Higher Foreign Direct Investment Research Articles

Macroeconomic determinants of foreign direct investment in emerging economies in turbulent times – A case of COVID’19 pandemic

The study investigates the macroeconomic determinants of foreign direct investment (FDI) in emerging economies in turbulent times, taking the case of COVID’19 pandemic. Fifteen (15) countries were included for empirical investigations and the period of investigation spans 2019q1–2023q2 and the analytical framework is the Wang and Wong (2007) model. With recourse to various data stability tests, the panel system generalized method of moment is adopted as the technique of analysis to obtain optimal identification solution and address inherent problems of endogeneity and heterogeneity in estimations. For robustness, the sample was decomposed into two; emerging economies with history of high and low FDI receipts respectively. The results obtained show the sensitivity of macroeconomic determinants to these disaggregation and that lag counterparts of these variables play significant roles. The results further suggests that FDI is a substitute for real gross domestic product in emerging economies with history of high FDI receipts.

Free Trade Agreements and Inequality: The Prospect for the UK Post-Brexit

This paper examines the potential effects of Brexit on income inequality in the United Kingdom (UK) and utilizes empirical methods to predict these effects. The study focuses on the impact of trade and Foreign Direct Investment (FDI) on income inequality, using macroeconomic data from 1971 to 2019. By employing cointegration techniques and an Error Correction Model (ECM) on annual time series data, the analysis reveals that higher levels of trade have historically reduced income inequality in the UK over the long term. Consequently, changes in trade resulting from Brexit are expected to have a negative influence on the distribution of income and wealth in the UK. On the other hand, the study finds that higher FDI has only had a short-term negative effect on income distribution in the UK.

The Carbon Conundrum: Exploring CO2 Emissions, Public Debt, and Environmental Policy

This study addresses a critical gap in the literature by examining the impact of CO2emissions on public debt in Malaysia, employing a non-linear autoregressive distributed lag (ARDL) approach spanning from 1980 to 2020. This methodology captures the non-linear relationship between CO2 emissions and public debt, providing nuanced insights into how environmental factors shape fiscal dynamics. Despite encountering challenges arising from the limited body of literature on this specific relationship, the study highlights key findings with profound implications for policymakers. The inverse correlation between trade openness and public debt underscores the influence of international trade on Malaysia's fiscal landscape, while a positive association between investment and public debt emphasizes the importance of prudent debt management for economic growth. Furthermore, the negative relationship between higher foreign direct investment and long-term public debt highlights the need to foster an investor-friendly environment. A pivotal contribution is the confirmation of a positive link between CO2 emissions and public debt, urging policymakers to prioritize emission reduction strategies, implement carbon pricing, and promote green technologies. This research offers a comprehensive understanding of the intricate interplay between CO2emissions and public debt, providing valuable insights for informed policy decisions in the Malaysian context. Doi: 10.28991/ESJ-2024-08-03-08 Full Text: PDF

Study on the Trade Effects of China’s FDI in ASEAN Countries under the RCEP Framework

As a developing country with the world’s highest foreign direct investment, China’s FDI to ASEAN will have an impact on trade between the two countries, helping to clarify the mechanism for China-ASEAN economic and trade cooperation and exploring ways to strengthen China-ASEAN economic and trade cooperation. Thus, using panel data from 2012 to 2020, this paper investigates the impact of FDI between China and ASEAN on trade volume. The findings indicate that China's direct investment in ASEAN has a significant negative impact on trade scale, specifically the trade substitution effect. Under the RCEP framework, the importance of ASEAN's position in China's foreign economic and trade cooperation network has become increasingly prominent. On this basis, it puts forward policy suggestions such as training corresponding talents, deepening structural adjustment, strengthening government guidance, and expanding correct cognition.

Determinants of exports performance: Evidence from Indonesian low-, medium-, and high-technology manufacturing industries.

