Foreign direct investment and audit outcomes: evidence from US firms

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

This paper takes a firm-level perspective to analyze foreign direct investment (FDI) in the European Union (EU). Our data rely on the global company database Orbis and allow the introduction of an original definition of FDI that accounts for the FDI direction – inward vs. outward – and the FDI margin – extensive vs. intensive. Based on the available information, we ask two questions. First, how deep is the FDI involvement of European enterprises? Second, is there any systematic relationship between FDI involvement and firm-level performance? To answer these questions, we adopt an empirical methodology consisting of descriptive statistics and econometric regressions (Probit, Bivariate Probit, and Poisson models). Concerning the depth of FDI involvement, our descriptive statistics reveal that the number of firms involved in inward/outward FDI is quite notable. However, firms’ actual involvement is rather low, meaning that FDI involvement in the EU is widespread, but not deep. Concerning the relationship between FDI involvement and firm-level performance, our econometric regressions show that better enterprises experience some inward/outward FDI rather than none. Moreover, the deeper the FDI involvement, the wider is the gap with domestic firms. This suggests that performance differentials are related to both the extensive and intensive margins of both inward and outward FDI.

This paper examines how financial development influences foreign direct investment. The direct and indirect sector-specific effects that source countries' financial development and destination countries' financial development can have on foreign direct investment are first identified in a conceptual framework. The presence and relative strength of these various channels of influence at the different margins of foreign direct investment are then empirically investigated using unique and underexploited sector-specific bilateral panel data on greenfield foreign direct investment over the period 2003-2006. Causality is established by applying a difference-in-differences approach that exploits the variation in financial vulnerability across manufacturing sectors. The overall effects of higher source countries' financial development and destination countries' financial development on the relative volume of bilateral foreign direct investment in financially vulnerable sectors are large, positive, and complementary. These effects appear to operate mainly at the intensive margin rather than at the extensive margin of foreign direct investment. There is also evidence of direct and indirect effects of financial development. The key findings are robust to the use of data on the number of bilateral Mergers&Acquisitions transactions. Overall, the empirical results unambiguously indicate that a sophisticated and well-functioning financial system in source and destination countries greatly facilitates the international expansion of firms through foreign direct investment, especially in financially vulnerable sectors

The purpose of this study is to assess the effectiveness of export and import activities of domestic companies with foreign direct investment during the external shocks. The relevance of the research is due to the fact that the impact of side effects of FDI on domestic companies and economic uncertainty after the sanctions and the outbreak of the pandemic was ambiguous. The empirical base contains about 170,000 observations on 18,799 operating companies with a foreign capital share of at least 10% for the period from 2012 to 2020, obtained from the Ruslana database - Bureau Van Dijk. For the purposes of the study, the companies are grouped by the industry and their roles in international trade. Efficiency assessment is measured by using the data envelopment analysis (DEA), taking into account the spillover effects from foreign direct investment. The results of the study confirm that firms that trade in both directions have better performance. Next come companies focused only on export or import. Companies that are not involved in international trade are the least efficient (hypothesis 1). Industries that benefit from FDI inflows include more capital-intensive sectors (hypothesis 2). External shocks have a negative impact on the efficiency of companies with FDI (hypothesis 3). This understanding has important implications for long-term economic growth and the recovery of the Russian economy in the current external shocks.

