Foreign Direct Investment Policy Research Articles

Foreign-owned subsidiaries: a neglected nexus between foreign direct investment, industrial and innovation policies

This paper addresses the interplay between foreign direct investment (FDI) and the industrial and innovation policies of host economies. Drawing on insights from both business and policy literature, the paper argues that the prevailing macroeconomic perspective related to the attraction of FDI inflows and disregard for existing foreign subsidiaries are misleading. The rationale for this claim is the very fact that foreign subsidiaries are part of the innovation and the industrial systems of their host countries. Hence, their economic and innovative performances impact the overall dynamics and competitiveness of their host countries. Copyright , Beech Tree Publishing.

The determinants of foreign direct investment in Sub-Saharan Africa

The study examined the determinants of foreign direct investment (FDI) in Sub Saharan Africa between 1970 and 2000. Results indicate that trade liberalization has been the main determinant of FDI over the three decades. However, the low level of FDI inflows to the region, suggest that liberalization policies are necessary but insufficient in attracting FDI. Policy makers in the region should therefore focus on institutional reforms and improve the business climate to enhance the region's chances of attracting more FDI. On the other hand, multinational enterprises could exploit the favorable FDI policy environment to negotiate favorable terms of entry and reap the benefits of beingfirst-movers.

Turkey's FDI Policy and Chinese Foreign Direct Investments in Turkey

The Republic of Turkey and the People's Republic of China are two countries with emerging market economies on the eastern and western borders of Eurasia. Turkey, with its notable economic improvement after the 2001 banking crisis and China, with entrenched economic reforms that have promoted the opening of its market to the world, have become attractive for international investors. Both states’ economic liberalization processes led to considerable increase in Foreign Direct Investment (FDI) although the amount of FDI is much higher for China. China, in turn, is likely to become a major investor in the coming years rather than just being an FDI magnet. This article analyses the FDI environment and recent developments in Turkey as well as indications of Chinese investments which are taking place in Turkey. The rapid expansion of the trade volume between Turkey and China, China's increasing foreign exchange reserves and its desire to enter world markets including the European market are all signalling an increase of its investments in Turkey. The implications of Chinese investments for Turkey are also discussed.

The Post-Crisis Development of Foreign Direct Investment Policies of Korea

The Post-Crisis Development of Foreign Direct Investment Policies of Korea

Managing Globalization: Lessons from China and India

Managing Globalization: Lessons from and India. Edited by David A. Kelly, Ramkishen S. Rajan, and Gillian H. L. Goh. Singapore: World Scientific, 2006. Pp. 481. and India, two fastest-growing and most populous nations in the world, have been attracting greater attention from experts and policy-makers in recent years. This book brings together various contributions by Chinese and Indian scholars for the Inaugural Conference of the Lee Kuan Yew School of Public Policy at the National University of Singapore in April 2005. Topics cover a wide range of issues, including that of the economy, social security, national security, and ethnicity and identity. Since this is a compilation of papers, the editors do not necessarily always draw any particular conclusion for readers. However, it undoubtedly provides plenty of analyses, information, and viewpoints on both and India, and is expected to trigger further discussion by scholars and policy-makers concerned. Having said so, the following are some observations primarily focusing on the economic aspects of and (not necessarily on social and political aspects). Firstly, we should bear in mind that although both economies attract attention equally, each has been developing under different socio-economic conditions and political regimes. For example, their economic models and development patterns are quite different in terms of the role played by the private sector and foreign direct investment (FDI) in the economy, industrial structures, language, and education. As the editors have suggested and perhaps many agree, that is why and can play complementary roles as non-rivals in the world market. Many would also agree to the China and (sometimes referred to as 'Chindia') approach rather than China versus India approach. could learn from in terms of the governance of the private sector, laws, and regulations that ensure fair and competitive market environment, and India's various international aspects, while could learn from China's FDI policy and infrastructural investment policy for instance. From such viewpoint, it is quite fascinating to compare and highlight which development path may fit other developing regions in order to increase their economic performance. Perhaps there is no universal development model and each region could follow either or or somewhere in between, taking into account its own conditions and development stage, but a comparative study of China's and India's development path will surely provide many less developed regions with a good basis for working out their own development strategy. For example, depending on the development stage, a country with a command economy or market economy could decide which strategy would be the more effective approach to move its economy forward, or how to assess the effectiveness of government intervention in the market-based experiences of both and India. Secondly, in connection with the above, perhaps many people will try to find the answer as to which development path will be more sustainable in the long run. In this connection, the implications of environmental degradation, energy constraints, and lack of governance in the private sector as well as in the government sector to the current globalization trend could be accorded more attention. In addition, if we look at each economy per se, it is a matter of concern whether India's development of relying specifically on the services and IT industry will really be sustainable, and whether the external and investment driven economy in will also be sustainable in the long run. Or to ensure sustainability, which should come first: economy or political makeup, for example, China's restructuring of one-party dominated political regime or India's change in its complicated salad bowl society, both of which might become political and social factors affecting the further development of each economy. …