This study explores the determinants of the export performance of Indonesia's low-, medium-, and high-technology manufacturing industries by focusing on the role of raw-material imports and technical efficiency. Micro firm-level data from 2010-2015 were utilized for the analysis in this study. The stochastic frontier analysis was employed to measure technical inefficiency and to determine its effect on export performance. Our findings indicate that in all categories of industry technical efficiency, raw materials imports, foreign direct investment (FDI), location, firm size, labour productivity, and concentration of industries were significant determinants of export performance. While high efficiency increases exports in low- and medium-technology firms, exports decrease in firms with high efficiency accompanied by high imports, FDI, size, and labour productivity. Furthermore, in high-technology industries, efficiency reduces exports and again increases them when mediated by a concentration of industries and location. The empirical strategy also supports the positive effect of imports on export performance in both industries, which also aligns with decreased exports in firms with high imports accompanied by high FDI, efficiency, labour productivity, the concentration of industries, and size. To this end, the study has implications for low-, medium-, and high-technology manufacturing that are mainly concerned with increasing exports.

Role of behind-the-border factors in determining state-level differences in FDI inflows to India

PurposeAlthough India is seen as a key player in the global economy, it is still below its potential level of growth. In this age of globalism, integration with the global economy through trade and foreign investments fosters domestic growth. For India, although this integration has strengthened over the years, there are certain gaps that remain to be addressed. Though numerous studies in the literature have tried to find answers to these questions, an important aspect that has not been considered by these studies relates to India’s federal structure and the role of states in determining the aggregate economic outcome. As Foreign Direct Investment (FDI) inflows to India are concentrated in a few states, this paper aims to provide an assessment of the reasons behind this trend.Design/methodology/approachThis paper aims to investigate the reasons behind the interstate differences with respect to FDI inflows in India. The analytical work undertaken for this paper is based on secondary data, collected and collated from various sources. The approach adopted for this paper includes a heat graph analysis to examine whether there is a clear pattern in terms of the state-specific factors for high FDI states versus the low FDI states. This data analysis is followed by an econometric estimation to gauge the impact of state-specific factors in determining the FDI inflows.FindingsAs per the secondary data–driven heat graph and econometric analysis, factors like industrial output, social sector expenditure, judicial quality, connectivity indicators, labor cost and availability of credit, act as differentiators between high and low FDI-receiving states. It then becomes imperative to bridge the gap between the two sets of states in terms of these specific factors. Implementation and success of policy interventions can only be derived at the state level and therefore needs more decentralized approach.Originality/valueThis paper tries to identify the reasons that are responsible for FDI inflows being concentrated in a few Indian states. This involves a comprehensive analysis of several variables to understand whether there is a clear pattern where high-FDI states are also in a better position with respect to these attributes. This effort to factor in the federal aspect of a macroeconomic indicator like FDI provides new dynamic to this area of work.

Trade margins of rubber exporters: The case of Indonesia

This study used a two-step system generalized method of moment (GMM) and spatial aspects to analyze Indonesia’s trade margins of a rubber product to export destination countries over the period 2009–2018. The study unraveled the role of non-tariff measures such as sanitary and phytosanitary (SPS), technical barriers to trade (TBT), and gravity factors in determining rubber trade margins. Our empirical strategies revealed that sanitary and phytosanitary policies negatively affect trade margins, while the technical barrier to trade and foreign direct investment (FDI) asserts a positive impact on trade margins. However, the economics of scale, port, and contiguity increases extensive margin and reduces intensive, population size, distance, and language barrier reduce extensive margin and increase intensive margin. Further evidence revealed that high population size and port quality accompanied by high FDI and distance increases extensive margin and reduces intensive margin. High economics of scale accompanied by distance, port quality, FDI, and population size reduces both trade margins. Our empirical strategy from the spatial analysis does not give overall significant results on each variable as only economies of scale and population size seem to have a spatial influence on trade margins. The study, therefore, recommends that innovation both in terms of technology, like industrial innovation in the field of rubber processing and certification related to rubber commodities, needs to be increased to intensify and expand Indonesia’s rubber market share.

