed to move their resources freely into and out of specific activities, both internally and internationally across border. To reach that goal, governments of potential host countries can adopt several measures, most importantly remove restrictions on payments, transfers and capital transactions and open previously closed industries to welcome foreign investment. In addition, to improve investment climate in general, governments need to pay attention to enhancing security of property rights, regulating internal taxation (i.e. corporate income tax), guaranteeing adequacy of infrastructure, efficient functioning of finance and labor markets and fighting against corruption.Social implicationsThe location choice of emerging investors set priority on similarity in economic size, geographical and cultural proximity. It is because shared borders or common official languages would reduce information costs and enhance information flows. Also, investors consider horizontal FDI (with motivation to expand market demand) as one of main modes of entry into a foreign market and a substitute for export. Likewise, distance is often understood as an important investment friction.Originality/valueThe outstanding contribution is that the research has uncovered the positive and statistically significant effect of physical capital on FDI activity, which has not been discussed in the earlier KC model. However, at the same time, the study casts doubt on the KAPC model's argument that relative abundance in physical capital to skilled labor between two countries determines FDI types and suggests that this argument and its empirical model specification should be carefully reviewed.

Foreign direct investment had a greater positive impact on total factor productivity in firms in the Czech Republic over a four - year period than joint ventures did, suggesting that parent firms transferred more know-how to affiliates than joint venture firms got from their partners. Firms without foreign partners experienced negative spillover effects, possibly because fewer training efforts made them less able to absorb and benefit from the diffusion of know-how. Firm-level data for the Czech Republic (1992-96) suggest that foreign investment had a positive impact on recipient firms' total factor productivity (TFP) growth. This result is robust to corrections for the sample-selection bias that prevails because foreign investment tends to go to firms with above-average productivity performance. This result is not surprising, given the presumption that foreign investors transfer new technologies and knowledge to partner firms. With some lag, this is likely to be reflected in greater TFP growth. Foreign direct investment appears to have a greater impact on TFP growth than joint ventures, suggesting that parent firms are transferring more know-how (soft or hard) to affiliates than joint venture firms get from their partners. Joint ventures and foreign direct investment together appear to have a negative spillover effect on firms that do not have foreign partnerships. This effect is relatively large and statistically significant. But if the focus is restricted to the impact of foreign-owned affiliates (foreign direct investment) on all other firms in an industry, the magnitude of the negative effect becomes much smaller and loses statistical significance. This result, together with the fact that joint ventures and foreign direct investment together account for significant shares of total output in many industries, suggests that more research is needed to determine how much knowledge diffuses from firms with strong links to foreign firms to firms that do not have such links. Especially important is the extent of spillovers among joint venture firms and between foreign affiliates and firms with joint ventures. Insofar as joint venture firms invest more in technological capacity (as suggested by their training efforts), those firms could be expected to be better able to absorb and benefit from the diffusion of know-how. The absence of such capacity may underlie the observed negative spillover effect on other firms in the industry. Longer time series and collection of data on variables that measure firms' in-house technological effort would help identify the magnitude and determinants of technological spillovers. This paper - a product of the Financial Economics Group - is part of a larger effort in the group to understand the transition process in the Czech Republic.

Foreign Direct Investment has positive impacts on developing economies, however without proper and effective policies in attracting and management of foreign investment, there can be negative impacts as well. This study attempts to provide a picture of foreign investment in Vietnam over the past time. The main research method used in the article is statistics analysis and Input-Output analysis method using data from Vietnam General Statistics Office, along with some contemporary policy discussion. A comprehensive statistical investigation shows that while FDI sector consistently accounts for about 20% of Vietnam GDP since 1995, this sector is becoming dominating in importing and exporting relatively to State and other non-State sectors. Besides, policies exercised by the Government are both showing signs of unfair treatment between FDI and domestic sectors and showing loopholes exploited by FDI firms (such as tax avoidance and price transfer). From the Input-Ouput analysis, we discovered that the sector which needs State investment the most—domestic sector with highest spillover effects to income and lowest to import—is begin neglected in favor of FDI sectors. Consequently, this has created a fragmented domestic economy that is assembly-based and not fully utilising its manufacturing potentials. Some recommendations drawn from the study are: increase effectiveness of policy in attracting and using foreign investments; ensure fairness in treatment between foreign and domestic firms; create incentives to boost domestic manufacturing; priorities foreign capitals which have positive spillover effects and technology transfer.

