Horizontal FDI Research Articles

Inward FDI and entrepreneurship rate: Empirical evidence on selected effects of FDI in Visegrad countries

IntroductionForeign direct investment (FDI) has been investigated by many scholars for decades. Literature offers numerous concepts, models and theories explaining FDI inflows and outflows. The most popular classification of these theories divides them into three groups [Kilic, Bayar, Arica 2014, pp. 8-15], namely macrolevel theories, micro-level theories as well as the development theories, which combine both macro- and micro-aspects. Trcpczynski [2015] notices that the FDI-related theoretical concepts at the level of host countries are diversified and multifaceted, including such topics as location determinants [Wach, Wojciechowski 2014, pp. 157-170; 2016; Wojciechowski 2013, pp. 7-22] or effects of FDI for home and host countries [Marona, Bieniek 2013, pp. 333-350].The main purpose of this article is to explore the impact of inward FDI on entrepreneurship in V4 countries. The reliable sources of data were used, among them statistical data of Eurostat and the UNDP. All calculations and estimation were conducted in R-Studio® and JMulti® computer professional software.1. Theoretical backgroundThe impact of FDI on economic growth has been a topical issue for several decades [Beugelsdijk, Smeets, Zwinkels 2008, pp. 452-472]. Empirical evidence on the relationship between FDI and economic growth is still inconclusive, and this topic is often undertaken by researchers. Recent studies suggest that the presence of FDI could under appropriate conditions positively or negatively impact economy of host country. It depends on structure of FDI inflow, types of investment, technological gap, productivity and many other determinants. Most researchers perform analyses at the macroeconomic level without taking into account industry or even microeconomic conditions which could foster or limit positive spillover effects. Hanousek, Kocenda and Maurel [2010] prepared a review of empirical investigations into the analysis on impact of FDI on productivity, spillover effects in European emerging markets. Once study results revealed differential economic impacts between horizontal FDI (market seeking) and vertical FDI (efficiency seeking) [Beugelsdijk, Smeets, Zwinkels 2008, pp. 461].Literature includes numerous examples of the use of quantitative methods in the context of these relationships. The prior research results indicate a two-way Granger causality in the sense of the size of FDI and GDP [Chloe 2003, pp. 55-57]. The analyses carried out using panel models allow to investigate that the impact of FDI on the growth of GDP depends on the economic conditions of the host country [Bengoa, Sanchez-Robles 2003, pp. 529-545]. The recent research using cointegrated autoregressive models for the Polish economy suggest a positive impact of FDI on GDP, unemployment and foreign trade [Marona, Bieniek 2013, p. 340; Balcerzak, Zurek 2010, p. 20]. The problem of the impact of FDI on the economy requires further in-depth research because results of numerous of studies on the impact of FDI on the economy are inconsistent (Table 1).From the perspective of international business, FDI is the most advanced entry mode into international markets [Marona, Bieniek 2013, p. 340; Balcerzak, Zurek 2010, p. 20], being a sign of international entrepreneurship [Daszkiewicz, Wach 2014]. The literature suggests that FDI could either stimulate or inhibit local entrepreneurship [Danahol et al. 2013], which is understood widely as doing business by any entities, mainly private ones, in the local environment. Let us focus on this and elaborate more in detail. We assume that inward FDI may affect private entrepreneurship in the host economy by stimulating cooperation between multinational corporations and local firms. Ayyagari and Kostova [2010] found that in the Czech Republic FDI has an unambiguous positive impact on entry rates of domestic firms through both intra-industry (horizontal) and inter-industry (vertical) spillovers. Albulescu and Tama§ilaa [2014] showed that the impact of FDI on the overall entrepreneurial activity is relatively poor, however, the findings are more conclusive if analysed separately between necessity and opportunity entrepreneurs (using GEM data for necessity-based and opportunity-based entrepreneurship). …

Does investment in capacity encourage FDI?