The role of agricultural sector performance in attracting foreign direct investment in the food and beverages sector. Evidence from planned investments in Africa

AbstractUsing a novel dataset on foreign direct investment (FDI), this paper analyzes the correlates of planned FDI in the food and beverages sector in 49 African countries over the period 2003–2017. It applies the random effects model and augments the standard specification of FDI determinants with a set of factors related to the agricultural sector performance, hypothesized to be essential from the perspective of supply chain linkages and access to raw materials. The results indicate that well‐performing and well‐capitalized agricultural sector of the host country is a key factor associated with the choice of investment location by foreign investors, especially those from the Global North. Capital investment in agriculture, as proxied by agricultural gross fixed capital formation and net capital stock, is particularly important. Public investment in agriculture, in the form of government expenditure and official development assistance, is also associated with higher FDI. These factors, however, are not significant in case of the least developed countries where only market potential appears to matter for foreign investors. The results suggest that complementarities may exist between different types of investments and that policy‐makers willing to attract food and beverages FDI should prioritize agricultural sector development. [EconLit Citations: E22, E24, F21, F23, Q00, Q13, Q18].

The Economic Impact of Green Credit: From the Perspective of Industrial Structure and Green Total Factor Productivity

Promoting economic growth while achieving sustainable development is the original purpose of green credit. Based on panel data of 30 Chinese provinces from 2008 to 2020, we systematically evaluate the economic impact of green credit by exploring the influencing factors, regional differences, and underlying mechanisms. The results show that: (1) Green credit is more prevalent in provinces with higher foreign direct investment (FDI), research and development expenditures (R&D), financial development, urbanization rates, and lower government fiscal spending. At the regional level, green credit issuance gradually decreases as the region moves towards the west. (2) From a national perspective, green credit issuance has a significant impact on local economies. Local GDP increases by 0.482% for every 1% increase in green credit. (3) The underlying mechanisms are the rationalization of intra-industry structure and the improvement of green total factor productivity. These findings are robust against alternative measures of economic growth, quantile regression estimation, and the construction of instrumental variables. Finally, we propose policy recommendations for China’s continued implementation of green credit policies.

The Belt and Road Initiative (BRI) on the “<i>Stress-Test</i>” of the Corporate Criminal Liability in Europe

There are different levels of involvement a company may undertake in its international activity, from low efforts trade and indirect participation partnering with local importers and distributors to high commitment FDI (Foreign Direct Investment). In general, any foreign enterprise operating overseas intuitively knows they must comply with local regulations. However, not all businesses working from abroad know that, regardless the commitment level chosen, companies and associations may be held directly liable for crimes of subjective intent committed on behalf or for the benefit of a company by a class of persons who have operational authority and are therefore liable on behalf of the company1. We explore the case of Europe as a target market as its legislatures set landmark principles on the topic. China expeditious international business and BRI plans are seen as an opportunity for increasing connectivity among countries. However, the same time, it may go throughout potential hassles. Recent scandals of alleged fraud on COVID-19 masks supplied to Italy might be seen as a red flag as a fraudulent intermediary may not exclude an unaware manufacturing company responsibility. This may advise Chinese as well as any foreign business to maximize efforts to structure themselves properly while growing business overseas.

Nexus of Renewable Energy Consumption, Economic Growth, Population Growth, FDI, and Environmental Degradation in South Asian Countries: New Evidence from Driscoll-Kraay Standard Error Approach

Environmental degradation is the most prominent area nowadays, especially in developing counties where high renewable energy consumption and population growth deteriorate the atmosphere of the country. Thus, the current study investigates the nexus among renewable energy consumption, economic growth (EG), population growth, foreign direct investment (FDI), and environmental degradation in South Asian countries. The covariance matrix estimators that are developed by “Driscoll and Kraay” are used in this study. The primary property of this estimator is that it does not account for the cross-sectional dependence; thus, it provides substantial, robust outcomes among the cross-sectional units while in the presence of cross-sectional dependence. The data was collected from the World Development Indicators (WDI) from 2001 to 2019. The findings exposed that positive nexus among the population growth, FDI, and environmental degradation while renewable energy consumption and EG has negative nexus with environmental degradation and also not supported the EKC hypothesis in South Asian countries. These findings suggested that the regulators should develop policies that reduce environmental degradation in the presence of high EG, energy consumption, FDI, and population growth.

Can China's Environmental Regulations Effectively Reduce Pollution Emissions?

