Foreign Direct Investment Liberalization Research Articles

Impact of Foreign Direct Investment (FDI) on Economic Growth in WAEMU from 1990 to 2012

In recent years, the effect of Foreign Direct Investment (FDI) on economic growth has been increasing, in developing countries, particularly in Africa. In their attempt to attract FDI, most African countries such as WAEMU (West African Economy Monetary Union) countries have liberalized trade and attempted to create an enabling environment. The purpose of our study is to investigate the impact of FDI on economic growth for WAEMU countries. We developed a theoretical model of investment that included an FDI variable and tested it with panel data from 1990 to 2012. The model is run for seven (7) developing countries in Africa. The estimation results show that FDI has a positive impact on economic growth. We found that FDI in WAEMU is going to facilitate the trade, FDI liberalization, economic cooperation, improve the business environment and increase the labour cost. FDI will allow WAEMU countries to attract more foreign capital for the creation of jobs and wealth. Based upon these results, the ultimate objective of our paper concludes that the Impact of FDI on economic growth is beneficial for host country’s trade and investment. The increasing of investment in WAEMU countries could generate important gains for most of African economies.

Modeling of FDI in business services: Additional effects in case of Ukraine's European integration

ABSTRACTTo analyze Ukraine's deep and comprehensive integration with the EU, we develop a multi-regional general-equilibrium simulation model incorporating heterogeneous firms and Foreign Direct Investment (FDI) in business services. This allows for consideration of (a) trade growth in new varieties; (b) aggregate productivity changes attributed to reallocation of resources across and within an industry; and (c) productivity growth in manufacturing due to increased access to business services. The results indicate relatively small gains for the EU, whereas Ukraine benefits with a welfare increase of over 8%. The deindustrialization impact, previously found by Olekseyuk and Balistreri (2014) in a comparison of different modeling structures, is supported by our findings. Ukraine's welfare gains are higher under an Armington structure compared to monopolistic competition. This is due to a movement of resources into Ukraine's traditional export sectors producing under constant returns. Implementation of the FDI modeling approach and liberalization of barriers to FDI, however, mitigates the deindustrialization impact as multinational firms enter the Ukrainian market. This increases the number of available varieties and, consequently, induces productivity growth of manufacturing sectors due to improved access to business services as critical inputs.

Taking the Measure of the TPP as Negotiated

We assess the impact of the Trans-Pacific Partnership (TPP) as negotiated, based on the actual text and liberalization schedules, supplemented by the technical summaries provided by various governments interpreting the outcome of the negotiations. In addition to the impact of tariff reductions and the expansion of agricultural market access through tariff rate quota concessions, we take into account estimates of likely preference utilization, and the impact of non-tariff barriers on trade in goods and services and on investment. We evaluate the latter on the basis of the extent to which the TPP reduces the parties’ scores on indexes measuring restrictiveness of the parties’ regimes for goods, services, and investment. We also take into account the value of binding market access commitments for services trade. We consider the potential spillovers on third parties of higher labour and environmental standards as well as of standards harmonization. We comment on the welfare costs stemming from the administrative burden of preferential trade and from compensating agricultural subsidies promised in some parties’ sensitive sectors; and discuss the implications of the TPP intellectual property regime. The assessment is based on a dynamic specification of the Global Trade Analysis Project model, modified to directly represent goods and services trade conducted through foreign affiliates, as well as on a cross-border basis, and to reflect the impact of liberalization of foreign direct investment.

Trade liberalization and aftermarket services for imports

We analyze the provision of repair services (aftermarket services that are required for a certain fraction of durable units after sales) through an international duopoly model in which a domestic firm and a foreign firm compete in the domestic market. Trade liberalization in goods, if not accompanied by the liberalization of foreign direct investment (FDI) in services, induces the domestic firm to establish service facilities for repairing the foreign firm’s products. This weakens the firms’ competition in the product market, and the resulting anti-competitive effect hurts consumers and reduces world welfare. Despite the anti-competitive effect, trade liberalization may also hurt the foreign firm because the repairs reduce the sales of the imported good in the product market. Liberalization of service FDI helps resolve the problem because it induces the foreign firm to establish service facilities for its own products.

Liberalize or Not? Societal Conflict, Plural Political Competition, and the Political Economy of FDI Liberalization

While the existing literature suggests political liberalization enhances the freedom of foreign direct investment (FDI), the observation that some countries with more liberal political regimes have more restrictive policies toward direct investment than others remains unexplained. With a theoretical model of plural political competition and empirical evidences gathered from panel data, I argue that the liberalizing effect of political liberty on foreign direct investment hinges on the local factor endowment of the country experiencing democratization. I develop a theory of investment policy formation that takes into account the strategic response from domestic societal actors to redistribution of political power and its impact on FDI liberalization. Consistent with the theoretical prediction, the empirical results show political liberalization is more likely to lead to liberalization of foreign direct investment when the capital–labor ratio in the economy is relatively low.

