Foreign Direct Investment Liberalization Research Articles

Effects of foreign direct investment in services on input imports of manufacturing firms: Evidence from China

AbstractThis study investigates the causal effects of foreign direct investment (FDI) in services on the input imports of manufacturing firms. We exploit a plausibly exogenous policy of FDI liberalization in services in China to construct an instrumental variable for FDI in services and address endogeneity concerns. The results demonstrate that FDI in services positively impacts both the value and sophistication of input imports for manufacturing firms. Mechanism analysis reveals that FDI in services enhances firms' input imports through reductions in production costs, relief from financial constraints, and decreased remote coordination costs. The positive effects of FDI in services are particularly pronounced for firms with lower initial productivity and higher levels of human capital.

Foreign Direct Investment and Air Pollution: Re-Estimating the “Pollution Haven Hypothesis” in China

This paper focuses on the relationship between foreign direct investment (FDI) and air pollution. Based on the relaxation of China’s FDI regulation policy as well as the “China Environmentally Extended Input-Output” database, we utilize a difference-in-differences methodology and investigate the casual effects of FDI liberalization on air pollution intensity. The empirical results demonstrate that FDI reduces the air pollution intensity. However, it is more pronounced in sectors with higher levels of absorption ability and human capital. The reduction in air pollution is mainly driven by technical effects through the enhancement of total factor productivity and technological efficiency. FDI can help achieve the green development goals in developing countries with a more liberalized policy.

Liberalization for services foreign direct investment and product mix adjustment: Evidence from Chinese exporting firms

AbstractThis article is the first to explore how manufacturing firms adjust their export product mix in response to services liberalization. We focus on the liberalization of services foreign direct investment (FDI) in destination (importing) countries. Our analysis of detailed customs transaction data from China, finds a promotion effect of services FDI liberalization on export diversification of manufactured goods, which is mainly revealed by an increase in export value, variation in the number of product varieties, the dispersion ratio across exported products, and a decrease in the export skewness ratio. However, this diversification‐promotion effect is only found in developing countries, but not present in developed countries. Our study suggests that services liberalization incurred in importing countries play an important role in promoting export scale and diversification.

Foreign Direct Investment Liberalization in Communist Regimes: A Theoretical Model Based on the Comparison Among China, Cuba, North Korea, and Vietnam

What are the driving factors for foreign direct investment liberalization in formerly communist countries? Previous research explains foreign direct investment liberalization as a function of the intensification of international commerce and democratization; however, the likes of China, Cuba, North Korea, and Vietnam hardly fit into this narrative. The following contribution makes a theoretical argument about the causes of foreign direct investment liberalization in communist authoritarian regimes with highly centralized and closed economies. We argue that foreign direct investment liberalization is caused by external shocks materializing in policy adaptations. The degree of foreign direct investment liberalization depends on the balance of power between actors who favor liberalization and actors who stand to profit from rent-seeking economies. The relative power of both factions determines the magnitude and type of foreign direct investment liberalization. We test this theoretical argument using case studies, which include China and Vietnam as representatives of gradual transitions and Cuba and North Korea as representatives of traditional rent-seeking economies.

Foreign Direct Investment (FDI) in the Defence Sector of India : A Review of the Policy Framework

This research paper provided an overview of the existing policy of FDI in the defence sector. It analyzed the effect of liberalization of FDI on the defence sector and examined the benefits India has derived in terms of technological advancements and employment generation. With opening of the defence sector, the Indian government sought to attract major defence players and acquire new technology. India is the third largest military and sixth biggest defence spender and one of the largest importers of conventional defence equipments. The ‘Make in India’ initiative by the Modi government has focused its efforts on increasing indigenous defence manufacturing and to become self-reliant. The study examined the existing framework of FDI in India for the defence sector, its strategic partners, and the collaborations under the ‘Make in India’ programme. It also looked at the pros and cons of the existing policy and discussed their implications and suggested policy recommendations for the future. India aims to be among the top five countries in aerospace and defence, for which it is desirous of reducing dependence on imports and focus on development of indigenous weapon systems. The paper looked at the progress made through the FDI in defence route.

