FDI Activity Research Articles

The Impact of the EU Emissions Trading System on Competitiveness and Carbon Leakage

Concerns about the potential negative effects on domestic firms’ international competitiveness and ensuing carbon leakage are the main obstacle to the unilateral use of carbon pricing for reducing greenhouse gas emissions. Since 2005, the EU Emissions Trading System (EU ETS) has put a price on about half of the EU’s overall emissions and presently remains the largest cap-and-trade scheme in the world. Monitoring the competitiveness effects of the EU ETS is vital for evaluating the cost effectiveness of the policy instrument and for amending it if needed. This paper surveys the econometric literature that tests for the occurrence of competitiveness effects and carbon leakage under the EU ETS. Emphasised is the specific or more general relevance of estimation results for sectors, countries and years. Organised in this way, the empirical evidence may better inform policy. The review also covers several studies analysing the competitiveness effects of the EU ETS through the lens of stock markets. By far, the most frequently encountered conclusion is that no evidence was found of negative statistically significant effects on firms’ competitiveness (nor, therefore, of carbon leakage). Among the few adverse effects, those concerning increased FDI activity in certain regulated sectors deserve special consideration.

The moderating role of education in the relationship between FDI and entrepreneurial activity

We investigate the roles of inward FDI and education in explaining country levels of entrepreneurship. It is widely recognised that inward FDI may have positive but also negative spillover effects on entrepreneurial activity. We argue that both types of spillovers (positive and negative) may be reinforced by high education levels of the labour force. Using a database across 75 countries between 2001 and 2015, we estimate a 2SLS model that tests for this moderating role of education. We find support for a negative interaction effect of FDI and macro-level education on the rate of entrepreneurial activity, suggesting that in countries with highly educated labour forces, inward FDI leads to more jobs in the wage sector rather than a higher number of entrepreneurs. Policy implications are discussed.

Foreign direct investments from emerging markets: The push-pull effects of sovereign credit ratings

This paper analyses the determinants of FDIs from emerging market countries. We investigate the role of sovereign credit ratings of both donor and recipient countries in determining bilateral FDI flows from 17 emerging countries to 71 recipient countries. We find that sovereign credit ratings are important determinants of emerging market FDI. Donor sovereign credit ratings have a positive relationship with FDI outflows, suggesting that emerging market investors are more likely to engage in FDI activities when their own ratings strengthen. We find that emerging market FDI investors invest more in high rating advanced countries and low rating emerging market countries when their own rating improves. In addition, they invest more in high rating advanced countries with rating downgrades and low rating emerging market countries with rating upgrades. Furthermore, we find that donor emerging market countries with better institutional quality are more likely to invest directly abroad. Emerging market recipients with a stronger institutional environment are able to attract more FDI from other emerging markets while the institutional quality of developed market recipients matter less.

Multinational activity of European firms and heterogeneity

AbstractThis paper offers an empirical assessment of the multinational activity of European firms. It takes the predictions of models of firm heterogeneity and FDI activity as a reference to explore the characteristics of multinational firms from 30 European countries. We use a data set, based on ORBIS, which links information of parent–affiliate pairs of firms. Our results show that more productive firms have greater multinational activity in terms of both scope, the number of foreign markets where they invest, and scale, the volume of local sales by subsidiaries active in foreign markets. The estimation of gravity equations shows that country characteristics that encourage multinational activity successively induce the entry of less productive parent firms. We confirm this asymmetry for the GDPs of the home and host countries, distance, contiguity and other standard gravity equation variables.

Global production networks and foreign direct investment by small and medium enterprises in ASEAN.

This paper examines cross-border investments by small and medium enterprises (SMEs) from member states in the Association of South-East Asian Nations (ASEAN). It explains this relatively under-researched topic from the perspective of SMEs’ strategic coupling with or “plugging into” regional production networks coordinated by global lead firms. Facilitated by growing regional integration, these SMEs create and capture significant value added from their involvement in these production networks. The paper first highlights the different drivers of SME-specific FDI activities in ASEAN that contribute to strengthening regional economic integration through intra- and inter-firm activities in the region. The paper then explains the working of their strategic coupling with ASEAN-based production networks through different coupling mechanisms, such as international partnership, industrial specialization and production platforms. The key challenges confronting SME regionalization are highlighted. Finally, the paper considers the policy and practice of promoting SME regionalization so that they can plug into the growth dynamics of different regional production networks.

Exploring outward FDI and the choice of destination: evidence from Swedish firm-level data

ABSTRACTUsing Swedish firm-level data on all firms and their affiliates abroad, we investigate what observable firm and country characteristics affect the size of an affiliate in a particular destination. We employ the richness of the data to investigate the importance of destination country factors in explaining firm outward FDI activities and distinguish between the factors that affect such activities in manufacturing versus services firms as well as vertical versus horizontal investments. Our results lend support to existing theories of multinational activity of manufacturing but not services firms. We also find observable differences between vertical and horizontal manufacturing firms that are not always explained by theory.