The Impact of Trade and Foreign Direct Investment Liberalization in the Dominican Republic

This research examines the effects of international trade and foreign direct investment (FDI) liberalization policies on the economy of the Dominican Republic during 1990s using a production function methodology. The regression results indicate evidence of unbalanced growth characterized by regional and technological dualism: (a) an efficient free trade zone (FTZ), highly dependent on FDI, and operating under increasing returns to scale, and (b) a relatively inefficient primary/secondary sector operating under decreasing returns to scale. Trade and FDI liberalization policies to promote sustained growth and development are not adequate because: (a) the implemented policies failed to establish economic linkages between different economic sectors, and (b) the FTZ’s contribution to GDP averages only about 3%.

The Impact of Taiwan's TPP Accession on Canada

This paper analyzes the impact on Canada’s economy of Taiwan’s accession to the Trans-Pacific Partnership (TPP) Agreement. While the TPP is to be concluded by the twelve current negotiating parties, it will allow accession by other regional economies, consistent with APEC’s endorsement of the TPP as a “pathfinder” approach to an FTAAP, which contemplates APEC economies that are ready to do so proceeding faster than others in deepening trade relations. Taiwan has clearly signaled its interest in acceding to the agreement. The approach in this study includes descriptive analysis of the commercial relationship between Taiwan and Canada and an analysis of the impact of Taiwan’s accession using computable general equilibrium model simulations that take in to account tariff liberalization, preference under-utilization and utilization costs, liberalized rules of origin, reduction of non-tariff barriers (NTBs) on goods and on cross-border services, and liberalization of foreign direct investment in services and the resulting implications for services trade through foreign affiliates (“commercial presence” or “Mode 3” services trade in WTO terminology). The liberalization assumptions are based on “best guesses” as to what the TPP agreement and the terms of Taiwan’s accession would actually be. The study concludes that Taiwan’s accession would generate over $20 billion of economic welfare gains for the incumbent TPP12 parties while Taiwan would enjoy a 2.8% increase in real GDP and $29 billion in economic welfare gains. For Canada, Taiwan’s TPP accession has some small structural/sectoral effects but no significant net impact on GDP or economic welfare. The results reported here suggest that Taiwan may need a “Canada strategy” to support its accession bid.

Democratization and Foreign Direct Investment Liberalization, 1970-2000

Despite the central role of foreign direct investment (FDI) in global economic integration, we lack explanations for why countries restrict FDI inflows. This article analyzes the sources of FDI liberalization using a comprehensive new data set of national foreign ownership restrictions spanning over 90 countries for the period 1970–2000. Analyses of this data show that democratization contributes to greater FDI openness. Democratization elevates the political influence of labor, the primary beneficiary of unrestricted FDI inflows. Democracies restrict six percent fewer of their manufacturing and service industries as compared to nondemocracies. This finding is robust to several controls for alternate explanations including economic crises, coercion, and diffusion; alternate measures of both democracy and foreign ownership restrictions; and a variety of model specifications. This article elucidates the political economy foundations of the contemporary world economy.

The relationship between trade, FDI and economic growth in Tunisia: An application of the autoregressive distributed lag model

The relationship between foreign direct investment (FDI), trade openness and economic growth in host countries remains one of the most important issues in the economic literature and met with renewed interest in recent years mainly for countries suffering from unemployment problems and lack of technological progress. This paper examines this issue for Tunisia by applying the bounds testing (ARDL) approach to cointegration for the period from 1970 to 2008. The bounds tests suggest that the variables of interest are bound together in the long run when foreign direct investment is the dependent variable. The associated equilibrium correction is also significant, confirming the existence of a long-run relationship. The results also indicate that there is no significant Granger causality from FDI to economic growth, from economic growth to FDI, from trade to economic growth and from economic growth to trade in the short run. Even though there is a widespread belief that FDI can generate positive spillover externalities for the host country, our empirical results fail to confirm this belief for the case of Tunisia. They go against the generally accepted idea considering the positive impact of FDI on economic growth to be automatic. The results found for Tunisia can be generalized and compared to other developing countries which share a common experience in attracting FDI and trade liberalization.

European Union Foreign Direct Investment Outflows to ASEAN Countries

The paper analyses foreign direct investment outflows from the European Union to the ASEAN countries. The region of Southeast Asia is very important for the EU in terms of economic cooperation. Previous relations between the European Union and ASEAN countries laid the foundations and became the basis for subsequent business initiatives, first encompassing trade and later investment initiatives. Today the liberalisation of foreign direct investment (FDI) flows is taking place, which has a positive impact on the increase in exports of ASEAN countries and in turn affects the economic development of these countries. The European Union deepens its economic ties with the region through FDI, which results in increased economic interdependence.