The overall aim of this thesis is to investigate, theoretically and empirically, the impacts of foreign direct investment (FDI) on the host labour market. Specific objectives focus on exploring the role of FDI firms in determining wages and the employment of female workers (hereafter referred to as female employment) by domestic firms, using the empirical case of the services sector in Vietnam. While the literature suggests that foreign firms, especially large multinationals, tend to pay higher and employ women more intensively than local firms, there is scant evidence on whether and how FDI firms can influence domestic firms' wages and gendered employment, notably in the context of service industries. This thesis contributes to filling these knowledge gaps from both theoretical and empirical grounds. To realise the research objectives, I constructed two theoretical models to illustrate how the presence of FDI firms can be a determinant of local firms' pay and employment decisions. The first model shows that foreign presence can influence the expected average wage of domestic firms (causing so-called 'wage spillovers') through two contrasting channels, namely productivity spillovers and cut-off capability. The second model shows that FDI firms can affect domestic firms' female employment (measured by female-to-male labour ratio), directly via augmented female productivity spillovers and indirectly via the cut-off effect. The ultimate impact of foreign presence on wage and female employment depend on the relative strength of the two channels. Guided by the theoretical frameworks, I then specified two econometric models to empirically test and estimate the impacts of FDI firms on average wage and female employment of domestic counterparts. The empirical analyses utilise rich panel datasets of firms in Vietnam's services sector over the five-year period 2009-2013, which were extracted from the enterprise survey database of the General Statistics Office (GSO). In the specified models, foreign presence is the variable of interest and measured by the employment share of FDI firms in an industry, region and year. To address the potential endogeneity problem, I utilised the Generalised Method of Moments with Instrumental Variable (IV-GMM) estimation technique. Of this method, I adopted a novel approach to constructing IVs, which capitalises on the geographical and industry segmentation of the local labour market. In the estimation procedure, I conducted a number of diagnostic checking, including the endogeneity test, underidentification and overidentification tests (for the relevance and validity of selected instruments), and accounted for multicollinearity, autocorrelation, and heteroskedasticy problems. The estimation results indicate that FDI firms exert positive and statistically significant impacts on the pay level and female employment of domestic firms in Vietnam's services sector. Specifically, a one per cent increase in foreign presence induces local firms to raise their real wage and female-to-male labour ratio by 1.15 per cent and 2.18 per cent on average, respectively. The findings also suggest that higher paying firms tend to be larger, state owned, more capital intensive, and well established. Additionally, smaller, privately owned, less labour-intensive firms are more likely to hire women at a higher rate. To provide deeper insights into the heterogeneity of FDI-linked impacts, I extended the analysis by examining different layers of disaggregation. Notably, at the two-digit Vietnam SIC level, the scatterplots of the data and the estimation results reveal divergent effects of foreign presence on domestic firms' wages (positive in the high-wage group and negative in the low-wage group), and female employment (positive in the male-intensive group and insignificant in the female-intensive group). Likewise, additional investigations at the three-digit level show heterogeneous FDI impacts, depending on specific characteristics of domestic and foreign firms. While the existence of positive FDI impacts at the overall sector level may imply services FDI attraction as a viable strategy to improve local wages and promote female employment opportunities, the findings of heterogeneous effects warrant a more cautious and selective approach to be adopted by local firms, workers and governments in policy and decision formulation.

PurposeConventional wisdom suggests that war in the host country makes it unattractive for foreign firms to invest. To see if this is true for US firms on the aggregate, this paper aims to examine the veracity of a “permanent war economy” hypothesis, that foreign direct investment (FDI) may, in fact, increase in the host country not despite, but because of, war, i.e. one that lends credence to the idea that, in the USA, “defense [has] become one of constant preparation for future wars and foreign interventions rather than an exercise in response to one-off threats.”Design/methodology/approachThe authors test the hypotheses using Generalized Method of Moments estimation, with Heckman Selection, on US FDI data from the Bureau of Economic Analysis and war data from the Correlates of War2 Project, the Uppsala Conflict Data Program/International Peace Research Institute data set, the International Crisis Behavior Project and the Center for Systemic Peace Major Episodes of Political Violence data set. The final sample consists of 351 country-year observations in 55 host countries from 1982 to 2006.FindingsThe findings indicate that overall US FDI in a host country in a given year decreases if the host country is engaged in wars with multiple countries and if the US Government is involved in the war. Most notably, the results show that US involvement in multiple host country wars is actually correlated with increased US FDI into the host country, providing empirical support for the “permanent war economy” hypothesis.Originality/valueWhile other studies have focused on war and FDI, the authors have sought to show the impact of the involvement of arguably the most influential country, i.e. the USA, in the sovereign matters of a focal host country. By studying FDI from the USA as a function of US involvement in wars overseas, over the years with the greatest use of private military companies by the USA and the largest portion of global FDI accounted for by the USA, this work motivates a research agenda on home-host-"other” relations in the context of war and FDI, with the “other” being the supranational “elephant in the room.”