Foreign Direct Investment in India: Emerging Trends and Patterns

This paper examines the trends in foreign direct investment (FDI) in India during 1980-2018 and the emerging patterns of the FDI inflows in the country during the last two decades (i.e., 2000 - 2019). Our analysis, based on the secondary data collected from UNCTAD and DPIIT, reveals that the ongoing FDI liberalization measures started in India since 1991 have resulted in a dramatic upsurge in the FDI inflows as well as a stock of FDI in the country. The share of India in the global FDI inflows has increased in the post-liberalization period. Still, there was no perceptible increase in India’s share in the global FDI stock during this period. Detailed examination of the patterns of the FDI inflows in India revealed that the equity capital had been the largest component of the FDI in India.Moreover, its share in the total FDI inflows has been increasing during 2000 and 2019. Mauritius and Singapore have been the two important sources of FDI inflows into India, contributing more than half of the FDI flows during the last two decades; this was mainly because these countries were considered as tax heavens for investors from other counties for routing their investments to India. Sector-wise distribution of FDI in India during the last two decades of the post-liberalization period (i.e., during 2000 - 2019) has shown that the service sector has emerged the largest recipient of FDI replacing the manufacturing sector. Our analysis has clearly shown the impact of liberalization on enhancing the FDI flows as well as stock in India and also in changing patterns of FDI distribution in the country.

Foreign direct investment and inequality: Evidence from China's policy change

AbstractIn this paper, we examine the impact of foreign direct investment (FDI) on local urban inequality in China. Specifically, we consider the FDI policy change as an exogenous shock on the local labour markets. We find that cities that have experienced a bigger policy change in promoting FDI between 1997 and 2002 are significantly more unequal in 2005. This pattern is mainly driven by the positive association between FDI liberalisation and skill premia. The result holds after we control for other policy changes, such as privatisation of state‐owned enterprises, infrastructure and trade liberalisation. We then turn to investigate the mechanisms using firm and individual‐level information. Our firm‐level evidence shows that FDI firms not only hire relatively more high‐skilled workers but also provide relatively higher wages to high‐skilled workers compared to domestic firms. Moreover, the individual‐level analysis shows that FDI has a significantly positive spillover effect on wages received by skilled workers employed by state‐owned enterprises, but not wages of unskilled workers.

Does foreign investment liberalisation enhance women's economic status? Micro‐evidence from urban China

AbstractThis paper analyses the effects of inward foreign direct investment (FDI) on female earnings and women's economic status in households using Chinese Urban Household Survey data from 1997 to 2008. The identification exploits the substantial relaxation of foreign investment regulations immediately after China's accession to the WTO in 2002. The difference‐in‐differences estimation results show that FDI liberalisation has improved women's economic status significantly by increasing female earnings in sectors more exposed to FDI. Further analyses indicate that foreign investment liberalisation facilitates the promotion of female employees in their career ladders and increases their skill premium, which are two important channels through which women enhance their economic independence.

Industry relatedness, FDI liberalization and the indigenous innovation process in China

ABSTRACTThis paper employs a structural innovation model to study the process of indigenous innovation in China and the role of industry relatedness. To better take into account China's transitioning economy context, it further tests to what extent the relationship between relatedness and firms’ innovation process is influenced by the relaxation of foreign ownership controls, an arguably exogenous shock. Controlling for selection, simultaneity and unobserved heterogeneity, the results show that firm research and development (R&D) boosts innovation output, which in turn enhances firm productivity. Relatedness economies are positively related to each phase of innovation, although the size of the effects depends on the type of firm and the stage of innovation. Foreign direct investment (FDI) liberalization encourages firms to rely more on relatedness economies: (1) to complement R&D spending that is required to adapt foreign technologies to local applications; (2) to recombine knowledge from related industries in order to bring forth new proprietary ideas, processes or concepts; and (3) to help solve process or organizational problems faced in related industries.

Policy of foreign direct investment liberalisation in India: implications for retail sector

This study has analysed the impact of liberalisation of Indian economy and FDI policy on the retail sector since its implementation in the 1990s. It also further analyses sub-categories by investigating its impact on the unorganised retail sector and the flow of FDI in single-brand retail and multi-brand retail sectors. A comprehensive and critical review of the existing evidence on the subject was carried out, and descriptive statistical analysis of data from 1991 to 2013 was performed which leads to conclude that the policy of FDI liberalisation has proved to provide diversification and sustainable development to the Indian economy and specifically retail sector which is considered to be one of the significant pillars of economy. Furthermore, for continuous growth of the economy, it seems vital to encourage more investment in other sectors by liberalising the restrictive policies.

