Greenfield Foreign Direct Investment Research Articles

Impediments in attracting greenfield investment: does a stable absorption rate of the European cohesion policy make a difference?

ABSTRACT This paper seeks to investigate how the absorption rate of the European Cohesion Policy (ECP) funds and its dynamics are related to the creation of greenfield foreign direct investment (FDI) projects in the European Union (EU). A dynamic panel estimation based on 28 recipient countries in 2007–2016 reveals that a high ECP funds absorption rate alone does not ensure the creation of greenfield FDI. However, stable absorption (i.e. low dynamics in the ECP funds absorption rate) seems to promote greenfield investment. The large year-to-year changes in the ECP funds absorption rate appear to indicate a non-stable business environment that may hamper new investment, calling for corrective mechanisms to prevent the inefficient rapid withdrawal of funds after the eligibility period.

Attractive target for tax avoidance: trade liberalization and entry mode

AbstractGrowing foreign direct investments (FDIs) have been observed in parallel to the development of tax avoidance by multinational enterprises; however, empirical evidence indicates the asymmetric effects of trade costs on a firm’s entry decision. To give a new rationale and insights into the impacts of transfer pricing and trade liberalization on a firm’s global activities, this study incorporates transfer pricing and investigates a foreign firm’s entry decision: exports, greenfield FDI (GFDI), or cross-border mergers and acquisitions (CM&As). We show that CM&A is the equilibrium entry mode when transfer pricing regulation is loose, whereas the choice between exports and GFDI depends on the fixed costs of GFDI. Moreover, trade liberalization increases the likelihood of CM&A but decreases that of exports because a reduction in trade costs enhances tax-avoidance efficiency due to more intrafirm trade, implying that tax avoidance in the form of CM&A becomes crucial as globalization progresses. Our welfare analysis shows that regulating CM&A based on consumers’ benefits may result in welfare reduction because profit shifting is most effective under CM&A and a host country’s tax revenue from the foreign firm increases. The results imply the importance of considering the link between international tax and antitrust policies.

Do greenfield FDI inflows promote international tourism?

ABSTRACT To what extent do Greenfield foreign direct investment (FDI) inflows to emerging markets and developing economies drive their tourist inflows? Using a novel dataset on bilateral Greenfield FDI, this study is the first to empirically investigate the impact of bilateral Greenfield FDI on bilateral tourist flows. The analysis is based on a large cross-country dyadic dataset comprising 103 origin countries and 63 destination countries over the period 2003–2017. The findings robustly establish that greater flows of bilateral Greenfield FDI stimulate bilateral tourism flows, and this effect is stronger for country pairs that are linguistically further apart and/or with greater physical distance. These findings are not susceptible to potential endogeneity issues.

FDI-led growth models: Sraffian supermultiplier models of export platforms and tax havens

This paper develops two Sraffian supermultiplier models of two different kinds of economies that are dependent upon foreign direct investment (FDI): the ‘export platform FDI-led’ growth model and the ‘tax haven FDI-led’ growth model. The former is driven by the growth of the exports of foreign-owned firms and is associated with greenfield FDI inflows, whereas the latter is driven by the growth of profits booked at foreign-owned shell companies that are partly absorbed through taxation and is associated with intangible FDI inflows. The two models achieve demand, output, and income growth via fundamentally different channels yet appear similarly export-led given how profit shifting artificially inflates the net exports of tax havens. Based on these models, a set of empirical indicators are proposed to differentiate export-platform from tax haven economies. In contrast to Bohle/Regan (2021), who characterise output growth in both Hungary and Ireland as being led by the exports of foreign-owned firms, the model and indicators proposed here support the hypothesis that Ireland is closer to the tax haven FDI-led growth model whereas Hungary is better approximated by the export platform FDI-led model.

Impact of political conflict on foreign direct investments in the mining sector: Evidence from the event study and spatial estimation

This study aims to investigate the impact of conflict on greenfield foreign direct investment (FDI) in the mining sector covering the period of the 1st quarter of 2003 until the 3rd quarter of 2017, across 151 countries. Unlike previous works, this paper focuses on testing two impacts. First, we test for a dynamic impact to uncover the effect of conflict on FDI over the contemporary and subsequent annual quarters. Second, we test for a spatial spillover impact. To achieve these goals, we apply both a panel spatial approach and an event study analysis, using a unique proprietary database FDIMarkets. The main findings are as follows. First, the presence of a dynamic impact depends on the intensity of the conflict for the particular country group, with higher levels of intensity being associated with a higher probability of the presence of a dynamic effect. Second, we find a significant negative spillover impact of greenfield mining FDI of neighbouring countries on the greenfield mining FDI of the FDI-receiving economy. We do not find, however, that conflict in neighbouring countries has a spatial spillover impact on greenfield mining FDI of the FDI-receiving economy.

