Outward FDI Stocks Research Articles

Which are the long-run determinants of US outward FDI? Evidence using large long-memory panels

This paper analyzes the long-run determinants of US outward FDI (OFDI) stock, focusing mainly on the Euro Area (EA) for the period 1985–2019. We consider a sample of 54 developed and emerging host countries representing over 70% of the total US OFDI stock. We aim to capture different determinants by country groups zooming in on the European Union (EU). We implement a Dynamic Common Correlated Effects Pooled Mean Group (DCCEPMG) estimator for this aim. Our econometric approach is especially suited for analyzing integrated economic areas as it allows us to deal with cross-section dependence (CSD), non-stationarity, structural breaks, and slope homogeneity usually present in large panel data. Our main results suggest that horizontal (HFDI) and vertical (VFDI) strategies coexist for all country groups. However, as we move towards more homogeneous groups, the results show the greater importance of VFDI. Additionally, we find that some variables have a common long-run effect on US OFDI, especially for smaller and more homogeneous groups.

Bilateral foreign direct investments: differential effects of tariffs in source and destination countries

We study the asymmetric effects of bilateral tariffs in FDI-receiving (destination) and FDI-sending (source) countries on bilateral FDI using Gravity analysis, with bilateral FDI and average tariff data for 47 countries during the period 2001–2012. Theory suggests that while the former would encourage tariff-jumping inward FDI, the latter would discourage offshoring and export-oriented outward FDI. Our empirical study uses two alternative methodologies to estimate a Gravity model, viz., PPML estimation method which uses pairwise, destination-time and origin-time fixed effects, and GMM with time fixed effects, which can deal with possible two-way causality. After correcting for possible two-way causality, our study confirms the theoretical expectations. We also find that the 2008 Financial Crisis has had a significant impact on the magnitude of the effects of bilateral tariffs. We find that one percentage-point increase in tariffs in the destination country increases inward FDI stock to GDP ratio in that country by 0.06% in the non-crisis years and by 0.01% in the crisis years. Similarly, one percentage-point increase in tariffs in the origin country decreases outward FDI stock to GDP ratio from that country by 0.06% in the non-crisis years and by 0.02% in the crisis years.

Who cares about sanctions? Observations from annual reports of European firms

ABSTRACT This paper uses textual analysis to examine how European corporations assess sanctions in their annual reports. Using observations from a panel of almost 11,500 corporate annual reports from 2014 to 2017, we document significant cross-country variation in how firms perceive Russia-related sanctions, even after controlling for many firm-level characteristics, sectoral differences, and time trends. The cross-country differences also remain for sentiments about sanctions and contexts in which sanctions are mentioned. We also examine the role of macroeconomic linkages in explaining these differences. We show that Russia’s inward and outward FDI stocks and high levels of imports and exports with Russia explain about half of the cross-country variation, leaving a nontrivial share of variation unexplained.

Inward and outward FDI and the shadow economy during the Greek Economic Crisis

The purpose of the paper is to discover the bearing of inward and outward FDI and the shadow economy on the Greek Economic Crisis (GREC) in reviving the shattered economy. Students and researchers of the global economic crisis will benefit from this novel approach in exploring the GREC from the inward and outward FDI and the shadow economy perspective. The paper establishes that inward and outward FDI and FDI stock as a percentage of GDP, after a substantial period of ups-and-downs, was on the road to recovery as the economy was coming out from the crisis. The shadow economy in Greece exhibits a paradoxical evolution, as it substantially declined due to the sharp reduction in incomes that reduced the demand for activities in the shadow economy. Economic policymakers need to exploit the recovery of inward and outward FDI and this once in a lifetime opportunity of the substantial reduction of the shadow economy.

Is there a euro effect in the drivers of US FDI? New evidence using Bayesian model averaging techniques

In this paper the authors analyze the potential determinants of US outward FDI stock with a particular focus on the euro effect during the period 1985–2017. To this aim, they consider a large set of candidate variables suggested both by theory and previous empirical analysis. They select the covariates using Bayesian model averaging, a data-driven methodology. Their sample includes a total of 56 host countries, that represent around the 70% of US outward FDI stock. They study the role of the euro on American FDI both in Europe and the rest of the world. In Europe, they consider various country groups: the European Union (EU), the euro area (EA), as well as core and periphery within this last group. They conclude that many variables studied by previous FDI literature cannot be considered robust determinants. Moreover, US OFDI is explained by both horizontal and vertical motives. However, HFDI strategies predominate in EA core countries, whereas VFDI prevails in the periphery. As for the euro effect, the common currency seems to have played an important role encouraging US FDI, being a crucial element in the convergence of EA periphery to its core. In addition, the results indicate that the adoption of the euro has favoured VFDI to the detriment of HFDI.