The Determinants of Inward FDI in Selected ServiceS Industries in MalaysiA

In its drive to achieve a high-income country status, Malaysia aspires to attract more private investment into the services sector. However, empirical studies on the determinants of foreign direct investment (FDI), especially in the services sector, are sparse, even more so at the industry level. The location theory asserts that FDI inflows into a host country are determined by variables related to resources, infrastructure, market conditions, cost and business environment. This paper investigates the validity of the location theory on Malaysia using a set of panel data for eight services industries from 2003 to 2010. We find that at the industry level, market size, ICT infrastructure and human capital have significantly influenced FDI inflows into the services sector. However, the impact of FDI liberalisation is not significant compared to the dynamic changes of the other variables as progress in FDI liberalization is slow and limited.

FDI Deregulation Versus Labor Market Reform: a Political Economy Approach

This paper studies the political economy of foreign direct investment (FDI) in interaction with labor market policies. It analyzes the setting of reform focused on deregulating labor markets as a political compromise pressured by the lobbying of an industry lobby and a trade union. Using a common agency model of lobbying, we show that the interest group’s influence is socially distortive towards less deregulation. Also, our political economy framework shows that, for large countries, exogenous FDI liberalization policies lead to deregulation in the labor market. For small countries, such policies enhance more labor market rigidities.

Analyzing the effects of the Regional Comprehensive Economic Partnership on FDI in a CGE framework with firm heterogeneity

The Regional Comprehensive Economic Partnership (RCEP) is a free trade agreement (FTA) that is currently under negotiation among China and 15 other Asian countries. It is one of several potential mega-regional FTAs in the Asia-Pacific region. In this paper we investigate the potential effect of RCEP on foreign direct investment (FDI) with a focus on China using an innovative computable general equilibrium (CGE) model. The model is built on the theory of firm heterogeneity extended to FDI. The framework is able to capture FDI increases along both the intensive and extensive margins. Liberalization under RCEP is simulated as impacting on FDI both directly through FDI liberalization and indirectly through trade liberalization. Our simulation results suggest that RCEP would encourage significant increases in FDI to China through both these pathways. While competition from imports drives out the least productive foreign owned firms, export expansion of firms using FDI will lead to an overall increase in foreign investment. In addition, the facilitation of trade in intermediate goods tends to promote vertical FDI. The direct FDI effect from investment liberalization will evidently promote FDI from partners. Projected economic gains to China from RCEP are in the range of US$103–214 billion, or 1.1–2.2% of GDP.

Evaluating the Impact of FTAs on FDI: A Text-Based Approach

The literature on the impact of bilateral investment treaties (BITs) on foreign direct investment (FDI) has had difficulty establishing a robust effect of BITs on FDI flows. This conclusion extends to FDI chapters in free trade agreements (FTAs), which feature the same substantive content as BITs. The lack of an empirically identifiable effect may reflect econometric difficulties, a minimal role of BITs/FTAs in corporate FDI decisions, or the lack of liberalizing content in the treaties. We consider the latter issue by mapping the legal commitments in FTAs onto the OECD’s Foreign Direct Investment Restrictiveness (FDIR) Index, while drawing on the Mode 3 component of the OECD’s Services Trade Restrictiveness Index (STRI) to enable greater granularity of treatment of the measures in FTAs. The modified index, which we label the FDI-RI to distinguish it from the FDIR, has the same broad policy areas and the same weighting scheme as the FDIR but the measures under each horizontal policy area (i.e., policies that apply to FDI in general without distinguishing sectors) that are covered in more detail by the STRI have been disaggregated into measures that correspond to those in the STRI. The FDI-RI thus covers both goods and services on a consistent basis, but with greater detail for goods sectors than available under the FDIR. Importantly, we take into account the impact of FTA measures in improving upon each party’s bindings under the General Agreement on Trade in Services (GATS). In principle, empirically quantified NTBs reflect both applied restrictions and uncertainty. We identify uncertainty with “water” in the bound commitments and construct a composite NTB that reflects applied measures and water. This approach allows a determination of whether and how much FTAs liberalize investment by either reducing applied barriers, decreasing uncertainty, or both. Given measures of tax equivalents for non-tariff measures affecting investment, this approach also allows the calculation of a tax equivalent shock for use in quantitative models. We comment on the impact of FDI liberalization in the Trans-Pacific Partnership (TPP) Agreement using this approach.

