For Foreign Direct Investment Flows Research Articles

Demographics and FDI: lessons from China’s one-child policy

Abstract Following the introduction of the one-child policy in China, the capital-labor ratio of China increased relative to that of India, while FDI/GDP inflows to China versus India simultaneously declined. These observations are explained in the context of a simple neoclassical overlapping generations paradigm. The adjustment mechanism works as follows: the reduction in the growth rate of the (urban) labor force due to the one-child policy increases the capital per worker inherited from the previous generation. The resulting increase in China’s domestic capital-labor ratio thus "crowds out" the need for foreign direct investment (FDI) in China relative to India. Our paper is a contribution to the nascent literature exploring demographic transitions and their effects on FDI flows.

Foreign Direct Investment in Nepal’s Hydropower Development

The fund for Foreign Direct Investment (FDI) is globally limited and overstretched. Therefore, Nepal needs to go the extra mile in offering a competitive investment environment to attract FDI flows into Nepal’s hydropower development. It literally means that our investment policies and laws should be more competitive compared to that of other countries like Vietnam, Cambodia and Bangladesh etc.DOI: http://dx.doi.org/10.3126/hn.v14i0.11256HYDRO Nepal JournalJournal of Water, Energy and EnvironmentVolume: 14, 2014, JanuaryPage: 41-42

Egalitarianism, Cultural Distance, and Foreign Direct Investment: A New Approach

This study addresses an apparent impasse in the research on organizations’ responses to cultural distance. We posit that cross-country differences in egalitarianism—a cultural orientation manifested in intolerance for abuses of market and political power and support for protection of less powerful actors—affect multinational firms’ choices of destinations for foreign direct investment (FDI). Using historically motivated instrumental variables, we observe that egalitarianism distance has a negative causal impact on FDI flows. This effect is robust to a broad set of competing accounts, including the effects of other cultural dimensions, various features of the prevailing legal and regulatory regimes, other features of the institutional environment, economic development, and time-invariant unobserved characteristics of origin and host countries. We further show that egalitarianism correlates in a conceptually compatible way with an array of organizational practices pertinent to firms’ interactions with nonfinancial stakeholders, such that national differences in these egalitarianism-related features may affect firms’ international expansion decisions.

From Road Town to Shanghai: Situating the Caribbean in Global Capital Flows to China

Research Highlights and Abstract This article: Assesses the role of Caribbean offshore financial centres (OFCs) in FDI flows to China. Argues the OFC provides financial intermediation services beyond simply tax minimisation. Demonstrates a similar use of the OFC in other developing economies. Suggests the position of the OFC in global finance continues to evolve. This article examines the prominent location of offshore financial centres (OFCs) among the leading origin and destination points for foreign direct investment (FDI) to China. The OFC (characterised as a tax haven) frequently has been ignored or assumed out of analyses on Chinese FDI as simply servicing tax minimisation practices. This article challenges that assumption and emphasises the financial intermediation role performed by the Caribbean OFC beyond practices of tax arbitrage. Through the use of an international business company (IBC) registered in an OFC these jurisdictions perform several functions for investors, to include providing access to foreign capital markets, reducing tax obligations across multiple jurisdictions and concealing potential politically-sensitive beneficial ownership of the investment. This assessment for the role of the OFC in circuits of global capital involving FDI to China demonstrates that China's relationship with the OFC is different from that experienced by Europe and North America.

Competitiveness in India and China: the FDI puzzle

Given their growth records, large markets, and reformed economic systems, both China and India appear to be equally likely candidates for foreign direct investment (FDI). Yet, China has received substantially more FDI. The literature comparing FDI in these two countries is small, and does not provide conclusive evidence to explain this puzzle. Applying the Porterian framework of the competitiveness of nations to compare China and India, we garner evidence that differences in demand, factor conditions and firm strategy, structure and rivalry are not sufficient to explain the differential in the two countries' FDI flows. Differences in related and supporting industries, as well as Porter's other two factors – government and chance – are more compelling. We identify China's early entry into East Asian production networks in the 1980s as a key factor pushing China ahead of India in terms of FDI. We argue that this coincidental mix of timing and geography (Porter's ‘chance’ factor), pushed forward in China by the establishment of special economic zones, gave China a sustainable competitive advantage for the following two decades. What is implied from these findings is that China's FDI sources have been much larger and heavily slanted towards East Asia and manufacturing, while India, having missed this particular historical phase, needed to find an alternate route to development and global competitiveness.

A Composite Measure to Determine a Host Country's Attractiveness for Foreign Direct Investment

We contribute to the question of why some countries are more attractive for foreign direct investment (FDI) than others by constructing a composite measure that describes a host country's attractiveness for receiving FDI. This index considers all identified major, measurable and, for our scope, comparable aspects that affect FDI decisions. As a result, we can rank 127 countries with respect to their FDI attraction. The index provides the possibility of conducting detailed strength and weakness analyses for all of our sample countries and regions. These analyses provide support to policy-makers to improve their country's attractiveness for receiving inward FDI. They also enhance the discussion of why FDI flows still remain concentrated in advanced economies and, additionally, in which areas emerging and developing economies have to improve in order to narrow the existing gap. We provide correlation and sensitivity analyses to test the quality of our composite measure. Additionally, we benchmark our index with several alternative indices. Thereby, we show that no other index tracks actual FDI activity more closely.