The Determinants of Chinese Outward FDI in Countries Along “One Belt One Road”

ABSTRACTThis article identifies the main determinants of Chinese outward FDI (OFDI) activities with a focus on One Belt One Road (OBOR) countries during the period 2003–2015. We established a panel dataset including 93 countries (49 OBOR countries within and 44 countries outside the OBOR). The results show that Chinese OFDI in OBOR countries are highly sensitive to exchange rate (ER) level, market potential, openness, and infrastructure facilities of host countries. The determinants of Chinese OFDI in OBOR countries differ from those outside.

The New Definition of Oral Health and Relationship between Oral Health and Quality of Life.

FDI World Dental Federation, which has 200 dental association members in some 130 countries, is the official representative body and voice of more than 1 million clinicians worldwide. It set itself the task of creating a new definition for oral health as a baseline to develop tools to measure oral health and related indicators. The definition allows FDI to position oral health within the global health agenda in areas such as quality of life and wellbeing and the challenge of an ageing population worldwide. Furthermore, it provides an impetus for FDI activities in favour of worldwide periodontal health.

FDI in Space Revisited: The Role of Spillovers on Foreign Direct Investment within the European Union

We estimate a spatial econometric interaction model for bilateral aggregate FDI stock data between 25 European Union member countries in 2010. We find evidence for spatial spillovers of foreign direct investment for three different types of spatial dependence. Our results document FDI spillovers between neighboring countries of FDI origin countries, neighboring countries of FDI destination countries as well as between neighboring countries of both FDI origin and destination countries. Relying on recently developed methods, we provide the first model-consistent interpretation of marginal effects of market size (measured by GDP) as well as GDP per capita on bilateral FDI activity. Our research highlights the importance of taking into account spatial lags when estimating bilateral FDI gravity models.

The impact of banking deregulation on inbound foreign direct investment: Transaction-level evidence from the United States

We evaluate the effects of state-level banking deregulation that resulted in improved access to cheaper local finance on foreign firms investing in the U.S. We provide direct, micro-level evidence from U.S. inbound foreign direct investment transactions showing that interstate banking, but not intrastate branching, deregulation increased the number of transactions, reduced the average transaction value, and boosted overall investment by foreign multinationals. We also show that lower cost of local credit and greater local bank competition in each state, following the interstate banking deregulation, are potential mechanisms that stimulated FDI activity. Finally, we demonstrate that after the adoption of the interstate banking deregulation, both the number and the average value of transactions increased in industries that are more dependent on external finance relative to industries that are less dependent.

A gravity model of foreign direct investment in the hospitality industry

This paper investigates the determinants of FDI activity in the hospitality industry using a gravity model. It draws on a new and unique database of 2420 FDI projects carried out by 50 parent countries in 104 host countries from 2005 to 2011. Results show that the number of hotel FDI projects is significantly and positively related to the market size and the existence of a common language while increases in the level of business regulations, tax rates or minimum wages have the opposite effect. Geographical distance and socioeconomic factors are not relevant. Comparing the number of predicted FDI projects with those actually carried out, we find that the United Kingdom, India, and Mexico are particularly successful in attracting hotel FDI projects, whereas Russia, Germany, and the United States host much fewer.

The Impact of Skill Endowments and Collective Bargaining on Knowledge-Intensive Greenfield FDI

This paper assesses the contribution of skilled employment and labour market conditions to the ability of attracting knowledge intensive and manufacturing greenfield FDI. We carry out our analysis by controlling for a wide range of labour market features, such as the collective bar- gaining coverage rate, the non-wage labour costs, and the occupational skills of employment. It departs from the existing literature in two respects. First, it deepens the analysis on the ef- fect of labour market regulations and skills endowments on greenfield FDI inflows. Second, it investigates the extent to which labour market characteristics matter for discriminating among 'resource-seeking' and 'efficiency/strategic asset-seeking' greenfield FDI activities (e.g. manufac- turing versus knowledge-intensive foreign investments, respectively). Our empirical analysis suggests that the quality of employment and the technological knowl- edge base have different impact on the location of knowledge-intensive and on low-cost labour- intensive manufacturing foreign investments. Further, associating the collective bargaining cov- erage of unions with the level of regulation in the labour market, our results can provide insights into the effectiveness of labour market policies that aim at attracting knowledge-intensive invest- ments.

The motives for inward FDI into Sub-Saharan African countries

This study contributes to the FDI literature by investigating the impact of all four locational motives of FDI in Sub-Saharan African (SSA) countries for the period 1996–2010. To achieve this aim, panel data techniques (pooled OLS, fixed effects and GMM) were employed on a sample of SSA countries. The empirical results showed that efficiency and strategic asset seeking factors influenced FDI activities in SSA for the period investigated. Market size also influenced FDI however this was less robust to specifications. Surprisingly, FDI in SSA was not resource seeking. Furthermore, a statistical test confirmed structural and behavioural differences in FDI determinants between SSA sub-regional groups and when analysed separately, FDI in West and Central SSA was market and efficiency seeking while FDI in South and East Africa was best explained by efficiency seeking factors. Based on the empirical findings, a number of policy implications were derived. These policy implications include further implementation of policies targeted at increasing and sustaining trade liberalisation and trade diversification, control of corruption, credible upgrades and productive investments in infrastructure, and support for human capital accumulation as FDI is increasingly directed towards R&D, innovation and strategic asset activities.

