FDI Policy Research Articles

Short-run Strategies for Attracting Foreign Direct Investment

This paper empirically investigates the effectiveness and feasibility of two FDI policies, fiscal incentives and deregulation, aimed at improving the attractiveness of a country in the short run. Using disaggregated data on sales by US MNEs’ foreign affiliates in 43 developed and developing countries over the 1982–94 period, results show that the provision of fiscal incentives or the deregulation of the labour market would exert a positive impact on total FDI. Given the drawbacks frequently associated with the use of incentive packages, economy-wide policies which ease firing procedures and reduce severance payments would certainly be the best policy option. This paper also highlights the different aggregation and omitted variable biases that have affected results of previous studies and provides some support to recent theoretical models of FDI by showing that third-country effects and spatial interdependence influence respectively the location of export-platform FDI and vertical FDI.

Formation of special economic zone, liberalized FDI policy and agricultural productivity

Formation of Special Economic Zone (SEZ) using agricultural land to promote industrialization has recently been one of the most controversial policy issues in many developing economies including India. This paper critically evaluates the consequences of this policy in terms of a three-sector Harris–Todaro type general equilibrium model characterizing a typical developing economy. It finds that agriculture and SEZ can grow simultaneously provided the government spends a substantial amount of its resources on irrigation projects and other infrastructural development designed at improving the efficiency of land. Agricultural wage and aggregate employment in the economy may also improve owing to this policy.

Firm Heterogeneity, Origin of Ownership and Export Participation

This paper investigates the relationship between firm heterogeneity and a firm’s decision to export, using the annual survey of Thai manufacturing firms from 2001 to 2004. A significant contribution of this paper is that we are, for the first time, able to break down FDI by country of origin to observe whether the behaviour of MNEs differs by region of origin. We find that sunk entry costs and firm characteristics are important factors in explaining a firm’s decision to export. Another important determinant is the ownership structure of the firm, with foreign-owned firms having a higher probability of exporting than domestically owned firms, although this differs across country of ownership with potentially important policy implications. Export platform FDI is used to explain the behaviour of foreign firms that invest in Thailand. Using three measures of total factor productivity, we also find that highly productive firms self-select into the export market. The implication for governments of developing countries is the need to think carefully about how and to whom they target their inward FDI policies as a means of growth. The heterogeneous behaviour of multinationals from different nations means that policies targeting specific regions or countries may be preferable to general tax concessions or the implementation of special economic zones that are open to all.

Research note: World Investment Report 2009: Transnational corporations, agricultural production and development key messages FDI trends, policies and prospects

Global FDI flows have been severely affected worldwide by the economic and financial crisis. Inflows are expected to fall from $1.7 trillion in 2008 to below $1.2 trillion in 2009, with a slow recovery in 2010 (to a level up to $1.4 trillion), and then gaining momentum in 2011 (approaching $1.8 trillion).

Legal Regulation of Foreign Direct Investment and its Role in the Growth of National Economies

Legal regulations governing inflow of foreign investment as well as the functioning of FDI projects in an economy plays the most vital role in attracting FDI. Every nation has its own special case and its FDI policies must be based upon that only. It is extremely important to understand the local economy before drafting the policies for FDI. FDI inflow makes positive impact on economy in most of the cases and it can be used as a significant tool in developing economy. Intellectual Property issues are very critical in FDI. Host economies are always desirous of domestic human resource development and technology transfers but foreign enterprises are always sceptical when it comes to the proliferation of their methods and technologies. Strict IP rights protection regimes are surely favoured by foreign investors but that doesn’t necessarily increase the FDI. Host economies are expected to follow balanced IP rights protection regimes to attract maximum FDI and at the same time get maximum benefits through spillovers and technology transfers. Legal regulations governing FDI are the most important factors that decide the level of inflow of FDI and extent of impact of FDI on host economy. A proper legal policy must be drafted by the nations so as to suit their individual needs.

What drives large South African corporations to invest in sub‐Saharan Africa? CEO's perspectives and implications for FDI policies

AbstractForeign direct investment (FDI) flowing into Africa is highly diverse in terms of the origin of the investors, size of the firms, and the sectors of activity. The motivations and factors driving firms' decisions to invest in Africa are equally diverse. A direct survey of senior management in South African firms that are operating in sub‐Saharan Africa reveals that the drivers of foreign investment as well as the risks and the strategies to overcome them differ markedly between sectors. A further finding is that there is a limited pool of FDI promotion policies and incentives that governments can institute that are effective in impacting South African corporations' investment decisions. As a consequence, broad‐based FDI promotion policies aimed at attracting FDI across all investor groups are likely to have limited impact in attracting FDI from any particular investor group, or in attracting any FDI from multinational companies similar to the South African companies studied here. Such broad based policies probably need to be complemented with policies targeting those specific firms or sectors which countries hope to attract.