FDI promotion through bilateral investment treaties: more than a bit?

Policy makers in developing countries have increasingly pinned their hopes on bilateral investment treaties (BITs) in order to improve their chances in the worldwide competition for foreign direct investment (FDI). However, the effectiveness of BITs in inducing higher FDI inflows is still open to debate. It is in several ways that we attempt to clarify the inconclusive empirical findings of earlier studies. We cover a much larger sample of host and source countries by drawing on an extensive data set on bilateral FDI flows. Furthermore, we account for unilateral FDI liberalization, in order not to overestimate the effect of BITs, as well as for the potential endogeneity of BITs. Employing a gravity-type model and various model specifications, including an instrumental variable approach, we find that BITs do promote FDI flows to developing countries. BITs may even substitute for weak domestic institutions, though probably not for unilateral capital account liberalization.

Investigating geography and institutions as determinants of foreign direct investment in Africa using panel data

This article uses a cross-country econometric approach to identify the determinants for foreign direct investment (FDI) in Africa. The contribution is 3-fold. Firstly, we recognize that the estimation techniques used elsewhere, such as ordinary least squares, may be flawed. We therefore use a dynamic one-step generalized method of moments (GMM) estimator due to Arellano and Bond (1991). The GMM-estimates identified a number of robust determinants of FDI, namely government consumption, inflation rate, investment, governance (political stability, accountability, regulatory burden, rule of law) and initial literacy. It is concluded that geography does not seem to have a direct influence on FDI flows to Africa. Neither market-seeking nor re-exporting motives of FDI seem to dominate, with different policy instruments being significant in the different specifications. This does not discount the importance of good policies, but probably indicates the importance of good policies made by good institutions. Institutions, in the form of political stability showed up as a significant determinant of FDI.

Egalitarianism, Cultural Distance, and FDI: A New Approach

This study addresses an apparent impasse in the research on organizations’ responses to cultural distance. We posit that cross-country differences in egalitarianism — a cultural orientation manifested in intolerance for abuses of market and political power and support for protection of less powerful actors — affect multinational firms’ choices of destinations for foreign direct investment (FDI). Using historically motivated instrumental variables, we observe that egalitarianism distance has a negative causal impact on FDI flows. This effect is robust to a broad set of competing accounts, including the effects of other cultural dimensions, various features of the prevailing legal and regulatory regimes, other features of the institutional environment, economic development, and time-invariant unobserved characteristics of origin and host countries. We further show that egalitarianism correlates in a conceptually compatible way with an array of organizational practices pertinent to firms’ interactions with non-financial stakeholders, such that national differences in these egalitarianism-related features may affect firms’ international expansion decisions.

A WTO Agreement on Investment: A Solution in Search of a Problem?

As global competition for foreign direct investment (FDI) intensifies, the question pending before the World Trade Organization (WTO) is whether to negotiate an agreement on investment that would address, inter alia, national laws that restrict market access of foreign capital. Whether the WTO can succeed in concluding a multilateral agreement on investment is subject to doubt. Several WTO members (e.g., the EU) have supported such a framework agreement, while others (e.g., the United States) have expressed misgivings and shown reluctance to move forward on meaningful negotiations. Considering the diverse and broad WTO membership that includes developed, developing, and emerging economies, a strong argument can be made that the WTO is the proper forum for concluding a multilateral investment agreement, not only because of its broad-based membership, but because of the close link between trade and liberalized investment rules. On the other hand, a WTO agreement on investment may be a solution in search of problem for the following reasons. First, FDI flows are steadily increasing, even in the absence of a multilateral investment agreement. Second, the threat to national sovereignty that a WTO agreement on investment represents to developing countries is a genuine concern. Third, the development concerns of developing countries and their capacity (or incapacity) to absorb yet another WTO agreement cannot be ignored. Fourth, it is safe to predict that many exceptions and reservations will be made to any WTO agreement on investment, effectively hollowing it out. Fifth, an incremental, sectoral approach is a tested and proven approach at the WTO for successfully negotiating market liberalization for foreign investment. Sixth, the most pressing issue facing the WTO membership in the context of FDI isn't a lack of market access for foreign capital. The immediate problem are TRIMs, both positive and negative, that potentially distort investment patterns. Seventh and finally, it is far from clear that the current network of bilateral and regional investment agreements provides an unstable and unpredictable legal environment for FDI. Bilateral investment agreements offer the flexibility that is not possible under a multilateral framework.

Market or policy driven? The Foreign direct investment boom in Argentina

Although the programme of structural reforms and price stabilization has contributed to a better environment for foreign direct investment (FDI) in Argentina in the 1990s, FDI flows are mainly explained by the incentives established in specific policies regulating the privatization of public services and in the automotive regime. The growth in internal demand has been the main locational advantage inducing recent FDI into Argentina. In this context, the impact of trade liberalization, entry of new firms and the requirements of the specific policies in force have encouraged firms to apply their human and physical resources in a more efficient way. Thus, in contrast to what happened in the era of import substituting industrialization, recent investments have been not only internal market but also efficiency seeking. However, most FDI has a significant import content and, except in the automobile industry, has not led to export growth. Furthermore, resource enhancement activities have been far less important than efficiency seeking investments and no significant strategic asset seeking investments have yet been made in the country.