Based on the provincial panel data of China during 2006–2017, this study uses the panel smooth transition (PSTR) model to study the dynamic transformation mechanism of pollution emission under environmental regulation. We focus on technological progress, economic growth, and foreign direct investment (FDI) as threshold variables, and analyses the non-linear effects of environmental regulation on pollution emissions under those threshold variables, attempting to explore the effectiveness of existing environmental regulations. The structure of biased technological progress is based on the slacks-based measure (SBM) and Global-Malmquist–Luenberger index, which is divided into pollution-biased technology progress and clean-biased technology progress. Finally, we use the panel vector auto regressive (PVAR) algorithm to further verify the relationship. The findings are as follows: (1) Environmental regulation has a significant nonlinear effect on pollution emissions, and technological progress is the optimal threshold variable of this study. (2) Under the influence of these three factors, environmental regulation has a substitution effect on pollution discharge, and a stronger substitution effect on emission reduction in areas with advanced technology and high FDI. It also has a lower emission reduction effect in the high-system areas of economic development than in the low-system areas. (3) The PVAR results show that the impact on environmental regulation of technological progress and FDI has gradually turned from positive to negative; the impact of economic growth on environmental regulation has always been positive but is gradually decreasing. This study points out the direction for governments and companies to implement effective environmental regulations.

The impact of foreign direct investment inflows on nonperforming loans: the case of UAE

The banking sector is at risk of worsening loan quality, which is a major threat to the financial system’s stability. The impact of foreign direct investment (FDI) inflows on nonperforming loans (NPLs) in the United Arab Emirates (UAE) is empirically investigated in this study. The data from 2008 to 2017 are collected and analyzed through the ordinary least squares (OLS) technique. The findings reveal that FDI inflows reduced the size of NPLs during the economic crisis. Also, the combined effect of higher FDI inflows and bank efficiency reduced the size of NPLs for banks, while the combined effect of FDI inflows and better institutions, such as strong regulatory quality, did not reduce the size of NPLs but rather increased the size of NPLs. The findings have implications and contribute to the literature to establish a relationship between FDI inflows and NPLs by examining the relationship between FDI inflows and NPLs in the context of banks in the UAE.

Effect of volatility of foreign direct investment inflows on corporate income tax revenue volatility

PurposeThis paper aims to examine how the volatility of foreign direct investment (FDI) inflows affects the volatility of corporate income tax revenue.Design/methodology/approachThe study has used an unbalanced panel data set of 129 countries over the period 1981–2016 and the two-step system generalized methods of moment approach to perform the empirical analysis.FindingsThe main findings are that FDI volatility enhances the volatility of corporate income tax revenue in less advanced economies, but reduces it in relatively advanced countries. The positive corporate income tax revenue volatility effect of FDI inflows is far higher in non-tax haven countries than in tax haven countries. Additionally, FDI volatility exerts a higher positive effect on corporate income tax revenue volatility as countries experience greater dependence on natural resources. Finally, the positive effect of FDI volatility on corporate income tax revenue volatility is further amplified by higher FDI volatility.Research limitations/implicationsOne important limitation of the present analysis is the use of aggregate FDI inflows because of the lack of data over a long period on greenfield FDI inflows and cross-border mergers and acquisitions FDI inflows. Therefore, an avenue for future research could be to explore separately the effect of the volatility greenfield FDI inflows and the volatility of cross-border mergers and acquisitions FDI inflows on the volatility of corporate income tax revenue, when long-time series data (covering many countries) would be available.Practical implicationsThese outcomes particularly shed light on the role of FDI volatility on the volatility of corporate income tax revenue, particularly in countries that are highly dependent on natural resources. Foreign capital flows, notably FDI flows, play an essential role for countries’ economic development through, inter alia, technology transfer, jobs creation and economic growth. Policymakers should aim to attract FDI, while also reducing their volatility, by designing and implementing policies and measures (such as those in favor of business environment improvement, property rights enforcement and political stability) that would assure foreign investors of the continuous high returns of their investments.Originality/valueTo the best of the author’s knowledge, this is the first time this topic is being addressed empirically in the literature.