The literature analysing whether firms prefer to engage in FDI or to export has not considered the role played by strategic investment in capacity by firms. To fill this gap we consider two markets – North and South – and two firms owned by investors from the North, and show that firms have excess capacity. We consider two types of FDI: vertical and horizontal. Examples can be found in industries such as textiles and toys for the former and in automobile industry for the later. We find that investment in capacity encourages vertical FDI but restricts horizontal FDI. Therefore, investment in capacity has an opposite effect on the different types of FDI and so it should be borne in mind by governments when deciding policies affecting FDI.

Domestic impacts of outward FDI in Taiwan: Evidence from panel data of manufacturing firms

This paper explores how the outward FDI made by Taiwanese manufacturing firms affects their decisions on domestic employment, production, investment and income distribution. The empirical examination was carried out by utilizing a set of panel data of 1084 manufacturing firms in Taiwan over the period of 2000–2010. Taking into account the firm heterogeneity, it is found that Taiwanese outward FDI to high-wage countries (horizontal FDI) tends to have a favorable impact on domestic employment, production and investment. At the same time, the outward FDI to low-wage economies (vertical FDI) is very likely to lead to job loss and industrial hollowing out at home. In contrast, domestic income inequality is generally aggravated by outward FDI irrespective of the wage level in destination countries.

The pattern of EU FDI in the manufacturing industry: What role do third country effects and trade policies play?

The aim of this paper is to assess the impact of “third country effects” and trade policies on the outward stocks of FDI of the EU. We estimate a model based on the knowledge-capital theory of the multinational enterprise over the period 1995–2008 by using a sample of five EU countries and 24 partner countries. Explanatory variables include an index of applied bilateral tariffs, a dummy to capture the presence of bilateral investment treaties (BITs) and a variable to take into account the impact of the participation of host countries to free trade agreements (FTA) with other than EU countries. The paper checks the third country effects by testing whether there is spatial lag dependence in bilateral FDI. The results show that trade costs play a key role in explaining the pattern of FDI in the manufacturing sector as a whole and in four out of six disaggregated industries. The impact of tariffs varies across industries, suggesting the predominance of horizontal FDI in some industries, and the existence of export-platform FDI in others. BITs and the participation of the host country in other FTAs positively affect the outward stock of EU FDI, while we find no empirical evidence to support the hypothesis of spatial lag dependence in bilateral FDI.

Testing for FDI Externalities in Thailand: A Firm Level Analysis of Horizontal and Vertical Spillovers

Many empirical researches have been dedicated to study the impacts of MNCs on host nations’ growth and trades; however, the consensus among them is still a far reaching destination. Among all aspects of the impact of MNCs, the externalities toward the local firms have lately gained the most attention. By using Thailand’s firm level database combined with an I/O table at the most disaggregate level, this paper is designed to empirically investigate the externalities from the presence of foreign-controlled plants toward the performances of local plants, who reside in identical industries (Horizontal FDI spillovers) / in the related industries (Vertical FDI spillovers). In the study at the overall manufacturing sector, we find that the participation of foreign plants in supplying industries significantly increases the productivity of local plants. In capital and labor intensive industries, we find that there is a strong evidence of positive externalities from the foreign plants’ participation in the downstream industries. Interestingly, the performances of local plants in natural based industries are not significantly influenced by the presences of foreign plants either in the same or related industries.

The Quest for Non-Resource-Based FDI: Do Taxes Matter?

Using manufacturing and services firm-level data for 30 sub-Saharan African (SSA) countries, this paper shows that taxation is not a significant driver for the location of foreign firms in SSA, while other investment climate factors, such as infrastructure, human capital, and insitutions, are. By analyzing disaggregate FDI data, the paper establishes that, while there is considerable contrast in behavior between vertical FDI (foreign firms producing for export) and horizontal FDI (foreign firms producing for local markets), taxation is not a key determinant for either type of FDI. Horizontal FDI is attracted to areas with higher trade regulations, highlighting interest in protected markets. Furthermore, horizontal FDI is affected more by financing and human capital constraints, and less by infrastructure and institutional constraints, than is vertical FDI.