Japan's FDI drivers in a time of financial uncertainty. New evidence based on Bayesian Model Averaging

In this paper we analyse the determinants of Japanese outward FDI stock for the period 1996–2017. This period is especially relevant as it covers a process of increasing economic globalization and two financial crises. To this aim, we consider a large set of candidate variables based on the theory as well as on previous empirical analysis. Our sample includes a total of 27 host countries. We select the covariates using a data-driven methodology, the Bayesian Model Averaging (BMA) analysis. Moreover, we also analyse whether these determinants change depending on the degree of development (emerging vs developed) or the geographical areas (EU vs East Asia) of the countries considered. We find that Japan's FDI can be explained by a wide variety of variables, that include not only the typical gravitational ones but also institutional and macroeconomic variables, including those that measure financial development. Moreover, Japanese FDI can be explained by both horizontal and vertical FDI motives in the groups of countries analysed. However, in developed, and more precisely, EU countries, horizontal FDI strategies are predominant, whereas for East Asian and emerging countries, there is more evidence in favour of vertical FDI.

Who Cares About Sanctions? Observations from Annual Reports of European Firms

This paper uses textual analysis to examine how European corporations assess sanctions in their annual reports. Using observations from a panel of almost 11,500 corporate annual reports from 2014–2017, we document significant cross-country variation in how firms perceive Russia-related sanctions. Even after controlling for firm-level characteristics, cross-country differences remain for sentiments about sanctions and contexts in which sanctions are mentioned. We also examine the role of macroeconomic linkages in explaining these differences. We show that the Russia’s inward and outward FDI stocks and high levels of imports and exports with Russia only partially explain the cross-country variation, leaving a nontrivial share of variation unexplained.

Home Country Institutions and Outward FDI: An Exploratory Analysis in Emerging Economies

Although the internationalization of economies is driven by specific industry conditions or business-specific differences, the institutions that exist as background conditions directly determine firms’ strategies and interactions in the international environment. This paper contributes to the discussion on the relationship between institutional quality and outward FDI (OFDI). We used 30 indicators in 48 emerging economies in the period 2007–2017; we collected the indicators from alternative secondary sources. After we applied Factor Analysis, six factors were retained. We named the components as follows: “Transparency of government” (F1), “Research, development and innovation, R&D+I” (F2), “Inequality” (F3), “Rules on inward FDI (IFDI)” (F4), “Education and training” (F5), and “Financial market” (F6). The panel data model outcomes suggest that Factor 2, Research, development and innovation, has a significant and positive effect on OFDI. Factor 6, the Financial market, has a significant and negative effect on OFDI. When we include lagged values of OFDI stocks the results also show that the government measures transparency positively and significantly affects OFDI stocks. These findings imply that the institutional environment creates two streams of OFDI: leverage and escapism.

Trump\u2019s Trade Policy, BREXIT, Corona Dynamics, EU Crisis and Declining Multilateralism

Since 1991 there has been a reinforcement of the World Market Economy, not least since China and the, then new Russian Federation have joined the World Trade Organization and because of EU Eastern enlargement and ASEAN integration deepening, while the Transatlantic Trade and Investment Partnership (TTIP) and Trans-Pacific Partnership (TPP) negotiations seemed to indicate stronger regional integration dynamics. With the Trump Administration, the situation has changed dramatically as President Trump is supportive of neither multilateralism in general nor of the EU, which is weakened through BREXIT, in particular. Trump’s focus on the US merchandise trade balance deficit is ill-placed and import tariffs imposed on China seem to be excessive as the optimum tariff rate is miscalculated on the basis of the traditional formula – while a new adequate formula would include the role of sectoral US outward FDI stocks. Asia, the EU and the US could define fighting the Corona World Recession as a global public good, but the United States is weakened in the corona pandemic crisis; the EU is facing serious problems in avoiding a Euro Crisis 2 problem and the €750 billion EU loan package could undermine the Eurozone’s stability while being inadequate to minimize the risk of a Euro Crisis 2. At the same time, the prospects for EU cooperation are declining due to political disappointment concerning the national corona pandemic policy in some member countries. An effective anti-corona pandemic policy would mean to organize a consistent EU-ASEAN cooperation or a G20 cooperation with a later extension to UN Organizations, including the IMF, the World Bank and the WHO. Post-corona, global governance could change strongly because of the long-term political scarring effects of the pandemic shock which could undermine EU and Western stability. Networked international leadership in support of multilateralism is an innovative – but difficult - option for EU-ASEAN-Mercosur.

