Horizontal Foreign Direct Investment Research Articles

FDI inflows and export quality: Domestic competition and within-firm adjustment

Product quality is widely regarded as an important determinant for economic development. This paper investigates whether horizontal foreign direct investment (FDI) improves or deteriorates the quality of domestic firms’ exports. We use China’s FDI regulation changes in 2002 as an instrument variable (IV) for FDI penetration in China to identify the causal impact and introduce a theoretical model to rationalize our empirical work. We find that FDI inflows exert a significantly negative effect on Chinese firms’ export quality. The mechanism of the negative effect is that FDI intensifies the domestic market competition, which induces within-firm adjustment of product mix and lowers domestic firms’ incentive to invest in the quality of new products. In particular, while domestic firms drop some existing products and introduce new products, they invest less in the quality of new products and maintain the quality of continuing products.

Foreign Direct Investment and Technology Spillovers: An Analysis of Indian Manufacturing

Using a rich firm-level panel dataset of Indian manufacturing over 2010–2018, this study aims to identify the spillover effects associated with foreign direct investment (FDI). To this end, we distinguish spillover effects into horizontal (Intra-industry linkage) and vertical (backward or downstream and forward or upstream Inter-industry linkages) FDI channels. We employ various semi-parametric methods to tackle the endogeneity issues in productivity estimation. We find that backward spillover from the downstream multinational enterprises is the only source of total factor productivity gains. However, the magnitude of negative forward–vertical linkage is larger than the positive backward–vertical effect. The analysis also broadly compares technology spillovers for domestic and all firms in the sector. Finally, we investigate productivity spillover across industries based on their technology intensity. Our findings suggest that industry heterogeneity is a key driver of FDI spillover. JEL Codes: F23, D24, O33, L1

Trade and value chain participation: Domestic firms and FDI spillovers in Africa

AbstractData on the location of foreign direct investment (FDI) projects within and across African nations are combined with firm‐level survey data and information on sectoral input–output relationships to assess what types of FDI are more likely to influence participation in global value chains (GVCs) and to investigate the relationship between FDI and the performance of proximate domestic firms. Firm‐level analysis finds evidence of vertical spillovers from exposure to FDI, mainly in the manufacturing sector: domestic firms located near FDI projects that offer potential supply or demand linkages are more likely to engage in trade through imports or exports. Proximity to FDI projects in the same sector (horizontal linkage) is less likely to affect trade or GVC performance of domestic firms. Both vertical and horizontal FDI linkages are associated with higher labour productivity and other dimensions of performance.

Determinants of product sophistication in Vietnam: findings from the firm–multi-product level microdata approach

ABSTRACT By using data from the Vietnam Enterprise Survey and applying the fixed effect model, this study investigates the determinants of product sophistication at the firm – multi-product level in Vietnam-a transitional economy – over 2010–2016. Estimations show that horizontal foreign direct investment (FDI) spillovers have a negative effect on product sophistication. We find a positive contribution of forward spillovers and a negative contribution of backward linkages. An interaction term between forward spillover and productivity has a negative effect but is insignificant. Estimated outcomes also indicate that the average amount of labour, revenue, productivity, technology level, and capital to labour ratio of firms has advantageous impacts on product sophistication. Our results are robust using different measurements of product sophistication. This article suggests that strengthening forward linkages by facilitating the supply of intermediate inputs from multinational firms and improving productivity, capital-to-labour ratio, and governance capability could help Vietnamese firms produce more sophisticated goods.

The impact of foreign direct investment on innovation at domestic firms: Evidence from the deregulation of foreign investment in China

AbstractThis paper studies the impact of foreign direct investment (FDI) on innovation by domestic firms in China. A difference‐in‐difference estimation strategy yields causal evidence by exploiting China's deregulation of FDI in 2002. Analysis of a matched firm–patent data set from 1998 to 2007 shows that both the quantity and quality of innovation by domestic firms benefited from the presence of FDI. Emphasizing the importance of knowledge spillover from FDI in similar technology domains, the authors examine the role of horizontal FDI and FDI in technologically close industries—those sharing similar technology domains. Findings show that the latter generates much more substantial positive spillover than the former. The paper also shows that knowledge spillover from FDI in similar technology domains is not driven by input–output linkages. In addition, the spillover effect is stronger in cities with higher human capital stock and firms with higher absorptive capacity.