Quantifying the TPP Without the United States

We assess the outcomes for the negotiating parties in the Trans-Pacific Partnership (TPP) if the TPP11 go ahead with the agreement as negotiated without the United States, as compared to the outcomes under the TPP12 agreement as signed in October 2016. Both the TPP11 and TPP12 are assessed on the basis of commitments in the actual text and liberalization schedules, supplemented by the technical summaries provided by various governments interpreting the outcome of the negotiations. The difference is the US withdrawal. This assessment is based on a dynamic specification of the Global Trade Analysis Project model, modified to directly represent goods and services trade conducted through foreign affiliates, as well as on a cross-border basis, and to reflect the impact of foreign direct investment liberalization. We find that the TPP11 is a much smaller deal in aggregate than the TPP12, but that some parties do better without the United States in the deal, in particular the TPP11 parties in the Western Hemisphere – Canada, Mexico, Chile, and Peru. This sets up a complex negotiating situation for all parties going forward, as the United States seeks to re-negotiate one-on-one outside the TPP framework what it had already negotiated one-on-one inside the TPP framework. For the politically relevant medium term, the United States stands to be less well-off without the TPP12 than with the TPP11 in force and the Eleven stand to be better off. Since provisional deals can be in place for a long time, the results of this study suggest that the Eleven are better off to continue with the deal without the United States on a provisional basis, leaving aside the controversial governance elements, the implications of which for national interests are unclear and, in any event, may be substantially affected by parallel bilateral negotiations between individual TPP parties and the United States.

Market access and technology adoption in the presence of FDI

This paper theoretically investigates whether improved access to the domestic market speeds up new technology adoption by foreign firms. Foreign firms choose between exporting and foreign direct investment (FDI) to serve the domestic market. If two firms compete in the domestic market, multilateral liberalization of FDI or the realization of multilateral free trade may deter or delay technology adoption, while they always promote and accelerate technology adoption if only a single firm serves the domestic market. Technology adoption can be quickest and consumer welfare greatest when the fixed cost of FDI and the trade costs are neither very high nor very low. Preferential liberalization of FDI promotes the technology adoption of the targeted firm but may not benefit consumers because it discourages technology adoption of the non-targeted firm.

Foreign Direct Investment, Trade, and Economic Growth in MENA Countries: Empirical Analysis Using ARDL Bounds Testing Approach

This article proposed to analyze the interrelationship between foreign direct investment (FDI), international trade, and economic growth for 15 selected Middle Eastern and North African countries over the period 1999–2012 using autoregressive distributed lag test as an approach to examine the cointegration and the vector error correction model. Our findings show that there exists a long-run unidirectional relationship running from FDI to economic growth in MENA countries. We also found that FDI can generate positive spillover externalities for the previously mentioned countries. This belief was also confirmed for the host countries. The results obtained about these countries could be compared to those of other developing countries, considered to be experienced in attracting FDI and trade liberalization. These empirical insights are of a particular interest to policymakers as they help build sound economic policies to ensure a sustainable development.