On Dynamic Relationship between Foreign Direct Investment (FDI) and Macro-Economic Factors: The Indian Experience

Cross-country evidence indicates that Japan hosts little inward foreign direct investment (FDI), even after taking into account its size and geographical or cultural distance from potential investors. Hoshi (2018) is a judicious empirical assessment of the impact of Abenomics on Japan's ability to attract inward FDI, and, by extension, increase the nation's rate of economic growth. Hoshi reaches a skeptical conclusion as to whether Abenomics has contributed to increasing inward FDI. The Abenomics target goal for FDI may be attained, but according to Hoshi's analysis, the goal has been set too low and its achievement does not require any positive impact of Abenomics policies. That skepticism may well be justified. However, before accepting this conclusion it may be worth making the simple observation that insufficient time may have elapsed for the effects of Abenomics to manifest. The policy initiative was first announced in 2013, but some of the measures discussed in the present paper were introduced as recently as May 2016. It is possible that Abenomics will eventually work as intended, but it is just too early to tell. Hoshi correctly observes that from a theoretical perspective the impact of inward FDI flows on growth is ambiguous and the empirical literature generally concludes that inward FDI flows are only growth-enhancing conditional on financial sector development and outward orientation. The latter is particularly important, insofar as a plausible theoretical example of immiserizing capital inflows is FDI induced into a protected capital-intensive import-competing sector (Bhagwati & Srinivasan, 1983). The samples used by much of the empirical literature cited by Hoshi include developing countries where capital inflows into a protected sector of comparative disadvantage is a real problem, or are restricted to FDI into the manufacturing sector. Therefore, it is not evident that this cross-country evidence is entirely applicable to Japan. While exchange in differentiated products is pervasive in modern economies, one would not necessarily expect Japan to gain a lot from foreign investment in its dominant sector either directly or via interfirm externalities and spillovers. Yet even in this relatively inauspicious setting, analysis of firm-level Japanese data indicates that there are significant benefits to foreign investment in the manufacturing sector. The positive result for manufacturing suggests that the gains for Japan from investment in its lagging service sector, which has traditionally been sheltered via regulation from entry by either new domestic or foreign service providers, could be even more profound (Fukao, 2013). It is partly due to this lack of local presence by foreign service providers that historically Japan has been a dramatic outlier relative to other major industrial countries in the share of domestic sales accounted for by foreign firms (Bergsten & Noland, 1993). Given the relatively scant presence in Japan of foreign service providers, and Japan's evident competitive challenges in the service sector, increased inward FDI in the service sector could have a significant impact on domestic productivity, and, at least during a transitional period, the economic growth rate, thus fulfilling the promise of Abenomics. So, how could Abenomics increase FDI into Japan? Discouragingly, many of the robust correlates with inward FDI identified in Hoshi's paper such as physical and cultural remoteness, and parent gross domestic product (GDP) and per capita GDP, are exogenous and not susceptible to policy intervention. And even more discouragingly, there appears to be a disconnect between the conditions amenable to policy intervention that might promote FDI and what the government is doing. One approach could be a sharper, if not targeted, approach to inward FDI which would emphasize the removal of barriers to entry in the service sector. A government survey summarized in Hoshi (2018, Table 1) found that the "high cost of doing business" was the single most frequent complaint, with three-quarters of the respondents identifying it as a barrier to FDI. Apart from regulation, capital and labor market imperfections could be important. Addressing labor market policies that discourage interfirm labor mobility appear to be particularly salient. It is striking that among the factors inhibiting FDI into Japan listed in Hoshi's Table 1, "difficulty in securing personnel" is the only one that increased significantly between the 2012 and 2016 surveys, rising more than 10% points to 46%, indicating that the problem is both important and worsening. Such an approach of addressing basic factor market and regulatory inhibitions on business, would not only benefit potential foreign entrants, but could also contribute to revitalizing domestic entrepreneurship by making it easier to establish – and expand – vibrant new businesses (Noland, 2007), precisely the sort of structural change that the third arrow of Abenomics is supposed to promote.