Bilateral Trade and Investment between India and China

The paper focuses on bilateral strategic cooperation between India and China. It started with describing and explaining the recent bilateral situation between these two countries. The comparative macroeconomic variables between these two countries are also provided to initiate the discussion and to make a better understanding of the present situation. The paper explains the overall trade dynamics between India and China, where Constant Market Share Analysis (CMS) model is used to understand the nature of export change. Using CMS, the paper analyzed the prospects of several products in each other's market. While analyzing investment, the paper examines FDI policies of China and the sectors where the Indian companies have invested. The potential sectors for the Indian companies to invest in China have also been identified. Finally, the paper concludes through describing the trade negotiation strategy of both the countries and the areas where economic synergies can be formed. JEL: F13, F15

Reforms in FDI Policy and the Investment Climate in Vietnam

This article surveys the evolution of foreign direct investment policy since the initiation of renovation reforms (Doi moi) in 1987 and current state of the policy regime. It is shown that following a period of slow progress of over a decade, the reform processed gained momentum in the aftermaths of the Asian fi nancial crisis(1997–1998) and accelerated in the course of the WTO accession process. Reforms over the past five years have virtually eliminated ownership restrictions and streamlined procedures for business entry and operation, ensuring a level playing field for business ventures of all ownership types. However, there are still various institutional constraints and infrastructure bottlenecks that need to be redressed in order to improve Vietnam’s ranking among the dynamic East Asian economies as an attractive location for foreign investment.

FDI Policies and Competition Model between Korea and China

FDI Policies and Competition Model between Korea and China

Are the FDI policies of the Central European countries efficient?

This article examines the efficiency of the Central European countries' foreign direct investment policies by evaluating the spillover effects of foreign investment. It is argued that the poor contribution of foreign direct investment to the emergence of competitive indigenous firms is partly due to the adoption by Hungary, the Czech Republic, Poland and Slovakia of a very friendly FDI policy. The argumentation is based on a stylised comparison of the ‘Irish Model’ and the ‘TKC model’ (Taiwan, Korea, China) representing two main categories of FDI policies of countries which have built their development on integration in international trade. The comparison of the two families of FDI policies tends to demonstrate that the ‘TKC model’, built on strong state intervention in the industrial structure and in industrial guidance of FDI, has been more efficient in terms of the creation of competitive indigenous firms than the ‘Irish model’ which totally bans policies constraining FDI.

Have China’s FDI Policy Changes Been Successful in Reducing Its FDI Regional Disparity?

From the very beginning of China’s open door policy in 1979, China’s preferential FDI polices have generally favored the coastal provinces, which has led to a pronounced regional disparity in FDI. Since 1992, the Chinese government has implemented a series of polices to reduce FDI regional disparity and diversify inward FDI to Western and Central provinces. This article uses a regression–based approach to assess the contribution of China’s preferential FDI policy changes toward FDI regional disparity. Our results suggest that the contribution of China’s regionally preferential FDI polices in inward FDI disparity decreased from 24 percent in 1990 to 13 percent in 2005. China’s preferential FDI policy changes dominate all the other factors in reducing China’s inward FDI regional disparity during this period.

Japan's Gradual Transformation in Corporate Governance

Japan has recovered from a 'lost decade' of economic stagnation over the 1990s. Anyway, it has been a 'found decade' for civil and criminal justice law reform, especially in corporate and securities law. Yet, have liberalisation and globalisation in those fields led to major changes in the 'law in action'? Does this represent 'Americanisation' of Japan's corporate governance system, focusing on shareholders rather than other key stakeholders such as 'main banks', core employees, and partners within diffuse corporate groups (keiretsu)? This version of our introductory chapter explains how our forthcoming book argues for a more complex 'gradual transformation'. Such shifts are also found in many other post-industrial economies, but Japan appears to give greater emphasis to certain modes of achieving change. The book brings together contributions from academics and practitioners from Japan, Australia, New Zealand, Canada and the United States. An early chapter introduces methodology for effective cross-country comparisons and for evaluating the burgeoning but divergent literature on Japanese corporate governance. The concluding chapter compares continuities and changes in Japan's largest companies now and two decades ago. Other chapters cover 'lifelong employment', main banks, the untold story of closely-held companies, the limited uptake of the Committee-based governance form, and the procedural, substantive and FDI policy dimensions of takeovers law and practice.

Firm Heterogeneity and Export Participation: A New Asian Tiger Perspective

This paper investigates the relationship between firm heterogeneity and a firm's decision to export, using the annual survey of Thai manufacturing firms from 2001 to 2004. A significant contribution of this paper is that we are, for the first time, able to break down FDI by country of origin to observe whether the behavior of MNEs differs by region of origin. We find that entry sunk costs and firm characteristics are important factors in explaining a firm's decision to export. Another important determinant is the ownership structure of the firm, with foreign owned firms having a higher probability of exporting than domestically owned firms although this differs across country of ownership with potentially important policy implications. Export platform FDI is used to explain the behavior of foreign firms that invest in Thailand. Using three measures of total factor productivity, we also find that highly productive firms self-select into the export market. The implication for governments of developing countries is the need to think carefully about how and to whom they target their inward FDI policies as a means of growth. The heterogeneous behavior of multinationals from different nations means that policies targeting specific regions or countries may be preferable to general tax concessions or the implementation of special economic zones that are open to all.