The evolving patterns of global production of multi‐product firms

AbstractWe extend the framework of Antràs and Helpman (2004) to investigate how multi‐product firms choose different production structures for producing various products and derive four equilibrium patterns of global production. We show that the evolving patterns of inward foreign direct investment and outward processing trade observed in China can be explained by the rapid increase in labour productivity relative to wages. The model predicts that, as labour productivity increases, outsourcing activities will eventually exhibit an inverse U‐shape. We also find that technology spillover increases outsourcing but reduces FDI; the increase in labour productivity, however, could raise both FDI and outsourcing activities.

The Characteristics of FDI Activities Located in Different Host Regions — A Study Based on Firm-Level Data

Summary Based on a unique firm-level dataset for Swiss MNEs, this paper characterizes FDI activities located in different host regions. The characterization of the FDI activities is based on information on the parent companies, their foreign subsidiaries and the two-way trade flows between parent companies and foreign affiliates Concretely, the study provides econometric evidence based on multivariate probit estimates about the relationship between a firm’s choice of nine alternative host regions and the type of FDI (horizontal production-oriented, vertical production-oriented, distribution-oriented), a firm’s FDI experience and its capabilities for innovation, respectively. The estimation results indicate that there is low correlation between a firm’s capability for innovation and FDI experience, respectively, and the location of their FDI activities. Further, our estimates indicate large heterogeneity with respect to the type of FDI activities.

The FDI of Small- and Middle-Sized Enterprises: A Literature Review

In recent years, increasing SMEs (small- and middle-sized enterprises) started internationalization, and FDI became an important approach for SMEs to participate in international activities. As traditional FDI theories explain little about the FDI activities of small and medium companies, the paper reviews the related literatures about the FDI of SME, classifies the motives of conducting FDI, elaborates the decision-making process, concludes the investment performance and summarizes the related empirical studies and the defects of existing literature.

Focus on industrial districts and local production systems. Esportazioni e investimenti diretti all'estero nelle imprese distrettuali italiane

The paper describes the internationalization strategies of industrial districts, analyzing export flows and FDI expansion. Industrial districts confirm both a high export propensity and a more intense FDI activity, compared to non-districts areas specialized in the same industries. Moreover, industrial districts internationalization strategies present a wider and more diversified geographical span and a high propensity to serve, both with FDI or exports, markets more distant from a geographic and cultural point of view. Export flows and FDI appear to be more related in the case of district areas, with FDI significantly contributing to explain export performances in the 2010-2012 period.

Foreign Direct Investment and Transnational Corporations

The chapter summarizes 40 years of UNCTAD’s research and analysis on the relationship between FDI and TNC activities and development. While during that period pros and cons of development strategies relying on inward FDI have oscillated in response to events in the world, it is now widely recognized that FDI, as a complement to domestic investment, can bring important development benefits for both host and home economies. It is also clear that makers should not rely on passive liberalization and market forces alone. UNCTAD’s analysis has underscored the crucial role of active government policies to help ensure that FDI brings development gains: policy matters has become a consistent message. On the other hand, FDI is no panacea for breaking out of underdevelopment. The scope for benefiting from inward FDI is closely linked to a country’s ability to foster its domestic capabilities, and under the right circumstances FDI can act as a catalyst for economic growth and development. In the area of FDI and development there are no clear-cut answers or one-size-fits-all solutions. UNCTAD has played its role in advancing the intellectual comprehension of the phenomenon of FDI and, over time, has developed policies to deal with it. The chapter reviews the evolution of research and work of UNCTAD and how it has interacted with technical assistance work as well as with national Governments through its intergovernmental machinery.

The Spatial Dimension of Trade- and FDI-Driven Productivity Growth in Chinese Provinces: A Global Cointegration Approach

Since the introduction of its “open door” policy in the late 1970s, China has been attracting a growing share of FDI inflows and its international trade integration has advanced considerably. In this study, we take a closer look at the regional growth impact of the Chinese internationalization activity on labor productivity over the period 1979-2006. Our empirical analysis thereby extends the existing empirical literature by considering the likely spatial effects associated with Trade- and FDI-led growth in a dynamic error correction modelling framework. Our results indicate that, in the long run relationship, regional labor productivity is indeed driven by direct and indirect spatial effects of FDI and trade activity next to further supply side factors such as the regional infrastructure equipment and human capital endowment. Similarly, in the short-run, changes in FDI activity and especially human capital variables are found to matter for the regional growth dynamics.

How Far Away is an Intangible? Services FDI and Distance

AbstractForeign direct investment (FDI) in services has grown significantly in recent years. Evidence of spatial relationships in FDI decisions have been provided for goods manufacturing by utilising physical distance‐based measures of trade costs. This paper investigates spatial interactions for services FDI using several distance measures, including physical distance, genetic distance and transport time. Across different measures of distance, the traditional determinants of outbound FDI activity remain valid for services. We also find spatial interdependence for services FDI that is generally supportive of export‐platform FDI.