Comment on “From Industrial Policy to Innovation Policy: Japan's Pursuit of Competitive Advantage”

Comment on “From Industrial Policy to Innovation Policy: Japan's Pursuit of Competitive Advantage”

Inter-jurisdiction subsidy competition for a new production plant: What is the central government optimal policy?

This paper models inter-jurisdiction competition for foreign direct investment and optimal government policy intervention to protect the national interest. The inter-jurisdiction competition for a multinational has the potential of favouring the multinational and of becoming detrimental for the host country. The central government wants to limit such competition but it cannot tax-discriminate between different types of multinationals. We find that the central government would use tax policy to create asymmetries even when the underlying structure is symmetrical. This offers a novel explanation for the creation of ‘Special Economic Zones’ in many countries, which are well known to be aimed at the attraction of foreign direct investment.

Information Age Ireland: The Attraction, the Reality and Never Ending Geography

This paper is an attempt to probe deeper behind the well-documented success story of the Irish economy over the 1990s. Over the decade, the country experienced unparalleled levels of economic growth that saw unemployment levels plummet, inflation levels stabilize and inward investment rise at a substantial rate. Growth rates of gross national product (GNP) best surmise the Irish case, the tigerish performance brought the country from one with a per capita GNP two-thirds of the European Union (EU) average in 1987, to one which exceeded the average 10 years later. An exposition of Ireland's pursuit of a foreign direct investment (FDI) development model forms a major part of this work. Recognizing the importance of FDI in Ireland, and FDI in the software sector in particular, this paper shows how and why investors flocked into the country over the golden era of the 1990s. Exogenously, Ireland's place on the outskirts of one of the world's biggest markets made it an alluring option for outside investors. Endogenously, the rationale behind the pursuit of high-tech FDI policy, beyond employment creation was the expected spill-over effects of multinational companies (MNCs) on the local economy. Questions are asked about the nature of positive externalities both in terms of the growth of an indigenous sector alongside a foreign-owned one as well as the sustainability of this type of investment. Changes in the organizational structures of MNCs over the 1990s, through decentralization of activities and outsourcing are integral to the Irish success story. Organizational transformation resulting in networks of global production have helped Ireland, as a peripheral region, to reposition itself as an access point to the lucrative European market. The geographic alteration on the national level however, has not been recreated on the sub-national scale. Contrary to the writings of many technology determinists, Ireland's pursuit of an information economy has had a very real impact in terms of regional economic divergence within the country. The lack of coherent regional or spatial planning is to blame along with a telecommunications infrastructure that has exacerbated the regional woes of an economy with an explicit focus on high-technology industries.