Economic Globalisation, Growth and the Environment: Testing of Environment Kuznet Curve Hypothesis for Malaysia

Economic liberalization-growth-Environment nexus is well known but debatable and an open question in the economic literature. Results regarding this nexus are not straight forward but they are sometimes confusing and contradicting. Some studies have found that the two key elements of globalization viz. trade liberalization and inflow of Foreign Direct Investment (FDI) have a positive impact on economic growth, while others have seriously questioned the significance of this result. Likewise studies have been conducted to investigate the impact of trade liberalization and FDI inflow on environment and the results remain inconclusive. There are numerous studies investigating the impact of trade and FDI on economic growth. But few studies exist that have analyzed the joint impact of FDI and trade liberalization policies on environment. The present study fills this gap by introducing explicitly and jointly the two major elements of globalization namely trade liberalization and the inflow of FDI into the analysis. Annual data from 1980 to 2008 from the World Bank data base has been used. To start with, the paper explores the causal relationship between FDI, trade, and Gross Domestic Product (GDP) growth. Also variables are tested for the degree of stationarity and co integration. Then Autoregressive Distributed Lag (ARDL) approach to co-integration techniques has been used to capture the impact of short-run dynamics and long-run equilibrium.

Evolution of Asia's Outward-Looking Economic Policies: Some Lessons from Trade Policy Reviews

This Working Paper contains some observations concerning the evolution of trade and trade-related policies in the Asia-Pacific region since the establishment in 1989 of the Trade Policy Review Mechanism (TPRM), whose goal is to improve the transparency of these policies. It also draws some lessons from the Reviews undertaken. In particular, the Paper examines how reforms, either unilateral or in connection with bilateral, regional or multilateral trade agreements, can be greatly facilitated by transparency, including cost-benefit (C-B) analyses of policies and measures that take full account not just of the interests of domestic producers, but also those of other groups, including exporters and domestic consumers. While high quality transparency is not cheap, the costs of achieving it pale in comparison with the financial assistance involved and efficiency losses associated with such assistance. Trade Policy Reviews (TPRs) throw light not only on measures that appear to contravene WTO rules, although that is not their purpose; more importantly, they identify measures not seemingly covered by WTO rules, which can, nonetheless, have economic effects equivalent to measures that are subject to these rules. One of the main lessons from these TPRs is that impediments to economic development are largely homegrown. Consequently, unilateral structural reform, of which liberalization of both trade and foreign direct investment (FDI) has been an integral part, is of paramount importance. By fostering transparency, particularly evaluating the effectiveness of policies and measures in achieving their objectives and their overall impacts (intended or unintended) on the economy, the TPRM can be a catalyst for unilateral reform, including liberalization of trade and FDI. Although the latter has received added impetus from multilateral liberalization under the auspices of the GATT/WTO, the stalling of negotiations in connection with the Doha Development Agenda (DDA) should not preclude further unilateral liberalization. By contrast, the benefits of preferential trade agreements are far from obvious, notwithstanding their proliferation during the past decade throughout the Asia-Pacific region, where few governments have subjected these agreements to rigorous cost-benefit analysis.

Foreign direct investment and R&D-offshoring

We analyze a two-country model of Foreign Direct Investment (FDI). Two firms, each of which is originally situated in only one of the two countries, first decide whether to build a plant in the foreign country. Then, they decide whether to relocate R&D activities. Finally, they engage in product-market competition. Our main points are: first, FDI liberalization causes a relocation of R&D activities if intrafirm communication is sufficiently well developed, external spillovers are substantial, competition is not too strong and foreign markets are not too small. Second, such a relocation of R&D activities will usually nevertheless increase domestic welfare since it only occurs if intrafirm communication is well developed and therefore knowledge generated and obtained abroad flows back to the domestic country. Third, the potential of R&D offshoring makes FDI itself more likely. Fourth, when countries are asymmetric, the small-country firm is more likely to offshore its R&D activities into the large country than conversely.

FDI Liberalisation, Firm Heterogeneity and Foreign Ownership: German Firm Decisions in Reforming India

The paper investigates the role of firm-level productivity and industry-level R&D for multinational enterprises' (MNEs') choice of undertaking foreign direct investment (FDI), and the share of ownership in foreign affiliates. Two firm-specific datasets on German MNEs with varying equity stakes in Indian affiliates are used to account for the two-step decision process. The paper also analyses how German firm decisions were affected by the liberalisation of FDI regulations in India. Results show remarkable differences between the selection and the ownership share equation, and also between the pre-reform and post-reform periods. The evidence clearly reveals the trade-offs involved in selective FDI approvals and foreign ownership restrictions.