Japan's outward FDI potential

While Japan's outward FDI stock is historically high, it is not necessarily clear whether there is untapped growth potential, given the economic size of Japan and that of partner countries. This paper examines whether Japan's actual outward FDI stock is high or low relative to the FDI predicted by the gravity model using the outward FDI patterns of all OECD nations, which we call counterfactual FDI. The results indicate that the ratio of Japan's actual to counterfactual FDI is the highest among the OECD countries as of the year 2015. The regional distribution of Japan's actual to counterfactual FDI favors Southeast Asian nations, South Africa and the US. These results imply that Japan has no unrealized potential for outward FDI.

Sectoral dimensions of Poland's investment development path revisited

The purpose of the present paper is to determine the changes of the sector and industry structure of FDI and to confront the observed patterns with the hypotheses or predictions derived from the IDP model. At the heart of the IDP model lies the concept of net outward investment (NOI). The NOI position (NOIP), broken down by the main sectors and component industries of the Polish economy, is analyzed for the period of 1996–2016. We develop a conceptual framework of the sectoral shifts in the composition of NOIP along its different stages. Subsequently, our panel regression analysis indicates that the relative share of a sector in inward and outward FDI stocks is positively related to its level of technological intensity and its level of service intensity.

Supply Uncertainty and Foreign Direct Investment in Agri-Food Industry

We investigate whether and to what extent agricultural uncertainty drives the location of capital in the food processing industry. We show that when a risk-neutral food company has the possibility of exercising market power as both seller and buyer, the impact of agricultural uncertainty on the decision of producing abroad depends on whether the multinational makes the pricing/production decision before or after uncertainty is revealed. An econometric study is then needed to identify the mechanisms at work. The theoretical implications are tested by using a gravity model on European countries’ and the United States’ outward FDI stock, detailed by destination country in the agri-food industry. Overall, our results suggest that a higher agricultural volatility in the home country triggers investments abroad and that a host country exhibiting low agricultural uncertainty attracts relatively more foreign capital. Moreover, international differences in agricultural uncertainty generate incentives for vertical disintegration by food companies, especially when trade costs are sufficiently low.

Russian foreign direct investments as a factor of eurasian integration

The article is based on statistics of monitoring of Russian FDI in the CIS and other Eurasian countries which is being conducted under the author’s leadership in the IMEMO-Institute since 2011 with the financial support of the Eurasian Development Bank. Real distribution of the Russian outward FDI stock in the CIS and other neighboring countries is shown. It includes data on FDI via offshores. Motives of Russian TNCs’ activities are explained. It is stressed that full-fledge corporate integration in the CIS does not exist. Special attention is paid to the competition between Russian firms and TNCs from the EU and China in their investment expansion in Ukraine and Central Asia.

Trade-FDI linkages in a simultaneous equations system of gravity models for german regional data

We analyze the nature of German trade-FDI linkages within the EU27 for a system of gravity equations, modelling imports, exports, inward and outward FDI stocks. Using regional data, we are able to estimate both aggregate as well as regionally disaggregated specifications. Our identification strategy rests upon the idea that we are able to identify long-run trade and FDI correlations in a flexible gravity approach, which allows us to control for common factors driving internationalization. Starting from the macroeconomic perspective, our analysis supports earlier empirical evidence for Germany in finding substitutive links between trade and outward FDI. However, switching to the (macro-)regional perspective, we reveal additional correlations, which can be motivated by recent theoretical approaches. For example, West German to EU27 trade-FDI linkages closely follow New Trade Theory models predicting export replacement effects of FDI. However, at the same time, outward FDI are found to stimulate trade via reverse good imports. For the West German to EU15 sub-aggregate, we reveal complementaries among export and outward FDI activity likely driven by a greater degree of similarity in the respective levels of development. On the contrary, for the East German economy, we mainly get substitutive linkages of EU wide trade and FDI. This regional heterogeneity emphasizes the need to take into account the regional dimension in analyzing cross-variable linkages between trade and FDI.