FDI, Globalisation and Development: Some Implications for Korean Firms and Korean Policy Makers

The paper first summarises some of the economic and social characteristics of the evolving world scenario, and their relevance for globalization, economic development and foreign direct investment. It then goes on to identify and discuss the main components of the competitive strengths and weaknesses of the Korean economy and of Korean firms; and finally examines the implications of these findings for outward and inward foreign direct investment policy.

The Effects of Japanese Foreign Direct Investment on Bilateral Food Trade with East Asian Countries

This paper analysed the effect of Japanese foreign direct investment (FDI) on bilateral food trade with East Asian countries by applying the panel data econometrics approach to provide empirical evidence. The results indicated the existence of a complementary effect in the cases of ASEAN4 countries and China, suggesting that FDI was mainly the vertical type that promotes bilateral trade. In contrast, only an export complementary effect was detected in the cases of Hong Kong and Singapore, suggesting that FDI was mainly the horizontal type, as Japanese affiliates started to buy intermediate goods from their home country, Japan. In the cases of Korea and Taiwan, a substitution effect was found, suggesting that FDI was the horizontal type, with local production more efficient than importing goods from Japan. Japanese Multinational Enterprises (MNEs) have been interested in using the ASEAN4 countries and China as production bases, and in accessing local markets of the Newly Industrialized Economies (NIEs). The promotion of inward FDI policy in East Asia by the Japanese food industry should be achieved by more trade liberalization in the case of ASEAN4 and China but, to a lesser extent in the case of NIEs.JEL classification: P45, Q17, R11, R12

Incentives for Attracting FDI in South Asia

Incentive offers along with performance requirements are a notable feature of the Foreign Direct Investment (FDI) policies of South Asian countries after they opened up to trade and investment in the 1990s. Since FDI operates in an imperfect market environment, a government policy that tries to counter this imperfection by insisting on performance requirements could well improve welfare. Incentives are then offered to soften the impact of performance requirements. There are no systematic studies to assess the cost and benefits of these incentives offered competitively in South Asian countries. Often, the purpose of these incentives may have been to generate funds for side payments to the bureaucracy of host countries. Incentives seem to affect mainly footloose FDI or, at best, lead to relocation of FDI within a region. This latter advantage disappears when countries of a region tend to compete in incentives. The limited number of studies on the South Asian region that are available seem to identify an increase in employment and/or wages, reduced prices or improved product quality, more revenues for the government and indirect benefits through professionalism, learning and technology diffusion as benefits. The impact of providing facilitation to foreign investors on national savings, deterioration in trade conditions and balance of payments are cited as the cost of incentives. Coordination in FDI policy making among South Asian countries is the main policy prescription that emerges out of this study.

Liberalization policy over foreign direct investment and the promotion of local firms development in Indonesia

Inviting Foreign Direct Investment (FDI) is a means used by developing countries to nurture local firms in developing an international competitive edge. Recently, many developing countries have implemented liberalization policies for FDI in the hope that it would lead to more benefits for host economies and help local firms upgrade their technological capabilities through production linkages, especially backward linkages (BL). Due to the dual nature of liberalization such benefits depend on many factors. On the one hand, liberalization offers local firms more BL opportunities and access to the international market, on the other hand, it brings local firms into more severe competition with global suppliers. Without capabilities to cope with the latter, the liberalization will not benefit the host economy. This paper will show that liberalization policies for FDI in Indonesia, especially in the Batam bonded zone, have not led to abovementioned benefits. The main issues identified for the government are the improvement of partnership readiness of local firms and the lowering of linkage costs between FDI and local firms.