The Quest for Non-Resource-Based FDI: Do Taxes Matter?

Using manufacturing and services firm-level data for 30 sub-Saharan African (SSA) countries, this paper shows that taxation is not a significant driver for the location of foreign firms in SSA, while other investment climate factors, such as infrastructure, human capital, and insitutions, are. By analyzing disaggregate FDI data, the paper establishes that, while there is considerable contrast in behavior between vertical FDI (foreign firms producing for export) and horizontal FDI (foreign firms producing for local markets), taxation is not a key determinant for either type of FDI. Horizontal FDI is attracted to areas with higher trade regulations, highlighting interest in protected markets. Furthermore, horizontal FDI is affected more by financing and human capital constraints, and less by infrastructure and institutional constraints, than is vertical FDI.

FDI, Trade Integration and the Border Effect: Evidence from the European Union

This paper intends to combine two fields in the economic literature by examining empirically the FDI pattern –horizontal versus vertical– within the European Union and the relevance of trade integration as a potential determinant of investment flows over the period 1995-2009. We capture trade integration by estimating the magnitude and evolution of the home bias or border effect rather than by using other indicators such as the openness rate or the existence of tariffs and non-tariff barriers. We find that, for the particular case of the EU, it is not possible to strictly discriminate between horizontal or vertical FDI. The market-seeking strategy appears to be more important than factor-proportion related motivations; however, the robust relationship of complementarity between trade integration and FDI provides at least one argument in support of vertical FDI and suggests that the vertical model cannot be dismissed entirely.

The Impact of Free Trade Agreements on Foreign Direct Investment: The Case of Korea

This paper aims to empirically identify the effects of FTAs on outward and inward FDIs in Korea. Considering the income differences between Korea and its FTA partners, we hypothesize that FTAs have a positive effect on outward FDI to developing countries and inward FDI from developed countries. An underlying source of the hypothesis is the Knowledge-Capital model, addressing the positive (negative) relationship between trade costs and horizontal (vertical) FDI. We test for the hypothesis using data on Korea’s FTAs and FDI over the period 2000-2010. We find that our empirical results support the hypothesis, and additionally, FTAs in general encourage FDI by creating an FDI-friendly environment.

FDI spillovers on firm survival in Italy: absorptive capacity matters!

The aim of this paper is to explore the effects of spillovers driven by competition and forward and backward linkages between foreign firms and Italian firms. We adopt the firm dynamics framework, which allows us to test the impact of foreign firms’ activity on the probability that local firms will exit. The empirical analysis relies on continuous survival models (Cox proportional hazard models) and uses a representative firm level database from the period of 2002–2010 with data concerning more than 4,000 Italian manufacturing firms. Our estimates regarding the whole sample show that horizontal and vertical linkages have no impact on firm survival. To further test this finding, we perform a more disaggregated analysis that allows for heterogeneity across firms and sectors. We obtain evidence that the effects of FDI spillovers on firm survival follow specific patterns at both the intra- and inter-industry levels based on differences in productivity between Italian firms and foreign firms and on the technological intensity of the industry. Foreign firms’ activity reduces the exit probability of competitors and of downstream local customers (through forward linkages) with low productivity gap but has no impact on high productivity gap firms. Firms in high technology intensive sectors do not benefit from horizontal FDI while in low and medium technology sectors they do. Differences in absorptive capacity may explain these results. However, we also find that vertical linkages with foreign firms in the upstream supplying industries spur firm duration in medium and high tech sectors.

Export‐supporting FDI

AbstractA large fraction of affiliates owned by multinational manufacturing companies operate in the wholesale and retail sectors. This paper proposes a model of trade, horizontal FDI, and export‐supporting FDI (ESFDI). ESFDI reduces distribution costs abroad, while production remains at home. ESFDI introduces a complementarity between trade and FDI, while trade and production abroad remain substitutes. German firm‐level FDI data show that ESFDI is quantitatively relevant. In line with the model, most firms choose either ESFDI or horizontal FDI in a given market; ESFDI is chosen by smaller parents and is strongest when distance from Germany is low.