Unemployment and weak economic productivity are significant global issues, particularly in West Africa. Recently, through diverse mechanisms, remittances and foreign direct investment (FDI) have been sources of foreign capital flow that have positively influenced many less developed economies, including ECOWAS (ECOWAS stands for Economic Community of West African States). Nevertheless, these financial flows have exhibited significant inconsistencies, primarily resulting from economic downturns in migrants’ destination countries, with remarkable implications for beneficiary economies. This study, therefore, examines the effect of remittances and FDI on employment in ECOWAS. Specifically, the study assesses the effects of the inflow of remittances and FDI on employment using panel dynamic ordinary least squares (PDOLS) and also investigates the shock effects of remittances and FDI by employing Panel Vector Error Correction (PVECM), which involves variance decomposition. The results show that foreign direct investment (FDI) positively and significantly affects employment. Other variables that show a significant relationship with employment are wage rate, education expenditure, and interest rate. The variance decomposition result revealed that external shocks on remittances and FDI have short- and long-term effects on employment. The above findings imply that foreign direct investment has a far-reaching positive impact on the economy-wide management of the West African sub-region and thus calls for relevant policy options.

Objective: This study aims to analyze the influence of natural disasters on countries' FDI.Method: We used data from 137 countries, considering the period from 2011 to 2017. The secondary data used to measure Foreign Direct Investment are from the UNCTAD - United Nations Conference on Trade and Development following the study by Alfaro et al. (2004). For data on natural disasters, the EM-DAT database - The International Disaster Database provided by CRED - Center for Research on the Epidemiology of Disasters - was used, based on the studies by Toya Skidmore (2007) and Escaleras Register (2011). The analysis was performed through Linear Regression of panel data.Originality/Relevance: This study points to a direction of research for those interested in expanding the flows of Foreign Direct Investment in their countries, being significant in the field of business, government, public policy makers and the third sector.Results: The results show that when an economy suffers from natural disasters that cause deaths and, consequently, a reduction in human capital, foreign investors can negatively portray this fact. On the other hand, the number of occurrences and the loss in millions of dollars when analyzed individually do not discourage FDI and the presence of multinationals in the affected country. The variables: total of injured, total of affected, and total of homeless have no relation with FDI in the analyzed sample. It is indicated that, in the face of a natural disaster, countries create opportunities for the replacement and reconstruction of infrastructure and human capital.Theoretical contribution: We seek to contribute theoretically to the recent increase of studies that verify the relationship between natural disasters and FDI in the light of the institution-based view. We direct greater understanding to the premise that natural disasters affect a country's economy as they cause FDI reduction, and we provide the foundation for future studies. While previous studies are concerned with FDI determinants, being tax incentives and property rights, this study focuses specifically on the different variables that aggregate natural disasters. In addition, the study aims to expand the perception of decision makers, belonging to the government, private entities and the third sector, so that they can reduce and prevent the occurrence of natural disasters, thus attracting FDI flows in their countries.

Since the start of foreign direct investment (FDI) studies, scholars asked themselves what drives companies to invest abroad, what incentives are needed to start the flow of FDI to one destination country and how is the flow changing as that countries development is more and more advanced. The academic community launched the hypothesis that the level of development of one country influences the flow of FDI, also known as the investment development path theory. This article is a case study of EU member states as the EU is one of the most advanced forms of cooperation between countries in the world and the flow of FDI has a great impact on its development. The authors follow the evolution of FDI since the year 2000, including the effects of the financial crisis on the flows of FDI, and their post-crisis recovery, and the correlation of the net output investment per capita of FDI with the GDP per capita levels.

In this paper, we examine the impacts of foreign direct investment (FDI) on poverty reduction in Vietnam. The influences of FDI on the poor can be categorised into two types - growth-enhancing effects and distributional effects. This empirical study analyses the two effects through a sub-national data of 63 provinces and three regions of Vietnam from 2005 to 2015, using Driscoll-Kraay regression and the Sobel-Goodman mediation bootstrapping test. We measure the role of FDI as a synthetic contribution of FDI capital inflow, FDI productivity, and FDI labour creation. Results of this analysis suggest that FDI could reduce poverty throughout these regions of Vietnam since it stimulates productivity and job creation with foreign enterprises. Government bodies, therefore, need to prioritise the regulation of FDI enterprises over calling for FDI inflow at both the national and provincial levels. Additionally, differences in FDI distributions exist between Northern, Central, and Southern Vietnam.