Foreign direct investment (FDI) and environmental quality: Is greenfield FDI greener than mergers and acquisitions FDI?

AbstractEnvironmental sustainability is a key objective of sustainable development. In this connection, there are growing concerns about the environmental impact of foreign direct investment (FDI), even though it is a potentially powerful engine of growth and development in developing countries. In this study, we empirically examine and compare the environmental impact of two different types of FDI, namely greenfield FDI, and mergers and acquisitions (M&A) FDI. Using data from 91 countries in 2005–2020, we find significant differences in the environmental effects of the two different types of FDI. In particular, our empirical results show that greenfield FDI is more harmful to the environment of host countries than M&A FDI. In addition, FDI from emerging markets and developing countries tends to be more harmful to the environment than FDI from developed countries.

Greenfield FDIs as a catalyst for technological collaborations between European regions and emerging countries

ABSTRACT This research emphasizes the increasing role of emerging countries in the advancement of future technologies and investigates the extent to which greenfield foreign direct investments (FDIs) can represent a bridge capable of stimulating technological collaboration opportunities between European regions and emerging countries. Utilizing a balanced panel dataset spanning 15 years from 2003 to 2017 and covering 286 European regions, we conducted a study that integrated collaborative patent data and foreign investments with emerging countries. Our findings indicate that technological collaboration primarily depends on inward FDIs (from emerging countries to Europe) rather than outward FDIs (from Europe to emerging countries). Furthermore, we discovered that a mutually reinforcing process can significantly enhance this collaboration. In this context, such a process acts as a cornerstone for the European Union (EU), offering a potential solution to navigate the paradoxical pressure between the rise of protectionism in response to the imbalances and inequalities stemming from globalization and the need to promote an environment conducive to global openness, competition and innovation.

Export‐platform foreign direct investment and trade policy uncertainty: Evidence from brexit

AbstractThis paper analyses the effect of trade policy uncertainty in a customs union on export‐platform foreign direct investment (FDI). First, I develop a partial equilibrium framework with heterogeneous firms based on the proximity–concentration trade‐off that involves trade policy uncertainty about trade costs inside a customs union. Second, I derive an empirical equation that I test by exploiting the 2016 Brexit referendum as a natural experiment and using data on manufacturing greenfield FDI projects. The results show that trade policy uncertainty impacted negatively the decisions of firms to invest in export‐platform activities in the UK following the Brexit referendum. Moreover, I find that extra‐EU manufacturing firms preferred EU countries as opposed to the UK for new investments after the 2016 referendum.

Do institutions impact differently inward greenfield FDI and cross-border M&A sales? A study of five institutional quality indicators in developed and developing countries

PurposeThis study aims to test the impact of different institutional quality indicators on two modes of foreign direct investment (FDI)-greenfield investment and cross-border mergers and acquisitions (M&As) for a sample of 110 countries over the period 2003–2017.Design/methodology/approachThe authors develop a model of well-known FDI determinants, such as market size and potential, openness, the value of the national currency and the quality of institutions. The authors examine one-by-one five different institutional factors: law and order, investment profile of the host country, control of corruption (anti-corruption); democratic accountability, and government stability, applying a generalized method of moments (GMM) estimator that assures no endogeneity and reverse causality of the key explanatory variables.FindingsThe results point out the fact that fertile institutional conditions for attracting greenfield FDI to developing countries require law and order, good investment conditions and a state of democracy, but not necessarily tight control of corruption and a stable government. On the other hand, the appropriate institutional environment for attracting cross-border M&A sales flows to developing countries includes strong law and order, good investment conditions, strict control of corruption and strong democratic accountability. The results for developed countries show overall smaller importance of institutions as a determinant of both types of FDI.Originality/valueThis is the first study to analyze the differentiated determinants of the two modes of investment. The study holds implications for crafting two different policies for attracting greenfield FDI and M&A sales.