Is foreign direct investment good for the poor? A review and stocktake

Few issues in the development process raise as much heat as the role of the international private sector in the form of transnational corporations (TNCs) and foreign direct investment (FDI). This article reviews the most recent research on the impact of FDI on economic growth and poverty reduction in developing countries. A brief history of FDI is given. This is followed by discussion of the conceptual transmission mechanisms linking FDI, growth, and poverty. The available empirical evidence is then discussed. It is argued that it is not a question of whether FDI is good or bad for social and economic development, but that its impact is determined by the terms upon which FDI is accepted. Although overall the evidence on FDI, growth, and poverty is not conclusive, research has had a tendency to suggest that the benefits of FDI are linked to the FDI policy regime; and that the current orthodoxy of maintaining a highly liberal FDI policy regime leads to a situation whereby developing countries have a precarious trade-off to make between attracting FDI and maintaining policy instruments to extract the benefits of any inflows.

Foreign direct investment and international trade in a continuum Ricardian trade model

We develop a continuum Ricardian trade model to capture both North–South trade and technology transfer via foreign direct investment (FDI) by multinational enterprises (MNEs). We show that there is a unique range of products produced in the South by MNEs. In the case of an infinitely elastic supply of expatriates, if the ability of Southern workers in absorbing Northern technology increases, then (a) the range of MNE production increases, (b) Northern workers's welfare and Southern workers' welfare change in opposite directions, and (c) the world aggregate welfare increases under certain conditions. We explore issues such as North–South wage gaps, FDI policies and the product cycle. We also derive results under a general supply of expatriates.

Foreign investment impact and incentive: a strategic approach to the relationship between the objectives of foreign investment policy and their promotion

This paper offers hypotheses and tests empirically the relationship between the objectives of foreign direct investment (FDI) policy and it results (i.e. the various types of impact of FDI and investment incentives) within a strategic fit concept. In the process, this paper demonstrates a strong correlation between specific objectives and particular incentives. Specifically, it points to a strong correlation between, on the one hand, the advancement of industrial structure and fiscal incentives and on the other, between regional expansion/development and financial incentives. The results point out how a host government should establish a coherent investment incentive system matching specific objectives of FDI policy.

The Future of Foreign Investment in Southeast Asia

The Future of Foreign Investment in Southeast Asia. Edited by Nick J. Freeman and Frank L. Bartels. London and New York: Routledge Curzon, 2004. Pp. 288. Ever since Singapore took the bold step towards attracting foreign direct investment (FDI) in the 1970s, and grew to be a success, the other Southeast Asian economies did not wait too long to follow suit albeit at a slower pace, and today, there is such stiff competition among the economies to woo FDI for sustained economic growth. Thus, for Southeast Asia, FDI has become somewhat a necessity, and this underscores the importance of the contribution of this book. In addition, much has changed in the circumstances surrounding FDI - the type of economies courting FDI, differences in the kind of FDI sought, the reasons and policies in place for attracting FDI, the nature of parent companies, the effects on and from FDI due to the increasingly globalized environment in the face of liberalization,... The list is endless, and thus the book is a timely welcome to take stock of what has happened and to discuss the future direction of the all-important FDI for this region. While it is a tough task to present the various facets of the dynamism around FDI in the region in a single volume, the editors of the book have done a good job in the selection of topics which are wide ranging and provide much scope for discussion. Incidentally, I would like to suggest that after the introductory chapter, readers move on to the last chapter by Hal Hill as it is a good review and a critique (to some extent) of the chapters presented in this book. I am not sure whether this made my task of reviewing the book an easy or difficult one. Nevertheless, in retrospect, it is highly recommended that more of the edited volumes take on this integrated approach in order to give the ideas in the book a good bind. It is thus quite appropriate that I start with the last chapter. Let me first say that I agree with Hill's remark that the seriousness of the decline in FDI due to the 1997/98 Asian financial crisis is unduly magnified by some of the other contributors. The discussion and supporting evidence provided by Hill in making this point is convincing. There seems to be a preoccupation with the gloom brought about by the crisis, and perhaps this might have been the case at the time of writing. I also disagree with the notion that policy-makers in Southeast Asia are slow to recognize and react to the sorts of changes in global business and FDI activity. While there may be some isolated support for this, one can also ask if being cautious and ensuring that one is ready before reacting impulsively qualifies for such criticism. Economies within the region operate quite differently and institutions in place dictate the pace of reaction to FDI activity and policies governing FDI. In addition, there is a subtle contradiction in two related views of Hill's. One advocates that Singapore be emulated by the other Southeast Asian economies and another strongly advises that economies move away from the second-best approach of proving incentives to adopt the first-best approach of addressing the source of unattractive features of the host economic environment. When Singapore first started courting FDI, the so-called second-best approach was an important feature and, in essence, was the optimal strategy at that time. Today, a mixed rather than the first-best approach defined by Hill would be best - that is, a combination of both approaches. In times of stiff competition to attract FDI, economies have little choice but to provide incentives in addition to improving the economic and business environment of their economy, or they stand to lose more than they gain in terms of luring FDI. …