Trade-FDI Linkages in a System of Gravity Equations for German Regional Data

We analyse the nature of German trade-FDI linkages within the EU27 based on a simultaneous equation gravity approach for imports, exports, in- and outward FDI stocks. We adopt both a Hausman-Taylor (1981) IV approach (3SLS-GMM) and rival non-IV estimation (the system extension to the Fixed Effects Vector Decomposition model recently proposed by Pluemper & Troeger, 2007). Turning to the results, both estimators give empirical support for our chosen gravity setup as an appropriate framework in explaining German trade and FDI activity. Looking carefully at cross-variable linkages we basically find substitutive links between trade flows and outward FDI in line with earlier empirical evidence for Germany. Building upon German state level data we are also able to analyse the sensitivity of the results for regional sub-samples. The latter disaggregation hints at structural differences among the trade and FDI activity of the two West and East German macro regions on the one hand, and also their interaction with the 'core' EU15 member states opposed to the overall EU27 aggregate on the other hand. Taking West German-EU27 trade & FDI as an example, the identified pairwise linkages closely follow the theoretical predictions of New Trade Theory models as in Baldwin & Ottaviano (2001): That is, when trade is merely of intra-industry type with non-zero trade costs, we observe export replacement effects of FDI. However, at the same time outward FDI stimulates trade via reverse good imports. For the West German-EU15 sub-sample we even reveal complementaries among export and outward FDI activity. This strongly advocates to care for the regional dimension in analysing cross-variable linkages of trade and FDI.

Do domestic firms benefit from FDI?: evidence from Korean manufacturing industries

FDI is considered to be a meaningful component for the economic growth of a country. But, it has not been proven clear that the effect of FDI is really beneficial in a host country regardless of the state of the countries. This paper tries to provide an evidence of the effect of FDI in developing country. To do this, we relate industry level value-added to inward and outward FDI stocks in Korea in a production function framework. Especially we divide inward FDI into FDI on the Greenfield projects and FDI for M&A. The results show that the effect of inward FDI as a whole on productivity is not statistically significant, though we can presume that the direction is positive, whereas the effect of outward FDI is strongly negative, and is statistically significant. But the effects of inward FDI by the characteristics of FDI are not differentiated.

Do domestic firms benefit from FDI?: evidence from Korean manufacturing industries

FDI is considered to be a meaningful component for the economic growth of a country. But, it has not been proven clear that the effect of FDI is really beneficial in a host country regardless of the state of the countries. This paper tries to provide an evidence of the effect of FDI in developing country. To do this, we relate industry level value-added to inward and outward FDI stocks in Korea in a production function framework. Especially we divide inward FDI into FDI on the Greenfield projects and FDI for M&A. The results show that the effect of inward FDI as a whole on productivity is not statistically significant, though we can presume that the direction is positive, whereas the effect of outward FDI is strongly negative, and is statistically significant. But the effects of inward FDI by the characteristics of FDI are not differentiated.

Outward foreign direct investment and intermediate goods exports

Résumé Cet article étudie la relation entre les stocks d’investissements directs étrangers (IDE) sortants, et les exportations de biens intermédiaires et finaux dans le cas de l’économie américaine, pour la période 1989-2003. S’appuyant sur des données de commerce désagrégées à un niveau fin, l’estimation en panel montre que stocks d’IDE sortants et exportations de biens intermédiaires sont complémentaires ; ceci confirme l’hypothèse selon laquelle la fragmentation explique largement le commerce intra-firme entre les différentes implantations d’une même société multinationale. Par contre, les résultats ne confirment que faiblement un effet de substitution entre exportations de biens finaux et stocks d’IDE sortants, ce qui valide partiellement les enseignements des modèles d’IDE de type horizontal. Classification JEL : F14 ; F15 ; F23.

The trade and FDI effects of EMU enlargement

This paper considers the nature and the distribution of trade and FDI effects of a potential enlargement of the European Monetary Union (EMU) to the 10 countries that obtained EU membership in 2004. One-way and two-way error component gravity models are estimated using a data set of unbalanced panel data that combine bilateral trade flows among 29 countries and the distribution of outward FDI stocks among these countries. The results reveal a complementarity between trade and investment and a relationship between trade and exchange rate volatility that depend on the sign of bilateral trade balances. Using a simulation-based technique, we find that estimates of FDI effects of EMU range between 18.5% for Poland and 30% for Hungary.

On the role of distance for outward FDI

This paper focuses on the estimation of three distance-related effects on outward FDI. (1) Distance harms vertical multinationals, since they engage in trade. (2) It makes non-trading multinationals better off than exporters. (3) This positive effect on horizontal FDI is expected to rise with bilateral parent and host market size. The use of panel data and related econometric methods is highly recommended to avoid parameter bias from endogenous, unobserved, time-invariant effects. A unified estimation approach to assess all three hypotheses then has to rely on instrumental variable techniques for generalized least-squares methods. In the empirical analysis of 1989-1999 bilateral US outward FDI stocks at the industry level, it is shown that testing and accounting for autocorrelation is extremely important for parameter inference. In sum, the paper lends strong support to the theory of horizontally organized multinationals as outlined in Markusen and Venables (J Int Econ 52(2):209–234).