Gravity trade model with firm heterogeneity and horizontal foreign direct investment

AbstractWe develop a gravity trade model based on a theoretical analysis of heterogeneous firms that engage in horizontal Foreign Direct Investment (FDI) or exporting. The model allows firms' endogenous choice between exporting or FDI to impact the proportion of exporting firms and subsequently bilateral trade. Based on the theoretical results, we propose a three‐stage estimation procedure: First, estimate firm selection into horizontal FDI; second, use predicted probabilities from the first stage in the estimation of firm selection into exporting; and third, use predicted probabilities from the previous two stages in the gravity estimation of bilateral trade. We apply this procedure to the European Union (EU) processed food industry, which engages in worldwide FDI and trade. We estimate a baseline model of a standard gravity equation, a two‐stage model without FDI selection, and our proposed three‐stage model and quantify bias corrections in the coefficient estimates of the trade friction variables in the baseline and two‐stage gravity models. The bias corrections can be large. For instance, the inclusion of the proportion of Multinational Enterprises (MNEs) in the trade‐selection equation leads to a sign reversal of the distance coefficient estimate and results in an upward bias correction of . The three‐stage gravity corrects a downward bias of in the coefficient estimate of distance in the baseline but an upward bias of in the two‐stage method, which indicates that the two‐stage method overcorrects the downward bias in the baseline gravity.

The proximity‐concentration trade‐off with multi‐product firms: Are exports and FDI complements or substitutes?

AbstractStandard horizontal foreign direct investment (FDI) models predict substitutability between FDI and exports in light of the proximity‐concentration trade‐off, nonetheless, empirical literature finds, almost invariably, a complementarity effect. We show that given the multi‐product nature of multinational enterprises both effects coexist at the firm‐level, with a substitutability for some products and a complementarity for others, explaining why the empirical substitutability relation has been so scarce even at the level of the firm. We use detailed French firm‐level data over 2002 and 2009 to show that the question of whether FDI and exports are complements or substitutes depends on whether the product belongs to the core competency of the firm and the size of demand in the destination market. We find evidence of the substitutability predicted by standard horizontal FDI models, taking place only for the best performing products of the firm and in high‐demand markets. In turn, vertical linkages and proximity advantages related to FDI's foreign presence generate exports of intermediates and products that are further away of the firms' core competency. This complementarity jeopardises the substitutability when aggregating all products of the firm, resulting on an average null net effect of FDI on exports in high‐demand countries.

Global FDI inflows and outflows in emerging economies Post-COVID-19 era

FDI (Foreign Direct Investment) is frequently viewed as a critical measure of a country's economic strength and potential. Consequently, this paper investigates why countries attract FDI by utilizing factors and channels such as vertical or horizontal FDI as well as COVID-19’s impact on FDI flows in emerging economies with data from 1990 to 2020. Models of kinked exponential growth for estimating growth rates and the Andrew and Zivot trend formulations are used to analyze the rise in FDI inflows. The FDI inflow channels are estimated using dynamic panel data analysis, with a generalized method of moments for emerging economies as a whole and an autoregressive distributed lag-pooled mean group for specific countries. The countries studied were India, China, Russia, South Africa, and Brazil. Except for India, where the trend has accelerated, the rest of the nations in the emerging economies category has seen significant or minor declines. Overall, vertical and horizontal factors influence FDI inflows to emerging economies. However, estimations show that vertical and horizontal factors promote FDI inflow into the Russian Federation and India. China's horizontal motivation, on the contrary, is critical. Inflows of FDI into Brazil and South Africa appear to be unrelated. The pandemic scenario affects FDI in Brazil but not in other emerging economies. FDI determinants differ per country. In order to improve their economic situation following the pandemic, developing countries may establish adequate FDI policies to attract FDI.