I. INTRODUCTION Even though foreign acquisitions of U.S. assets are predominantly in service sector industries, research on foreign takeovers of U.S. domestic firms has focused on manufacturing firms. As foreign takeovers and new establishments in service sector industries have grown in importance (see Figure 1), research on service sector foreign direct investment (FDI) has fallen behind in part because service FDI and trade in service sector industries are not measured as well as those in the goods producing sector (Jensen 2011). Our paper analyzes the comparative advantage characteristics of foreign takeovers and new establishments in the U.S. service sector providing an insight on service sector FDI in the United States. Economic policies on service sector industries sometimes include large restrictions on foreign investors, particularly in the areas of public utilities, transports, financial services, and wholesale/retail trade. These restrictions have been used in cases such as opposition to an acquisition of a U.S. port by investors in Dubai and refusal to ease restrictions requiring that U.S. airlines must be at least 75% owned by U.S. citizens (Golub 2009). These types of policies may be misguided especially if foreign ownership brings increases in efficiency to those firms and their industries. Moreover, foreign investments in service sector industries may boost the productivity of downstream users and upstream suppliers in manufacturing (Markusen, Rutherford, and Tarr 2005; Arnold, Javorcik, and Mattoo 2011; Javorcik and Li 2013). More research is needed to better understand FDI in U.S. service sector industries and help guide policy. [FIGURE 1 OMITTED] Previous research by Feliciano and Lipsey (2015), shows that both foreign acquisitions and new foreign establishments in manufacturing tend to be in industries of investing country's revealed comparative advantage (RCA) in exporting. Moreover, new foreign-owned establishments tend to be in industries of U.S. revealed comparative disadvantage. This suggests that foreign investors in the manufacturing sector bring intangible assets or skills that make them more competitive. The relationship between foreign takeovers and investments in new foreign establishments and RCA may be different in the service sector because the motivation for foreign investment in service sector firms is different from foreign investment in the manufacturing firms. Decisions on FDI in manufacturing are based on trade costs, coordination costs, and market size. Services are not storable, and thus the provision of some services requires geographic proximity. This feature makes direct investment in service sector necessary as opposed to cross-border trade. Bhattacharya, Patnaik, and Shah (2012) develop a model for the choice of trade and FDI in the service sector and find that, contrary to FDI in manufacturing, less productive firms may engage in FDI in the service sector. The relationship between foreign acquisitions and new foreign establishments in the service sector and the comparative advantage of the country of ultimate beneficial owner (UBO) may not be positive. We analyze data on foreign takeovers of existing U.S. firms and newly formed foreign-owned firms (greenfields) in service sector industries outside of finance, insurance, and real estate from 1998 to 2008 from the Bureau of Economic Analysis (BEA) U.S. Department of Commerce. BE A data are more complete and have more detailed information than the Thomson Financial Securities data, widely used in the study of foreign acquisitions. Unlike the Thomson Financial Securities data, BEA data include smaller not publicly traded firms, contain the value of assets acquired in all transactions, and have information on new foreign establishments. (1) To our knowledge, this is the first study to estimate a relationship between foreign takeovers and new foreign firms, and the RCA of the country of UBO in the U. …