While global investment needs are enormous in order to bolster the implementation of the 2030 Agenda for Sustainable Development, developing countries are often excluded from global foreign direct investment (FDI) flows. Beyond economic fundamentals like market size, infra¬structure and labour, the impediments to FDI in developing countries relate to the predictability, transparency and ease of the regulatory environment. In contrast, tax incentives and international investment agreements (IIAs) have been found to be less important (World Bank, 2018). To harness the advantages of FDI, it is critical that governments have policies and regulations in place that help to attract and retain FDI and enhance its contribution to sustainable development. The 2030 Agenda and the Addis Ababa Action Agenda, thus, call for appropriate international frameworks to support investments in developing countries. In this context, the Joint Ministerial Statement on Investment Facilitation for Development adopted at the 11th Ministerial Conference of the World Trade Organization (WTO) in December 2017 called for the start of “structured discussions with the aim of developing a multilateral framework on investment facilitation”. Investment facilitation refers to a set of practical measures concerned with improving the transparency and predict¬ability of investment frameworks, streamlining procedures related to foreign investors, and enhancing coordination and cooperation between stakeholders, such as host and home country government, foreign investors and domestic corporations, as well as societal actors. Despite the deadlock in the WTO’s 17-year-old Doha Round negotiations, the structured discussions on investment facilitation, which have been under way since March 2018, show that the members of the WTO take a strong interest in using the WTO as a platform to negotiate new international rules at the interface of trade and investment. In contrast to previous attempts by developed countries to establish multilateral rules for investment, the structured discussions are mainly driven by emerging and developing countries. Most of them have evolved over the past years into FDI host and home countries reflecting the changing geography of economic power in the world. Their increased role has led to a shift of policy agendas, focusing on practical measures to promote FDI in developing countries while excluding contentious issues such as investment liberali¬sation and protection, and investor–state dispute settlement (ISDS). This policy brief provides an overview of the emerging policy debate about investment facilitation. We highlight that four key challenges need to be tackled in order to negotiate an investment facilitation framework (IFF) in the WTO that supports sustainable development: There is a need to properly conceptualise the scope of investment facilitation as a basis for empirical analyses of the potential impact of a multilateral IFF. Many less- and least-developed countries do not yet participate in the structured discussions. It is necessary to enhance their capacity to participate in the structured discussions and address their specific concerns. In order to enhance the contribution of FDI to sustainable development it is necessary to support the development of governance mechanisms at the domestic level. It is key to ensure transparency towards countries not yet participating in the discussions, the business sector and societal actors to support a successful policy process.

The flows of foreign direct investment (FDI) to developing economies have been considered important for sustainable growth as they enhance job creation and the transfer of technology and management expertise. As a result, the attention of scholars has been drawn to examining the relationship between FDI and growth resulting in several studies in this area. Notwithstanding, few studies have been carried out on the impact of FDI on real sector growth, particularly in the Nigerian economy. Hence, this study examines the effect of FDI on the real sector in Nigeria between the periods 1981–2016 using the impulse response function (IRF) and variance decomposition (VDC) of VAR. The study found that agricultural sector output responded positively to shocks in FDI inflows but it was statistically insignificant. The IRF also revealed that industrial sector output responded positively to shocks in FDI and it was statistically significant. This presupposes that the inflows of foreign direct investment have positive effects on the growth of the industrial sector in Nigeria. The VDC showed that FDI inflows exert influence on both the agricultural sector output and industrial output. However, FDI inflows influence the industrial sector output in a greater proportion than the agricultural sector. Using the VAR Granger causality, the study also found that while FDI inflows cause growth in industrial sector output, they, however, do not cause growth in agricultural sector output. The implication of the study is hinged on the fact that FDI inflows have not been driving the growth of the agricultural sector in Nigeria. This could be adduced to some structural bottlenecks besetting the growth and competitiveness of the sector, which have made the sector unattractive to foreign investors. The study, therefore, recommends that the government should greatly invest in rural infrastructure development that will encourage foreign investment. Also, the government should intensify research and development institutions in order to seek new knowledge and enhance innovation in the agricultural sector.