ECONOMIC LIBERALIZATION AND THE ENVIRONMENTAL KUZNETS CURVE: SOME EMPIRICAL EVIDENCE

(ProQuest: ... denotes formulae omitted.)1. INTRODUCTIONEconomic liberalization and environment are two major issues defining today's political agenda (Baek et al., 2009; Copeland, 2005; Copeland and Taylor, 2004). Although the theoretical backgrounds of economic liberalization on emission levels are not clear, studies in this area garner much interest (Jayanthakumaran and Liu, 2012) and much controversy exists on its impact on the environment.While it is widely agreed that economic liberalization is a major stimulus to environmental effects (Baek et al., 2009) its negative impacts have been highlighted by many studies (Cole, 2004; Daly, 1993; Greenpeace, 1997; Lang and Hines, 1993; Tisdell, 1999; World Wide Fund for Nature International, 1999).Previous studies have much expanded understanding on the environmental consequences of economic liberalization. However, earlier investigations mostly used the much-criticized Environmental Kuznets Curve (EKC) in its simplest form (Arrow et al., 1995; Ekins, 1997; Stern et al., 1996; Stern and Common, 2001). A specific criticism leveled at the EKC is that it does not account for the patterns of the different dimensions of economic liberalization simultaneously and in a coherent framework. Such dimensions that include trade, foreign direct investment liberalization, and the decreasing role of the state could potentially have significant impacts on the environment. Further, the earlier studies paid little attention to the issue of endogeneity in evaluating the relationship among trade liberalization, FDI, income growth, and environment quality (Chintrakarn and Millimet, 2006; Coondoo and Dinda, 2002).Although a number of papers have examined the separate impact of different dimensions of economic liberalization (Birdsall and Wheeler, 1993; Frankel and Rose, 2005; He, 2010; Jaffe et al., 1995; Janicke et al., 1997; Mani and Wheeler, 1997; Tisdell, 2001), a clear simultaneous indication of the extent to which economic liberalization may be responsible for the emission level while controlling for other variables such as energy consumption and urbanization yet to be provided. That is the contribution of this paper which appraises the impact of different features of economic liberalization in a simultaneous and coherent framework, using the GMM to take into account issues of endogeneity.This study uses different GMM estimators and detailed data on 166 countries comprising 36 developed economies, 83 developing economies and economies in transition, 47 least developed economies, and a combination of all the countries irrespective of their development stages. Apart from examining the validity of the EKC for each group of countries, this paper estimates the average turning point incomes for individual groups, and assesses the impact of trade liberalization, foreign direct investment liberalization, the decreasing role of the state on emissions. Further, the study ascertains whether patterns of urbanization and energy consumption could significantly impact pollution levels.The remainder of the paper is structured in the following manner: Section 2 addresses the way that economic liberalization is measured and the linkages between different aspects of economic liberalization and the environment; Section 3 contains the econometric analysis, and finally, Section 4 concludes the paper.2. ECONOMIC LIBERALIZATION AND THE ENVIRONMENT2.1.Measuring Economic LiberalizationAlthough economic liberalization is a complex process encompassing many facets and effects (Frankel, 2009), this paper, like in Santareli and Figini (2002), characterizes it based on three different aspects: trade liberalization, FDI liberalization, and the decreasing role of the state. A commonly used measure of the structural dimension of economic liberalization is the degree of openness usually measured as the ratio of trade over GDP ((Exp o r ts + I mp o r ts)/ G D P ). …

Impact of Foreign Direct Investment (FDI) on Economic Growth in WAEMU from 1990 to 2012

In recent years, the effect of Foreign Direct Investment (FDI) on economic growth has been increasing, in developing countries, particularly in Africa. In their attempt to attract FDI, most African countries such as WAEMU (West African Economy Monetary Union) countries have liberalized trade and attempted to create an enabling environment. The purpose of our study is to investigate the impact of FDI on economic growth for WAEMU countries. We developed a theoretical model of investment that included an FDI variable and tested it with panel data from 1990 to 2012. The model is run for seven (7) developing countries in Africa. The estimation results show that FDI has a positive impact on economic growth. We found that FDI in WAEMU is going to facilitate the trade, FDI liberalization, economic cooperation, improve the business environment and increase the labour cost. FDI will allow WAEMU countries to attract more foreign capital for the creation of jobs and wealth. Based upon these results, the ultimate objective of our paper concludes that the Impact of FDI on economic growth is beneficial for host country’s trade and investment. The increasing of investment in WAEMU countries could generate important gains for most of African economies.

Modeling of FDI in business services: Additional effects in case of Ukraine's European integration

ABSTRACTTo analyze Ukraine's deep and comprehensive integration with the EU, we develop a multi-regional general-equilibrium simulation model incorporating heterogeneous firms and Foreign Direct Investment (FDI) in business services. This allows for consideration of (a) trade growth in new varieties; (b) aggregate productivity changes attributed to reallocation of resources across and within an industry; and (c) productivity growth in manufacturing due to increased access to business services. The results indicate relatively small gains for the EU, whereas Ukraine benefits with a welfare increase of over 8%. The deindustrialization impact, previously found by Olekseyuk and Balistreri (2014) in a comparison of different modeling structures, is supported by our findings. Ukraine's welfare gains are higher under an Armington structure compared to monopolistic competition. This is due to a movement of resources into Ukraine's traditional export sectors producing under constant returns. Implementation of the FDI modeling approach and liberalization of barriers to FDI, however, mitigates the deindustrialization impact as multinational firms enter the Ukrainian market. This increases the number of available varieties and, consequently, induces productivity growth of manufacturing sectors due to improved access to business services as critical inputs.