External Debt Default and Foreign Direct Investments

Abstract We analyze the effect of a country’s defaults and restructuring its’ official and private external debt on its ability to attract foreign direct investment. We use different types of foreign direct investments: FDI Flows, Horizontal FDI, vertical FDI, cross-border mergers & acquisitions, and greenfield FDI. Using the Poisson-Pseudo Maximum Likelihood (PPML) estimation method, which has never been used in the literature to do a similar analysis, we find that external debt default decreases all types of FDIs. Furthermore, we also conduct a more granular sensitivity analysis by analyzing the effect of political risk ratings, effect on non-advanced economies, and effect on highly indebted poor countries (HIPC). We find that cross-border mergers and acquisitions (M&A) decrease as corruption risk decreases and increases as law and order improve. For HIPC countries, official external debt restructuring increases greenfield FDI. JEL classification number: C1, C33, D72, F21, H63, O57. Keywords: Debt Default, Restructuring, Foreign Direct Investment (FDI), External Debt, ICRG, Poisson-Pseudo Maximum Likelihood (PPML), Political Risk.

Networked FDI and third-country intra-firm trade

Foreign direct investment (FDI) is networked. This is beyond vertical and horizontal FDIs. Affiliates locate across multiple countries and trade among them. This paper investigates the FDI networks, using the Japanese foreign affiliate data. First, we investigate location patterns and industry patterns of foreign affiliates and find the network structure of FDI. Then, third-country intra-firm trade is explored. The third-country sales and sourcing within the firm boundary (third-country intra-firm trade) is active, but only large firms tend to construct production networks and engage third-country intra-firm trade. Firm size (size of parent and affiliates and the number of affiliates) is crucial in understanding third-country intra-firm trade.

Investment climate and foreign direct investment in Latin American countries: firm-level evidence

This paper analyzed the relationship between the investment climate and foreign direct investment (FDI) using a sample of 18 Latin American countries. The main results show that obstacles related to financial infrastructure and customs clearance might reduce the probability of a country receiving FDI, while physical infras-tructure obstacles do not significantly affect the influx of FDI. The disaggregated data show that financial infrastructure is important for attracting both vertical and horizontal FDI. On average, policies in Latin America that minimize financial obs-tacles and reduce the time it takes to clear customs will increase the likelihood of attracting FDI.Keywords: developing countries; FDI; export.JEL code: F21; F23

Determinants of Foreign Direct Investment in Indonesia

We examine what determines the flow of foreign direct investment (FDI) in Indonesia, focusing on the role of institutional measures. A knowledge-and-physical-capital (KPC) model is applied to a panel dataset that covers 42 of Indonesia’s FDI partners from 2004 to 2012. Evidence shows that both horizontal and vertical FDIs coexist in the bilateral aggregate data of Indonesia’s FDI flows, but horizontal FDI appears to be dominant. This can be explained by the market size (proxied by the total GDP of both countries and similarity in incomes per capita) and the relative factor endowments (proxied by skilled labor and physical capital). The vertical FDI, on the other hand, could be only explained by the significant effect of unskilled labor. Institutional factors, particularly corruption, are apparently important in affecting Indonesia’s bilateral FDI flows. The results also show that a higher FDI level in Indonesia positively correlates with macroeconomic factors, open policy factors, and utility infrastructure factors.

Trends and Determinants of FDI with Implications of COVID-19 in BRICS

Foreign direct investment (FDI) movement to any country is recognized as an important criterion for economic strength and potentiality. Hence, the present study analyzes the motives of FDI inflows through the determinants and channels, namely horizontal or vertical FDIs and the impact of COVID-19 on FDI Inflows in BRICS countries during the period 1990–2020. The Kinked Exponential (deterministic) trend, and Zivot and Andrew’s trend equations are applied for the growth analysis of FDI inflows. Regarding the estimation of channels of FDI inflows in terms of horizontal, vertical, and hybrid motivations, dynamic panel data analysis using GMM for BRICS economies together and ARDL-PMG for individual countries is made. The findings show significantly positive growth in FDI inflows in all BRICS countries except India during the first decade of the present century. After that, these countries have experienced either significantly or insignificantly declining trends, except India, where the trend has significantly increased during this later period. From the overall analysis, we see that both horizontal and vertical motivations play a dominant role in determining FDI inflows for the BRICS countries. However, from country-wise estimations, it is observed that both horizontal and vertical motives are dominant factors for FDI inflows to India and Russia. In contrast, the horizontal motive of it is significant for China. For Brazil and South Africa, no motive behind FDI inflows appears significant. The pandemic situation significantly impacts attracting FDI in Brazil, while it remains insensitive in the rest of the BRICS countries. The findings reveal that FDI determinants are country-specific. So, the BRICS countries can design proper FDI policy and adopt more reforms in attracting FDI that may help improve their economic situation.