Foreign Direct Investment in Developing Countries: have we reached a policy ‘tipping point’?

In the 1990s, around the world, government policies on fdi were unequivocally fdi -friendly. Numerous policy changes were enacted to make the investment climate more favourable to fdi. However, over the past few years a range of countries has enacted policy measures less favourable to fdi. Does this represent an overall shift in fdi policy thinking? And, if so, what are the current drivers of such a change? This paper discusses trends in contemporary fdi policy and the role played by prevailing narratives, actors and the changing context in shaping policy.

The Knowledge Spillover Theory of Entrepreneurship and Foreign Direct Investment

We explore if the Knowledge Spillover Theory of Entrepreneurship, applied to FDI, provides at least a partial explanation for the greater emergence of recent knowledgebased entrepreneurship in Ireland compared with Wales. In order to examine how FDI and entrepreneurship policy in these two regions might have influenced the levels of knowledge-based entrepreneurship, we outline FDI and entrepreneurship policies for Wales and Ireland and key measures of knowledge creation, and evaluate the extent and nature of FDI activity and its relationship with entrepreneurship in general and knowledge-based entrepreneurship in particular. Implications include possible policy directions for countries that are characterized by weak knowledge-creating institutions yet wish to encourage knowledge-based entrepreneurship.

Foreign Direct Investment in the Changing Business Environment of the European Union's New Member States

Business environment is one of the location factors taken into account by investors while investing abroad. This paper focuses on the relationship between changes in business environments in the new Member States of the European Union (EU) and foreign direct investors' behavior. The analysis concentrates on Central and Eastern European (CEE) countries, with special reference to Poland, the Czech Republic, Hungary and Slovakia. The EU policies and the national incentive-based FDI policies are two driving forces influencing business environment in the new Member States. All the adjustments to the EU requirements reshape conditions for doing business in the new Member States and lead to the improvement of so called economies' 'fundamentals'. The national FDI policies could be treated as a factor disturbing these long term processes and changing economic choices of the established and potential investors. The statistical data on FDI inward stock and annual FDI flows confirm the positive reaction of foreign investors to the changes taking place throughout Central and Eastern Europe. Some data, however, confirm also that there is intense incentive-based competition and a kind of bidding war between them in order to attract foreign investors.

Openness and the International allocation of foreign direct investment

This paper develops an ordinal index to measure the openness of FDI policy regimes for individual countries. There has been a generalised increase in the index between 1990 and 2002. The most important determinants of variations in FDI flows across countries and over time are country size, the level of educational achievement, and growth. The openness index is positively associated with FDI flows, but its explanatory power is low. Liberalising approval procedures and lifting requirements that foreign companies enter into joint ventures with domestic firms encourage FDI. We conclude that the openness of the FDI regime operates as a factor enabling FDI, but that location advantages are paramount in determining the international allocation of FDI. We also turn the question around and ask what countries are more likely to impose restrictions on FDI. We find that lower levels of education and larger domestic markets are associated with greater restrictions on FDI. In addition, there is some evidence that better institutions are associated with lower FDI restrictions.

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

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

An Analysis on the Inward FDI Policy of Ireland

Through the 5th and the 6th enlargements, the EU became the largest single market in the world with the total population of 457 millions and the total GDP of €9755.4 billions as of January 1 2004. This means that the EU becomes one of the most attractive markets in the world. However there is another face of the EU market which we have to consider. The EU has strengthened the degree of its economic integration since 1957 and already reached to the stage of ‘full economic integration’ which is understood as the most protective measure for non-EU member countries To pioneer very attractive but very protective EU market, FDI is certainly one of the best available ways for non-EU member states. In particular, the EU market is very important for the countries which heavily rely on external economic relations. Korea is also a country heavily relying on external economic relations. Among the EU member countries, Ireland is one of the countries which draw the largest amount of FDI. In this study, I analyzed why Ireland has been able to draw such a huge amount of inward FDI. It was found that the main factors which Ireland used in order to draw the FDI were its very effective policies toward inward FDI and its inherited investment-related factors such as cheap, good quality and young labor forces.

Technology transfer perspectives in globalising India (drugs and pharmaceuticals and biotechnology)

The paper briefly outlines the status of technology transfer related issues in drugs & pharma and biotechnology sectors in India. The paper also outlines the contemporary business strategies including R&D and technology transfer models. The study indicates that present technology transfer policies and mechanisms are weak and need to be restructured. The current fiscal incentives and tax concessions etc. available for R&D in industry seem to have outlived and are no longer attractive because of continuous lowering of tariff rates and tax rates in the context of WTO and liberalization of policies. Moreover, the issue of R&D support to industry is not covered in the WTO as in case of subsidies. Therefore, it is advisable for the government to revisit the existing promotional measures for R&D. FDI policies also need to be tailored to encourage Technology transfers and capability building. Recommendations are made for making Technology Transfer more effective for the growth and competitiveness of the industry. A technology transfer management model is suggested.