How to improve the developmental impact of foreign direct investment: A review

Most economists would probably agree that it is not sufficient for developing countries to attract more foreign direct investment (FDI). Even for host countries with high attractiveness to FDI, the challenge remains to ensure that FDI fosters economic development, e.g., by inducing technological and managerial spillovers, generating additional employment and income opportunities, and alleviating world-market integration. However, the consensus hardly goes further than this. It continues to be highly controversial what, if anything, host-country governments can and should do to improve the developmental impact of FDI in Third World economies. Two recent UNCTAD publications on the theme "FDI policies for development" do not provide ready-made solutions for policymakers in developing countries. Nevertheless, the detailed assessment of contentious FDI policies offers valuable insights. This refers especially to the World Investment Report 2003 which, in addition to the regular part on recent FDI trends, focuses on the developmental dimension of bi-, pluri-, and multilateral investment agreements (UNCTAD 2003a: Part 2). The report discusses eight key issues: the definition of investment, national treatment of foreign investors, nationalization and expropriation, dispute settlement mechanisms, performance requirements, FDI incentives, technology transfers, and competition policy. As concerns performance requirements, UNCTAD (2003a) draws on a concurrent publication offering detailed evidence from selected host countries (UNCTAD 2003b). Country studies on the incidence

Multinational Corporations and Host Country Receptivity: Perceptions from Three Asian Countries

An improved investment environment and aggressive foreign direct investment (FDI) liberalization strategies have enabled Asian countries, such as Korea and Vietnam, to attract sharply increased FDI inflows and multinational corporations (MNCs) during the 1990s. Indonesia, however, has suffered from stagnated FDI inflows and, in particular, continued divestment since late 1998. In this paper, we report the survey results of recent changes in attitudes toward foreign MNCs perceived by government officials and business leaders in these three Asian countries, and investigate the major individual attribute determinants of their assessment of foreign investments using econometric tools. We also discuss policy implications of these findings for host‐country FDI policy makers and the international business community.

Mode of foreign entry, technology transfer, and FDI policy

Foreign direct investment (FDI) can take place either through the direct entry of foreign firms or the acquisition of existing domestic firms. The preferences of a foreign firm and a welfare-maximizing host country government over these two modes of FDI are examined in the presence of costly technology transfer. The trade-off between technology transfer and market competition emerges as a key determinant of preferences. The clash between the foreign firm's equilibrium choice and the local government's ranking of the two modes of entry can provide a rationale for some frequently observed FDI restrictions.

Capital Account and Foreign Direct Investment Policies in the Late Nineties: What Effect on Trade?

The purpose of this paper is to empirically test the relationship between capital account policies and international trade in the late 1990s. A gravitational-based system is developed to identify and estimate this association for seventy-four countries and a subset of ASEAN countries. Using non-linear panel and cross-section techniques, a strong positive association is found, with foreign direct investment policies accounting for a significant portion of the total effect. The ASEAN sub-sample is found to be relatively more responsive to changes in capital account policies than the rest of the world, confirming the importance of financial liberalization in developing regions. However, this policy-trade association diminishes after the 1997-98 global contagion period for both ASEAN and world samples.