FDI, exports and export spillover in Taiwan’s electronics industry

This study primarily examines whether and how a firm’s exports are influenced by its own and other firms’ foreign direct investment (FDI) in an industry characterized by high proportions of exporters and FDI. A review of 619 firms in Taiwan’s electronics industry from 2006 to 2011 indicates the presence of optimal FDI in terms of exports. In addition, results suggest a negative (positive) export spillover from FDI for firms with low (high) FDI, signifying that FDI’s congestion/crowding-out effect is greater (less) than the demonstration/imitation effect for such firms. Moreover, a firm’s exports generally decrease with other firms’ exports particularly when its FDI is low, thus suggesting the predominance of competition’s negative effect over its positive effect under such circumstances. Furthermore, export spillover from FDI occurs through the competition effect and technology information effect, where the former (latter) drives a negative (positive) export spillover.

What drives the inflow of FDI in OIC countries? Evidence from Top 10 hosts of inward FDI flows

Purpose ­­­ – This study investigates the driven factors of Foreign Direct Investment (FDI) inflow in selected OIC member countries. The selection of samples observation based on the top 10 hosts of inward FDI flows countries, includes the United Arab Emirates (UAE), Morocco, Indonesia, Turkey, Iran, Egypt, Bangladesh, Kazakhstan, Oman, and Malaysia. Methodology – The data for this study are obtained from World Bank and United Nations Development Programme (UNDP) database for the period 2001-2018. This study adopted panel regression analyses and utilized the Random Effect Model. Findings – This study reveals that GDP and trade openness were positive and significantly plays a vital role in driving the FDI inflow. Whereas, the exchange rate, inflation, and human development index did not have a significant impact on FDI inflow in the top 10 hosts of inward FDI flows countries. Research limitation – The main limitation of this research is the lack of a variable that represents the Islamicity index, which can differentiate the driven factors of FDI in Muslim and non-Muslim organization countries. Practical implication – This study suggests that members of OIC countries should provide a conducive investment environment which is represented by higher GDP growth and engage in various international trade agreements because those factors have higher possibilities in impacting the FDI inflow. Moreover, the rules which describe the investment priority amongst the member of OIC countries must be ratified immediately to decrease the percentage of the FDI inflows goes to non-OIC members. Originality – This study has advanced the knowledge by examining the driven factors of FDI in the specifically selected members of OIC countries, which based on the highest FDI inward. Thus, this study provides significant insights for policymakers for the rest of the member OIC countries to attract FDI inflows referring to the top 10 hosts of inward FDI flows countries.

Can environmental investments benefit environmental performance? The moderating roles of institutional environment and foreign direct investment

AbstractThe contribution of environmental investments (EIs) to environmental performance (EP) is a lively topic for environmental researchers across the world. In spite of huge amount of research, there is still lack of clarity on the moderating factors that affect the role played by EI. In this study, we distinguish EI into pollution control investments (PCIs) and pollution prevention investments (PPIs). We further investigate whether institutional environment and foreign direct investment (FDI) can play their moderating effects both on the relationship between EI and EP and on the relationships between different types of investments and EP or not. The results indicate that EI has a positive effect on EP. More specifically, PPI plays a stronger positive role in EP, but PCI does not have a significant effect on EP. In addition, both institutional environment and FDI can strengthen the positive impact of EI on EP. The increase of EI in regions with better institutional environment or high FDI can lead to greater improvement in EP. These moderating effects of institutional environment and FDI are also confirmed on the link between PPI and EP. In summary, our results reinforce the existing views that EI, and specifically PPI, can improve EP but further contribute to the understanding of the positive moderating roles played by the institutional environment and FDI on the link between EI and EP.

Impact of Good Governance Indicators on the Inflow of Foreign Direct Investment (FDI) In Pakistan

Foreign Direct Investment (FDI) occupies extensive importance in the socio-economic development of any economy. High inflow of Foreign Direct Investment (FDI) helps in the reduction of poverty, unemployment, and in achieving high economic growth in developing countries, like Pakistan. In home country, a good governance environment significantly affects the inflow of FDI. In this connection, the purpose of this study is to analyze the scenario of good governance in Pakistan and its impact on attracting FDI. For this study, time series data was used covering the period from 1996 to 2017. ABDL approach was used for estimation, the findings prove that there is a significant impact of Political Instability, Regulatory Quality, and Effectiveness of Government, whereas, Rule of Law (RL) as well as Corruption (CC) and exert an insignificant effect on the inflow of FDI in Pakistan during the mentioned time period. The study suggested that the Pakistani government needs to develop a good governance environment through better law and order situations, a transparent legal system, and effective policies with proper implementation; to ensure high FDI inflows in the country.