Reverse FDI and knowledge-and-physical-capital model: empirical evidence from emerging economies

PurposeThe main aim of this paper is to verify whether the modern mainstream economic theory of multinational enterprise that explains foreign direct investment (FDI) from developed countries is also able to account for investment decisions of multinational enterprises (MNEs) from emerging economies.Design/methodology/approachUsing Knowledge-And-Physical-Capital (KAPC) model as an analytical framework and Poisson-pseudo maximum likelihood estimation technique, the authors identify determinants of FDI flows from emerging economies. The data set consists of 38 home and 134 host countries during the period 2000–2012. Empirical evidence supports high explanatory power of KAPC model. Further, compared with the earlier Knowledge-Capital (KC) model, results confirm the importance of physical capital.FindingsThe estimation results confirm the hypothesis that mainstream economic theory can explain FDI flows from the emerging economies by highlighting the roles of total market size, skilled-labor abundance, investment and trade costs and geographical distance between two countries.Research limitations/implicationsThis study casts doubt on the alternative way that the KAPC model suggests to distinguish between horizontal and vertical FDI. The argument that horizontal MNE headquarters would be relatively more abundant than vertical MNE headquarters in countries that are abundant in physical capital relative to skilled labor seems reasonable but the idea of variable specification in the estimated equation should be revised.Practical implicationsFirms should be allowed to move their resources freely into and out of specific activities, both internally and internationally across border. To reach that goal, governments of potential host countries can adopt several measures, most importantly remove restrictions on payments, transfers and capital transactions and open previously closed industries to welcome foreign investment. In addition, to improve investment climate in general, governments need to pay attention to enhancing security of property rights, regulating internal taxation (i.e. corporate income tax), guaranteeing adequacy of infrastructure, efficient functioning of finance and labor markets and fighting against corruption.Social implicationsThe location choice of emerging investors set priority on similarity in economic size, geographical and cultural proximity. It is because shared borders or common official languages would reduce information costs and enhance information flows. Also, investors consider horizontal FDI (with motivation to expand market demand) as one of main modes of entry into a foreign market and a substitute for export. Likewise, distance is often understood as an important investment friction.Originality/valueThe outstanding contribution is that the research has uncovered the positive and statistically significant effect of physical capital on FDI activity, which has not been discussed in the earlier KC model. However, at the same time, the study casts doubt on the KAPC model's argument that relative abundance in physical capital to skilled labor between two countries determines FDI types and suggests that this argument and its empirical model specification should be carefully reviewed.

Foreign Direct Investment and Financial Constraints: Firm-Level Evidence from Cambodia, Lao PDR, and Myanmar

Financial constraints have been a significant obstacle to firms operating in developing countries. Prior studies show that foreign direct investment (FDI) helps to ease credit constraints for domestic firms. However, they only account for horizontal FDI spillovers. This paper therefore investigates both horizontal and vertical FDI spillovers using firm-level data from Cambodia, Lao PDR, and Myanmar (CLM). The key findings of this paper are threefold. First, FDI inflows lessen the financial constraints faced by local firms through partnership or joint venture. Second, an increasing share of FDI in horizontally and vertically related industries raises higher credit constraints for domestic firms. Third, the crowding-out effect of FDI is not uniform across domestic firms of different sizes. Therefore, policymakers should be aware of these possible negative spillovers and formulate policy to maintain FDI inflows while also ensuring the growth and survival of domestic firms.

BITs, Colony Ties, and Offshore Centers: The Case of United Kingdom Outward FDI

This paper empirically investigates the impact of bilateral investment treaties (BITs) on foreign direct investment (FDI) using data on British multinational firms’ outward FDI in a panel of 140 countries across 2009-2017. We apply the Knowledge-Capital model to demonstrate that BITs act as a market access mechanism to parent country multinational enterprises. Our core result confirms the negative impact of BIT membership on horizontal FDI in the host economy. This result is robust to changes in partner sample composition, hypothetical stock levels, and inclusion of trade policies. Our findings imply that factor cost advantages are unable to compensate for the adverse effect of BIT entry, which raises concerns regarding the potency of BIT-centered development policies.