Linking FDI and trade network topology with the COVID-19 pandemic

Globalization has considerably increased the movement of people and goods around the world, which constitutes a key channel of viral infection. Increasingly close economic links between countries speeds up the transfer of goods and information, and the knock-on effect of economic crises, but also the transmission of diseases. Foreign direct investment (FDI) and trade establish clear ties between countries of origin and destination, and it is along these chains that contagious phenomena can unfold. In this paper, we investigate whether countries’ centrality in both global production and trade network corresponds to higher COVID-19 infection and mortality rates. Merging data on EU-27 greenfield FDI and international trade with data on COVID-19 infections and deaths, we find that countries mostly exposed to the COVID-19 outbreak are those characterized by a higher eigenvector centrality. This result is robust to the use of an alternative measure of network centrality and to the inclusion of other possible confounding factors.

How does political risk matter for foreign direct investment into Arab economies?

ABSTRACT The present paper extends previous work by Burger et al. ([2016]. Risky business: Political instability and sectoral greenfield foreign direct investment in the Arab world. World Bank Economic Review, 30(2), 306–331. https://doi.org/10.1093/wber/lhv030) that has attempted to investigate empirically the impact of political instability on FDI flows into the Arab host region. Specifically, based on gravity model approach and annual panel dataset on bilateral FDI projects in Arab countries from 2003 to 2018 (12,240 projects), it explores the following research questions: how does a host country’s political instability and institutional fragility affect the bilateral inward FDI project? Is there any sectoral specificity to this impact if it exists? Which component of political risk poses the most threat for the foreign investor in a specific sector? The empirical investigation highlights the negative, significant and robust impact of perceived political risk in the Arab host-country. It also establishes that there is substantial heterogeneity in foreign investment reactions to political risk reflecting both differences in the component of political risk and sectoral characteristics.

Impact of the greenfield-foreign direct investment on the economic growth of Afghanistan

Afghanistan is a least developed country; during the liberation, about three-fourths of the economy was ruined, and over the past two decades, the country has geared up a slight economic growth. The study's objective is to assess the impact of greenfield foreign direct investment on the economic growth of Afghanistan during the interval 2002-2021. The research also investigates the effect of remittances, foreign aid, and population. In this study, the stationarity of all variables is checked via the Augmented Dickey-Fuller test (ADF). The results were analysed with ARDL and ECM techniques. The results show that greenfield investment and remittances are statistically significant in the short and long run. Foreign aid is insignificant in the short and long run. The population is insignificant in the long run but significant in the short run. First, the government of Afghanistan improved its friendly investment policy to attract foreign investors. Second, the government of Afghanistan signed an agreement with neighbouring countries, especially developed countries, to send their skilled and educated labour so they will easily earn their livelihood and send remittances to their families. Third, the government of Afghanistan should avoid foreign aid that may affect its economy in the short term.

Relationship between greenfield investment and economic growth: Evidence from Bangladesh

The key purpose of the study is to investigate the relationship between Greenfield investment and economic growth of Bangladesh using annual time series data during the period 2003–2020. The study employs Toda-Yamamoto (T-Y) tests of Granger causality method that performs Modified Wald Test (MWALD) in order to establish causal relation among different variables. There are three steps in implementing the T-Y procedure. The first step involves using different tests (ADF, PP, and KPSS test) to identify the maximum order of integration of the variable. The second step requires selecting the optimal lag length (p) based on several lag length selection criteria. In the third step, MWALD approach is used for testing the vector auto regression model for causality. The results of the tests (ADF, PP, and KPSS) concluded that the maximum order of integration of the variables is two. Then, the optimal lag length of two (p = 2) has been selected based on several lag length selection criteria. Finally, the findings reveal the evidence of unidirectional causality from Real Greenfield Foreign Direct Investment (RGFDI) to Real Gross Domestic Product (RGDP). The key contribution of this study is to investigate the Greenfield investments-growth relationship for a country like Bangladesh.

Greenfield foreign direct investments and insurance market diversification: a cross-country analysis

Greenfield foreign direct investments and insurance market diversification: a cross-country analysis

Gone with the epidemic? The spatial effects of the Covid-19 on global investment network

The outbreak of Covid-19 epidemic has a prolonged impact on global economic activities. In recent years, many scholars have been motivated to estimate the effects of Covid-19 shock on global foreign direct investment (FDI). However, existing studies have not paid enough attention to the spillover effects caused by the epidemic. Although few academic works have explored the geographic-neighboring spillover effects of epidemic shock on global investment, we further extent the understanding of the spillover effects in an economic network. On the basis of country-month greenfield FDI panels, we construct a spatial Durbin model, and figure out that Covid-19 shock may have positive FDI spillover effects in an economic network via global FDI transfers. Furthermore, we find that such spillovers are greatly conditioned by country-level network position and institutional ties among nations. Our research suggests that global FDI transfers may partly offset economic-adverse effects of the Covid-19 shock. While global countries, especially those in the Global South, should be more closely embedded in the global investment network in such an uncertain environment.