PurposeThis paper aims to examine and compare the impact of foreign direct investment (FDI) inflows on bank deposits in aggregate as well as at the level of conventional and Islamic banks in Middle East and North Africa (MENA) countries. The study also tests hypotheses of direct and indirect impacts of FDI flow and FDI stock on bank deposits.Design/methodology/approachStatic and dynamic panel generalized methods of moments (GMM) estimation techniques are applied to analyze a large data set of 491 commercial banks (422 conventional banks and 69 Islamic banks) across 18 MENA countries between 1993 and 2017 (12,275 year observations).FindingsEmpirical results indicate that inflowing FDI flow and FDI stock have a significant negative direct impact on deposits of MENA banks. The results lend support for the direct channel hypothesis for the effect of FDI on bank deposits and find no evidence in support of the indirect channel hypothesis. FDI inflows affect bank deposits directly via increased FDI-related excessive competition in the banking market. Deposits from conventional banks appear to be more affected than those from Islamic banks. The variation may due to the fact that Islamic banks have fewer multinational corporations (MNC) customers than conventional banks and therefore are less sensitive to fluctuations in FDI.Practical implicationsFrom this analysis, this study concludes that foreign investments have a higher productivity than local investments in MENA region. Attracting more FDI is aimed at increasing overall national productivity through competition. However, governments would be wise to enact such a policy to maximize benefits and minimize potential harm to local industry. Furthermore, FDI policy should encourage small to medium-size banks and firms (SMEs)’ participation and linkage with multinational banks and MNCs, while upgrading research and development institutions and innovation activities to help SMEs to benefit from potential spillovers from foreign presence in the industry. In addition, the linkage and connection between SMEs and foreign firms should be strengthened and promoted by government policy.Originality/valueThis study is the first of its kind to examine the effect of FDI inflows on bank deposits. It also provides an in-depth quantitative analysis of the impact of FDI flow and FDI stock, separately, on bank deposits for both conventional and Islamic banks. It distinguishes between direct and indirect channels through which FDI inflows may affect bank deposits. The study analyzes 25 years of panel data for 491 banks (12,275 year observations) and uses both static and dynamic panel GMM estimation techniques to analyze the data.

The aim of the chapter is to characterise the evolution of Chinese foreign direct investment (FDI) in Poland since the beginning of 2000s till 2018 in terms of motivation and industrial structure. In addition, it presents the localisation of Chinese companies in Poland, their ownership and employment. The methodology used is statistical analysis of FDI flows and stocks provided by the National Bank of Poland (NBP) and Organization of Economic Cooperation and Development (OECD), and analysis of the data on Chinese multinational corporations (MNCs) from the Orbis database compiled by the Bureau van Dijk and COIG. The findings show that motivation that initially was related with market and efficiency-seeking, employing mostly greenfield entry mode, has been extended with strategic asset-seeking motive, reflected in acquisitions of Polish firms in the periods 2009-2014 and 2015-2018. Another characteristic of Chinese firms recently entering Poland is the fact that their presence is a result of Chinese MNCs' acquisitions of firms located in third countries, mostly Germany. This is an effect of Chinese MNCs entry into European value chains. The industrial structure of Chinese MNCs in Poland also evolved from assembly of electronics, to manufacturing of parts and components for automotive sector, utilities, and services. Chinese firms are mostly located in key industrial regions in Poland, namely mazowieckie, dolnoslaskie, malopolskie, and slaskie voivodships. The ten biggest Chinese employers have workforce between 372 and 2103 persons and are mostly from automotive and electronics sectors.

Purpose – This chapter examines the extent to which public support for internationalization can be considered as a determinant of foreign direct investment (FDI). Design/methodology/approach – The chapter examines the traditional determinants of FDI and the capability-building argument; and augments this by testing a set of public support measures as complement of the firm's internal needs, using a probit model. Findings – The chapter shows that a special theory is clearly required to explain the particular circumstances of the use of public support for internationalization activities. However, the received theory relying on capability-building argument performs well. Practical implications – The importance of specific characteristics related to competencies and the use of certain types of public support that improve competencies lead us to consider that public support matters for capability-building. Despite this issue, the analysis of the FDI determinants can be explained by standard theory. However, the impact of public policies on FDI suggests new models capable of capturing the behaviour of foreign direct investors in presence of public incentives. Originality/value – This research provides useful information to understand the role of intrinsic characteristics of the firms and how they bridge their internal gaps with external support in carrying out demanding activities. External support provides a good test of the general theory of FDI, and a special theory nested within this gives a great deal of insight into current issues of FDI in the link between the home-country government and the firm's needs. This study goes beyond the traditional analysis of the effects of public support on exports. It uses a uniquely rich data set to evaluate the importance of public support as FDI determinant.