Ülkelerin giderek daha fazla liberal politikaları benimsemeye başlamasıyla beraber gerek doğrudan yabancı yatırımlar gerekse portföy yatırımları dünya genelinde artmaya başlamıştır. Yabancı yatırımlar olarak adlandırılan bu tür yatırımları ülkeler kendilerine çekmek için çaba harcamaktadırlar. Daha çok gelişmekte olan ülkeler açısından önemli olduğu düşünülen yabancı yatırımlar, gelişmiş ülkeler tarafından da önemle talep edilmektedir. Bu çalışmanın amacı hem gelişmiş hem de gelişmekte olan ülkelerde doğrudan yabancı yatırımların büyüme ve işsizlik üzerinde, portföy yatırımlarının ise büyüme üzerindeki etkilerini araştırmaktır. Yabancı yatırımların gelişmiş ülkeler ile gelişmekte olan ülkelere olan etkilerinin de karşılaştırıldığı bu çalışmada; 15 gelişmiş, 15 gelişmekte olan ülke seçilmiş bu ülkelerin 1993-2018 yılları arası yıllık verileri kullanılarak panel veri analizi yöntemi ile incelenmiştir. Analiz sonuçlarına göre, doğrudan yabancı yatırımların hem gelişmiş hem de gelişmekte olan ülkelerin büyüme oranlarını artırdığı, işsizlik oranlarını ise azalttığı sonucuna ulaşılmıştır. Buna karşın portföy yatırımlarının gelişmiş ve gelişmekte olan ülkelerin büyüme oranları üzerinde istatistiksel olarak bir etkisi görülmemiştir. Ayrıca doğrudan yabancı yatırımların; gelişmekte olan ülkelerin büyüme oranlarının artmasına ve işsizlik oranlarının düşmesine sağladığı katkının, gelişmiş ülkelere sağladığı katkıdan daha fazla olduğu sonucuna ulaşılmıştır. Bu kapsamda doğrudan yabancı yatırımları çekmek isteyen ülkeler açısından; bürokratik engellerin azaltılması, çeşitli teşviklerin sağlanması, altyapıların iyileştirilmesi, yatırım yapmak isteyen şirketlere organize sanayi bölgelerinden bedelsiz ya da düşük bedellerle yer sağlanması ve enerji desteği gibi uygulamalar doğrudan yabancı yatırım girişlerini arttıracak faktörler olarak düşünülebilir.

PurposeThis paper aims to examine the impact of six possible foreign direct investment (FDI) spillover channels on the total factor productivity (TFP) of Chinese agricultural enterprises and investigate the moderating role of absorptive capacity (technological acumen) on TFP spillover effects.Design/methodology/approachBased on data from 118 agricultural and related Chinese industries, the authors employ a multithreshold regression model to empirically analyze the impact of FDI on the TFP of agricultural enterprises and the threshold effect of absorptive capacity. To overcome potential endogeneity problems, the authors select the FDI stock of corresponding USA industries and the industrial access policy index as instrumental variables and re-estimate the model.FindingsThe results suggest foreign-invested agricultural enterprises are more likely to benefit from FDI, while the “aggregate” FDI spillover effect is negative for domestic agricultural enterprises. However, once threshold effects are introduced, the authors find firms “close to” (“far from”) the technological frontier experience statistically significant positive (negative) spillover effects. Similar results are obtained for virtually all FDI spillover channels for firms in both upstream and downstream industries. FDI spillovers, when they occur, can be a two-edged sword – benefiting some firms at the expense of others.Originality/valueThe authors introduce six FDI spillover channels to examine the impact of FDI on the productivity of foreign-invested and domestic agricultural enterprises. Moreover, the authors analyze the threshold effect of firms' absorptive capacity. These findings can help formulate foreign investment introduction policies based on the characteristics of agricultural enterprises with different ownership structures. These results are also beneficial for agricultural enterprises to better exploit FDI spillover effects and improve their productivity.

Foreign investment refers to investments made by the residents of a country in the financial assets and production processes of another country. The effect of foreign investment, however, varies from country to country. It can affect the factor productivity of the recipient country and can also affect the balance of payments. Foreign investment provides a channel through which countries can gain access to foreign capital. It can come in two forms: foreign direct investment (FDI) and foreign institutional investment (FII). Foreign direct investment involves in direct production activities and is also of a medium- to long-term nature. But foreign institutional investment is a short-term investment, mostly in the financial markets. FII, given its short-term nature, can have bidirectional causation with the returns of other domestic financial markets such as money markets, stock markets, and foreign exchange markets. Hence, understanding the determinants of FII is very important for any emerging economy as FII exerts a larger impact on the domestic financial markets in the short run and a real impact in the long run. India, being a capital scarce country, has taken many measures to attract foreign investment since the beginning of reforms in 1991. India is the second largest country in the world, with a population of over 1 billion people. As a developing country, India's economy is characterized by wage rates that are significantly lower than those in most developed countries. These two traits combine to make India a natural destination for foreign direct investment (FDI) and foreign institutional investment (FII). Until recently, however, India has attracted only a small share of global foreign direct investment (FDI) and foreign institutional investment (FII), primarily due to government restrictions on foreign involvement in the economy. But beginning in 1991 and accelerating rapidly since 2000, India has liberalized its investment regulations and actively encouraged new foreign investment, a sharp reversal from decades of discouraging economic integration with the global economy.