Spillover Effect of FDI on Food Exports: Based on Firm-Level Analysis in China

This paper examines the spillover effect of foreign direct investment (FDI) on Chinese domestic food exports under firm heterogeneity. By using a rich firm-level panel data of China’s food firms, the empirical analyses rely on the first-order difference generalized method of moments (GMM) for industry-level analysis, and Heckman’s two-stage method for firm-level analysis. The results show that the horizontal FDI led to a positive spillover effect on domestic food industry exports, varying across food subindustries. The paper also finds that a large part of the promotion effect is driven through extensive margin (the probability to export) instead of intensive margin (the quantities of exports) in firm-level analysis. The heterogeneous export spillovers across food firms are further considered to depend on their nature characteristics, like productivity, size, and ownership. Moreover, the heterogeneities of FDI origins and business purpose are confirmed to influence export spillovers. The estimation results are quite robust for different types of regression specifications and substitutions of variable measurement. These findings provide suggestions for decision-makers to carefully assess the impact of FDI and make policy for the sustainable development of domestic food exports.

Determinante SDI u Evropi i uticaj Kine

Despite recent concerns about the increasing influence of outside investors on the European Union (EU) and Western Balkans, the developed European countries are still a dominant source of foreign direct investment (FDI) in the region, confirming the benefits of EU membership. At the same time, fast-growing connectivity and lower trade costs in accession and neighboring countries determine the FDI growth from China, particularly via the Belt and Road Initiative (BRI). By applying panel data over 2000-2019 for 34 countries, which form 89% of all European FDI, we first examine FDI patterns around Europe, compare the EU, NMS, and Western Balkans; verify the importance of EU membership for FDI, caused reducing trade costs and improving connectivity. Thus, the new EU member states (NMS) and Western Balkans appear both as a home country and as a pre- entry destination to the EU. Then, we calculate trade costs indices for each selected country and partners over time and find that Europe and China are closely interconnected through trade and FDI. It means that stronger ties with China can be realized for the sample countries at the cost of easing relations with the EU. Finally, incorporating trade costs indices into the FDI model; we evaluate the impact of connectivity on FDI and estimate how BRI affected FDI in Europe. Additionally, we validate that the old framework of horizontal and vertical FDI not representative well and even new complex vertical or export-oriented FDI strategies are shifting today.

Biased FDI spillovers in incomplete datasets: An empirical examination

AbstractWe examine biases in foreign direct investment (FDI) productivity spillovers that can arise when using incomplete datasets, by comparing estimates for Indonesia from the World Bank Enterprise Survey (WBES)—an incomplete dataset example—with estimates from the Indonesian Manufacturing Survey (MS). Furthermore, we conduct estimations on samples drawn from MS, following the sampling methodology of WBES. We find that estimates with this sampling framework are inaccurate, due to measurement error in industry‐level horizontal and vertical FDI, strong presence of small firms, and small sample size. Relaxing the WBES sampling criteria and using FDI variables from MS produces substantially more reliable findings.

The internationalization process of agrifood firms: a proposed conceptual framework

PurposeThis research seeks to develop a better understanding of internationalization patterns of agrifood firms and explains why different paths are adopted. Further, a conceptual framework to support public and private decision-making is proposed.Design/methodology/approachAn exploratory qualitative research framework was developed featuring case studies about three highly internationalized Brazilian meat processing firms. Top managers were interviewed, and documents were collected to support the intraand crosscase analyses.FindingsResults suggest that meat processing firms tend to adopt a dual internationalization pattern. Distribution-oriented foreign direct investment (FDI) is normally established gradually, whilst horizontal FDI – the establishment of foreign production facility – tends to be conducted through a fast-paced expansion mode. Interestingly, it was found that food safety issues play a central role in internationalization decisions.Originality/valueAn extension to the Uppsala model was provided by considering agrifood characteristics in the analysis. The results have broad appeal to managers and policymakers. Agribusiness managers could use the theoretical and empirical evidence to support their internationalization decisions. Policymakers can also use this research to gain a better understanding of how agrifood firms expand internationally to either attract or foster FDI.