The contribution of cross-border capital flow towards decarbonisation

This study examines the effects of greenfield foreign direct investment, mergers and acquisitions, and net foreign direct investment inflows, on carbon dioxide emissions in 68 countries from 1996 to 2018. The investigation adopts an augmented Stochastic Impacts by Regression on the Population, Affluence, and Technology (STIRPAT) framework and employs an instrumental variable approach and instrumental variable-quantile regression models for the sampled nations. Whilst several Foreign Direct Investment entry modes are shown to have varying effects, the results demonstrate that capital inflows via greenfield foreign direct investment and net foreign direct investment raise emissions in all nations, confirming the Pollution Haven Hypothesis. Also, the unrestricted inflows of capital via greenfield projects could increase environmental degradation overtime and the detrimental impact could spread to other sectors of the economy. Moreover, our study demonstrates that capital inflow through cross-border mergers and acquisitions is a significant contributor to decarbonisation throughout the analysed nations, confirming the halo hypothesis, with quantile results revealing diverse effects across national emission profiles. The results are robust to different model specifications of the independent variables and estimation methods. Based on the empirical findings, several policy implications are suggested for theory and practice on cleaner production and sustainability in the countries and multinational companies. This study recommends policy measures to regulate the inflow of polluting assets and incentives to contribute to decarbonisation solutions.

The impact of the brexit referendum on greenfield foreign direct investments from countries within and outside the European single market

ABSTRACT We use a Poisson Pseudo Maximum Likelihood (PPML) specification to investigate whether the number of greenfield foreign direct investments (GFDIs) announcements in the UK decreased from the referendum year and, if so, whether the decrease is more pronounced for announcements made by investors outside the European Single Market (ESM) than for those by investors within the ESM. In this context, we argue that increased uncertainty about the UK’s future economic relationship with EU began early in the referendum year and affected investors outside the ESM more than investors inside the ESM. One possible reason for this heterogeneity could be, among others, that not following the ‘Norwegian Model’ after the implementation of the withdrawal agreement poses a greater threat to them, since they tend to use the UK more often as an export platform. For the analysis, we use data from fDi Markets, the World Bank and the Tax Foundation, which contain information on 185 countries from 2005 to 2019. The results obtained support our hypotheses and are robust to model specifications.

The Effect of COVID-19 on Foreign Direct Investment

ABSTRACT This study empirically examines how the coronavirus disease (COVID-19) has impacted foreign direct investment (FDI), using the quarterly data on bilateral FDI flows from 173 home to 192 host economies from the first quarter of 2019 to the second quarter of 2021. The severity of COVID-19 in host economies adversely affected FDI in the manufacturing sector regardless of the entry mode, but the effect of home economies’ COVID-19 situation on FDI was insignificant. On the other hand, in the services sector, the severity of COVID-19 in both host and home economies has significantly negative impact on greenfield FDI, not on cross-border M&A.

Structure and evolution of the greenfield FDI network along the belt and road

Using bilateral greenfield investment projects data from 2003 to 2019 collected from fDi Markets, this study constructed the greenfield foreign direct investment networks along the Belt and Road (BR-GFNs). Based on a social network analysis, we investigated the structure of BR-GFNs at three levels. At the overall level, the BR-GFNs are characterized by small-world, reciprocity, and robustness. At the community level, the BR-GFNs form three communities: the east, south, and west. Lastly, at the national level, China, Russia, India, and Turkey occupy important positions in BR-GFNs, with relatively high resource control abilities. Moreover, we applied the quadratic assignment procedure to investigate the factors affecting the structural formation of the BR-GFNs. The results show that countries with less geographical, institutional, economic, and cultural distance, higher political affinity, and possibility of signing bilateral investment treaties are more likely to establish cross-border greenfield investments.

Pandemic arbitrage in foreign direct investments: A perspective on the modes of entry

ABSTRACT Foreign direct investments (FDI) are considered long-term and less sensitive to global shocks as they involve large amounts of capital investment that are costly to reverse. This study examines whether there was a reallocation of FDI flows from destination markets more affected by the pandemic, resulting in a pandemic arbitrage. Using bilateral FDI inflows data from January 2019 to December 2020, we show that FDI flows declined to destination markets that performed worse than source markets in COVID-19 infection rates, with the effect more evident in greenfield FDI. Our results also show that bilateral colonial ties and destination market COVID-19 policy stringency impact the pandemic arbitrage in FDI flows, especially for M&As.