Legal Issues on Foreign Investments in India

Liberalization of Foreign Direct Investment (FDI) laws in India has made India among the top five attractive destinations for international investors during the next two years, according to the United Nations Conference on Trade and Development (UNCTAD) in a new report on world investment prospects titled, 'World Investment Prospects Survey 2009-2011.' Easing of entry options for FDIs has made India one of the most attractive market for foreign investors as 100% FDI is permitted in various important sectors through automatic route. Though government approval is required in few sectors for FDI, the present legal framework has been made for obtaining approval. India is being viewed as investment heaven these days.

Barriers to Competition and Productivity: Evidence from India

Abstract A number of economic theories suggest that barriers to competition lead to higher levels of inefficiency among incumbents. In this paper, we use a detailed plant-level dataset to study the impact on productivity of two reforms (initiated in 1991) aimed at increasing product market competition in India -- liberalization of foreign direct investment (FDI) and reduction in tariff rates. First, we examine the effect of the liberalization policies on mean plant-level productivity in the targeted industries. We find significant increases in productivity in the FDI and tariff-liberalized industries, particularly in the longer term (1993-94). We check and find our results robust to a range of robustness tests. Next, we examine the role of intensive (within-plant productivity growth) and extensive (reallocation from less to more productive plants) margins in the post-reform productivity improvement, and find a predominant role for the former. Finally, we assess potential channels for within-firm productivity improvement. Consistent with a role for price competition, we find evidence of greater declines in output prices as well as concentration measures in the liberalized sectors.

FDI in Post-Production Services and Product Market Competition

Post-production services, such as sales, distribution, and maintenance, comprise a crucial element of business activity. A foreign firm faces a higher cost to perform such services than its domestic rival because of the lack of proximity to customers. We explore an international duopoly model in which a foreign firm can reduce its cost for post-production services by foreign direct investment (FDI), or alternatively can outsource such services to its domestic rival. Trade liberalization, if not accompanied by liberalization of service FDI, can hurt domestic consumers and decrease world welfare, but the negative welfare impacts can be mitigated and eventually turned into positive ones as service FDI is also liberalized. This finding yields important policy implications, given the reality that the progress of liberalization in service sectors is limited compared to the substantial progress already made in trade liberalization.

Foreign Direct Investment Liberalization Between Canada and the USA: A CGE Investigation

In this paper, we develop a computable general equilibrium (CGE) model to shed quantitative light on the implications of a scenario of deeper economic integration between Canada and the United States, where the barriers for foreign direct investment are preferentially eliminated. Our model distinguishes between the activities of domestic and foreign-owned firms at the microeconomic level, both in terms of demand and production characteristics. Overall our findings suggest that further investment liberalization between the two countries will accelerate the shaping of Canada’s industrial structure, as manifested by recent trends.

The new public service transnationals: consequences for labour

Since the late twentieth century, a significant number of public service providers operating in networks, previously defined as nationally-bound entities largely owned and controlled by the state, have embarked on aggressive expansion strategies abroad. This transnationalisation was a consequence of 1970s organisational reform, particularly privatisation, sectoral liberalisation and the liberalisation of Foreign Direct Investment. This article examines the recent organisational transformations of public service providers, particularly those based in the European Union, that have been at the forefront of this development, with a particular focus on electricity, telecommunications and postal services. Public service provider transformation, including transnationalisation, has significant consequences for work inside these organisations.

Foreign Direct Investment and Income Inequality in Mexico, 1990–2000

In this article we explore the relationship between the investments of multinational corporations (foreign direct investment) and income inequality in Mexico. We argue that Mexico's liberalization of foreign direct investment (FDI) inflows in the 1990s provides a natural experiment to test how FDI affects income inequality in a middle-income country. We use an instrumental variables approach as our identification strategy to mitigate problems of endogeneity and omitted variable bias. In an empirical test of the determinants of changes in income inequality from 1990 to 2000, we find that increased FDI inflows are associated with a decrease in income inequality within Mexico's thirty-two states.The authors would like to thank Lawrence Broz, John Freeman, Matt Gabel, Geoff Garrett, Quan Li, Eddy Malesky, Layna Mosley, Katie Ridgeway, Pablo Pinto, John Stringer, and Andy Sobel for comments and suggestions. Jacob Gerber and Mariana Medina provided excellent research assistance. Thanks also to Patricio Aroca Gonzalez for generously providing us with his data. We acknowledge the financial support of the Weidenbaum Center on the Economy, Government, and Public Policy. Nate Jensen's contribution to this article was written as a Global Fellow at UCLA's International Institute.