The Evolution of EMNCS and EMNC Thinking: A Capabilities Perspective

This chapter explores the parallel evolution of international business forms, the context for international business, and that ways that IB scholars frame these two. It employs a capabilities-based perspective, the RAT-CAT framework, to argue that Emerging Market Multinational Companies do have so-called “O-advantages”, built both on experience at home and learning abroad, and applies this framework both to traditional multinationals based on horizontal FDI and to Global Value Chain Enterprises based on vertical FDI.

Foreign direct investment spillover effects in China: Are they different across industries with different technological levels?

Despite the impressive magnitude of inward FDI in China, empirical studies on its spillover effects are relatively scarce and have failed to find conclusive evidence. By exploring a vast firm-level panel dataset, this study aims to test empirically whether the horizontal and vertical FDI spillover effects are different among industries classified by their technological levels. Key findings are as followings: First, foreign investments in the same industry are more likely to engender negative influences on the local Chinese firms. Second, these negative horizontal effects are particularly prominent in low technology sectors. Third, the effects of foreign investments in other industries appear to be positive and significant relatively evenly across industries with different technological levels. Considered in the context of Chinese policies on FDI, these findings suggest that government policies could be a crucial factor in taking advantage of FDI spillovers.

Export‐Platform Foreign Direct Investment: Theory and Evidence

AbstractThis paper proposes a model that accounts for ‘export‐platform’ FDI – a form of FDI that is common in the data but rarely discussed in the theoretical literature. Unlike the previous literature, this paper’s theory nests all the typical modes of supply, including exports, horizontal and vertical FDI, horizontal and vertical export‐platform FDI. The theory yields the testable hypothesis that a decrease in either inter‐regional or intra‐regional trade costs induces firms to choose export‐platform FDI. The empirical analysis provides descriptive statistics that point to large proportions of third country exports of US FDI, and an econometric analysis, whose results are in line with the model’s predictions. The paper suggests policy implications for nations seeking to attract FDI.

Heterogeneous Firms in a Product Fragmentation World

This paper analyses the ways in which product fragmentation (producing part of a product in one country, and a part elsewhere) can be used by multinational firms which have different productivity to serve the market abroad when product chains can be internationally and arbitrarily fragmented. Product fragmentation is thus an additional option to serving markets abroad by either horizontal or vertical FDI. Upon opening a market to trade, firms with the lowest productivity will exit, those with intermediate productivity will export, and those with higher productivity will choose fragmentation. Among the latter, the more productive a firm is, the more product chains are allocated abroad. Firms with the highest productivity will choose horizontal FDI. At a sector level, the more prone to fragmentation a sector is, the lower will be the ratio of exports to FDI sales.

Asymmetric Effects of Corruption on U.S. Manufacturing MNCs’ FDi - Horizontal FDI & Vertical FDI

해외직접투자를 설명하는 결정론자들 중 하나인 corruption은 중요하게 인식되어지고 있다. 이론적 관점에서 다국적 기업이 투자허가와 세금감정 등과 관련해서 정부 관료들에게 뇌물을 제공함으로써 사업을 영위함에 있어 유발되어지는 비용으로 간주되어질 수 있다. 따라서 다국적 기업이 해외시장 투자를 결정하는데 진출대상국의 corruption 수준은 고려되어야 한다. 그러나 해외직접투자 진출대상국의 corruption의 중요성을 분석한 연구들은 해외직접투자의 유형을 구분하고 있지 않다. 본 연구에서는 미국기업 자회사들의 the destination market for the sales에 근거하여 해외직접투자의 유형을 수평적 해외직접투자와 수직적 해외직접투자로 구분한다. 미국 제조업분야 해외직접투자의 진출대상국 (50개국)을 대상으로, 본 연구는 corruption의 영향이 해외직접투자의 유형에 따라 다를 수 있음을 보인다. 미국 제조업분야 다국적기업의 해외직접투자에 관한 데이터를 이용하여, 진출대상국의 corruption이 수직적 해외직접투자에 부정적인 영향을 미치고 있으나, 수평적 해외직접투자에는 유의적 영향을 제공하지는 않는다. 실증분석의 결과는 미국 제조업분야 다국적 기업의 직접투자를 유치하기를 원하는 국가는 corruption을 낮출 필요가 있음을 제시하고 있다.