Bilateral FDI flows in four major Asian economies: a gravity model analysis

PurposeThe purpose of this paper is to examine the determinants of foreign direct investment (FDI) flows from some leading developed countries (the USA, Japan, Germany, the Netherlands, the UK and France) into major four Asian economies (China, Korea, India and Singapore).Design/methodology/approachUsing one basic and four augmented versions of gravity model technique, the authors tried to examine the determinants of bilateral FDI flows in four major Asian economies. The study used World Development Indicators, CEPII, KOF and Heritage Foundation data for period 2001–2012.FindingsThe results revealed that besides the market size for host and source country, other criteria such as distance, common language and common border also influence foreign investors. Other macroeconomic factors such as inflation rate and real interest rate are among the key factors that attract more FDI. In addition to economic factors, institutional and infrastructural factors such as telecommunication, degree of openness, index of globalisation and index of economic freedom also stimulate the international investors from the developed world to the major Asian countries.Research limitations/implicationsIt is altogether possible that only a set of home country specific characteristics or host country specific characteristics does not matter when determining FDI. Most empirical studies using indices such as the index of globalisation and economic freedom are subject to certain methodological limitations such as model selection, parameter heterogeneity, outliers and moral hazard.Practical implicationsMore distance between the host and source country would result in less FDI flows due to more managerial and raw material supply chain cost. Similarly, more gross domestic product (GDP) and per capita income (PCI) are leading to more FDI flows into Asian economics. Therefore, major Asian economies should frame their economic policies in such a manner where these counties can strengthen their GDP as well as PCI. Furthermore, above countries should open its economy more and more for better FDI flows as it seems that economic globalisation and economic freedom are major determinants of bilateral FDI flows. The negative impact of inflation and interest rate should be controlled.Social implicationsFrom policy perspective, higher scores of economic, social and political globalisation also attract high FDI to the host country. On the same line higher scores in economic freedom mean that less restrictions in terms of economic policies and the policy environment are conducive for free trade and resource transfers. Higher scores in trade freedom, investment freedom and freedom from corruptions also show more developed and conducive policy environment. In the same reasoning higher scores in the composite index of economic freedom which takes information from trade freedom, investment freedom and freedom from corruption and others also encourage flow of FDI in to the host country.Originality/valueThis is the first paper which combines the globalisation index, economic freedom index and distance along with some major macroeconomic variables.

Tax sparing agreements, territorial tax reforms, and foreign direct investment

The governments of many developing countries seek to attract inbound foreign direct investment (FDI) through the use of tax incentives for multinational corporations (MNCs). The effectiveness of these tax incentives depends crucially on MNCs' residence country tax regime, especially where the residence country imposes worldwide taxation on foreign income. Tax sparing provisions are included in many bilateral tax treaties to prevent host country tax incentives being nullified by residence country taxation. We analyse the impact of tax sparing provisions using panel data on bilateral FDI stocks from 23 OECD countries in 113 developing and transition economies over the period 2002–2012, coding tax sparing provisions in all bilateral tax treaties among these countries. We find that tax sparing agreements are associated with up to 97 % higher FDI. The estimated effect is concentrated in the year following the entry into force of tax sparing agreements, with no effects in prior years, and is thus consistent with a causal interpretation. Four countries – Norway in 2004, and the U.K., Japan, and New Zealand in 2009 – enacted tax reforms that moved them from worldwide to territorial taxation, potentially changing the value of their pre-existing tax sparing agreements. However, there is no detectable effect of these reforms on bilateral FDI in tax sparing countries, relative to nonsparing countries. These results are consistent with tax sparing being an important determinant of FDI in developing countries for MNCs from both worldwide and territorial home countries.