FDI Contribution to Technical Efficiency in the Tunisian Manufacturing Sector: Evidence from Micro-panel Data

This paper investigates the contribution of FDI to firms’ technical efficiency based on a two-stage empirical method. Using panel data for 674 firms belonging to the Tunisian manufacturing sector and observed over the period 1997–2001, a bootstrap procedure is applied to correct for serial correlation affecting DEA technical efficiency scores estimated in a first stage. Results obtained from second-stage regressions show that FDI presence at the firm level has a positive effect on its technical efficiency. However, horizontal FDI spillovers are not evidenced while sectoral export activity represents a potential source of technology spillovers for local firms.

Investment History and Market Orientation Effects in the TFP–FDI Relationship1

AbstractThis paper examines the robustness of previous stochastic dominance tests that find significant total factor productivity (TFP) heterogeneity between firms that export abroad and multinational enterprises (MNEs). We extend this literature by focusing on how ‘within‐MNE’ heterogeneity affects the extent to which one can identify the TFP threshold in the exporter–MNE TFP relationship. Within‐MNE heterogeneity is established by determining both the number and location of the foreign affiliates established by each MNE. In this way, we separate single‐affiliate MNEs from those with multiple affiliates, as well as analyse the role played by vertical FDI, a topic typically ignored in previous stochastic dominance tests of the Helpman et al. (2004, American Economic Review, 94, 300–16) hypothesis. Our empirical tests employ Japanese firm‐level FDI and TFP data for the period 1975–2000. Using Kolmogorov–Smirnov tests to determine stochastic dominance, we find significant TFP heterogeneity within the MNE group based on investment history and affiliate geographic location. While our results confirm the standard HMY three‐tiered classification to exist for Japanese firms, exporter–MNE ‘between‐group’ TFP heterogeneity is sensitive to the ‘within‐MNE’ investment history heterogeneity. We note that single‐ and two‐affiliate MNEs are statistically more similar to exporting firms than to MNEs with greater foreign affiliate totals. This shows the exporter–MNE TFP threshold to be not as explicit as Helpman et al. (2004, American Economic Review, 94, 300–16) suggest. In fact, our results allow us to identify the MNE‐side width of Girma et al.’s (2005, Economic Letters, 83, 317–24) ‘uncertainty region’ surrounding this threshold. Finally, we also find a strong TFP–market orientation relationship exists where the most productive firms follow complex integration strategies, lesser TFP firms do horizontal FDI, and the least productive MNEs do vertical FDI.

Who Goes Where and How? Firm Heterogeneity and Location Decision of Korean Multinationals

This paper examines the role of firm heterogeneity in multinationals’ choice of FDI type and location. Using Korean firm-level data, we find that more productive firms are more likely than their less efficient counterparts to invest in tough markets and choose horizontal FDI against vertical or export-platform FDI across different host countries. These findings, consistent with the recent theories in international economics, suggest that firm heterogeneity may play a significant role in FDI strategy as well as location decision.

Domestic Repercussions of Different Types of FDI: Firm-Level Evidence for Taiwanese Manufacturing

This paper addresses the public concern of hollowing-out effects of FDI by analyzing firm-specific data on Taiwanese manufacturing multinationals. We estimate ordered probit models with the firms’ own assessment of domestic production and employment effects as dependent variables to investigate whether such effects depend on the size, location, and type of FDI. We find that the probability of negative effects increases slightly with the size of FDI. Furthermore, the effects of locating in China differ from those of locating in advanced countries. In contrast to vertical and export-platform FDI, employment effects of horizontal FDI tend to be positive.