Strategic Foreign Direct Investment Research Articles

Product Market Cooperation, Foreign Direct Investment and Consumer Welfare

Cooperation among rival firms raises serious skepticism among economists, policymakers, and legal experts, since it generally hurts consumers. We show that this may not be the case in an open economy with strategic foreign direct investment (FDI). Under Cournot competition, increased cooperation among firms reduces the domestic welfare, but it may benefit the consumers by attracting FDI. Under Bertrand competition with differentiated goods, increased cooperation may increase consumer surplus, and it may increase or decrease the domestic welfare by attracting FDI.

Foreign direct investment and economic growth. Analysis of sectoral foreign direct investment in Tanzania

AbstractThis paper assesses the role of foreign direct investment in economic growth by analyzing the contribution of sectoral external finance in Tanzania. Time series data from 1988 to 2017 and 1999 to 2017 for the general and sector‐specific foreign finance respectively is studied using time series econometrics techniques. More specifically, the autoregressive distributive lag bound test for cointegration and error correction model are employed to evaluate the impact of sector foreign direct investment on growth. The diagnostic tests suggest that our models are free from instability, nonnormality, misspecification, heteroscedasticity, and serial correlation. Estimated long‐ and short‐term coefficients show that the effect of the primary sector foreign direct investment is positive and statistically significant at the 10% and 5% significance levels, respectively. In contrast, that of the secondary and tertiary sectors is insignificant. The coefficient of the general foreign direct investment is found to be statistically insignificant. These results confirm that the type rather than the quantity of foreign direct investment may be more relevant in explaining economic growth. Other control variables exhibit their expected signs except that of openness to trade. Based on these findings, the study recommends more and strategic foreign direct investment incentives to the primary sector.

The international financial crisis and transnational corporation strategy

As is well-known to readers of this journal, foreign direct investment (FDI) is undertaken by transnational corporations (TNCs). In many ways FDI is not a financial investment decision, rather it is a micro-level, firm-driven, strategy decision. Thus FDI and TNC strategy need to be carefully distinguished from financial (portfolio) investment decisions which are country-level, macroeconomic, decisions. This distinction between FDI and portfolio investment has eluded many commentators on the international financial crisis. For example, although large banks and financial institutions are types of TNCs, their firm-level strategic FDI decisions need to be distinguished from country-level macroeconomic trade and financial imbalances. In this paper, we attempt to work through the logic of this distinction between FDI and portfolio investment to analyse the international financial crisis.

Foreign Direct Investment: A Journey To Economic Growth In Ghana - Empirical Evidence

Foreign Direct Investment (FDI) has been viewed as a major stimulus to economic growth in developing countries. Its ability to deal with two major obstacles; namely, shortages of financial resources and technology and skills, has made it the center of attention for policymakers in low-income countries in particular. In spite of the significance generated by FDI flows, the flow to developing countries and the world, in general, has witnessed persistent decline over the years. The implication for the drop means that competition to attract FDI has increased as developing countries continue to create the enabling environment to attract foreign investors. Ghana, in particular, has, over the last decade, pursued various forms of economic reforms and liberalization of trade regimes in order to become more competitive in the international financial market. A handful of papers has recently dealt with FDI flows in Ghana. However, most of these studies are concerned with strategic FDI policy to attract FDI flows. The purpose of this study is to empirically determine the factors that influence FDI flows in Ghana, using time series data from 1988 to 2011. Regression analysis was carried out using relevant econometric techniques. The results of the study capture trade openness, exchange rate, natural resources, and infrastructure as the drivers of FDI in Ghana. Macroeconomic variables, such as inflation and per capita gross domestic products, were also registered to impact the determinants of FDI flows in Ghana. The contribution of this paper is that economic liberalization was found to be significant, indicating that policymakers' efforts in liberalizing the economic activities may necessarily translate into significant FDI inflows into the country.

Strategic Foreign Direct Investment in Vertically Related Markets*

By using a simple North‐South trade model with vertically related markets, this article draws our attention to previously unidentified effects of foreign direct investment (FDI), namely that a North downstream firm affects the pricing behavior of an input supplier through technology spillovers and market integration led by FDI. Whether or not the North firm strategically undertakes FDI in the presence of technology spillovers depends on the South firm's capacity to absorb North's technology. When the capacity is not very high, the North firm could actually gain from technology spillovers to the South firm. FDI may benefit all producers and consumers.

Strategic Foreign Direct Investment in Developing Countries under Demand Uncertainty: Commitment vs. Flexibility

The paper analyzes the effect of expected future demand on the investment decisions of multinational enterprises. In particular, I explore the issue of the timing of switching between exporting and FDI in the host developing country and explicitly incorporate the firm's attitude toward risk in the model. The model demonstrates that the optimal time for switching to FDI depends on the expected future demand and the degree of its uncertainty.

Privatization, strategic foreign direct investment and host-country welfare

Recent evidence shows that developing countries and transition economies are increasingly privatizing their public firms and at the same time experiencing rapid growth of inward foreign direct investment (FDI). We show that there is a two-way causality between privatization and greenfield FDI. Privatization increases the incentive for FDI, which, in turn, increases the incentive for privatization compared to the situation of no FDI. The optimal degree of privatization depends on the cost difference of the firms, and on the foreign firm's mode of entry.

Unionisation Structure and Strategic Foreign Direct Investment

It is often argued that if the substitutability between workers is sufficiently high, labour is better off under a centralised labour union than under decentralised unions. We show that this may not be the case in an open economy with foreign direct investment as the incentive for outward FDI is higher under a centralised union than under decentralised unions. If the number of firms undertaking FDI under a centralised union is higher than under decentralised unions, their wage rates charged by the labour union and the union utility may be higher under decentralised unions than under a centralised union, and the comparison may depend on the competitiveness of the industry. We also show that there are situations where both the domestic industry and the labour unions prefer decentralised unions over a centralised union.

Privatisation, Strategic Foreign Direct Investment and the Host Country Welfare

Recent evidence shows that developing countries and transition economies are increasingly privatising their public firms and at the same time experiencing rapid growth of inward foreign direct investment (FDI). In an international mixed oligopoly, we analyse the interaction between privatisation and FDI. We show that privatisation increases the incentive for FDI, which in turn, increases the incentive for privatisation compared to the situation of no FDI. The optimal degree of privatisation depends on the cost difference between the public and the foreign firms, and on the foreign firm's mode of entry. We show that our results are robust with respect to the incentive contracts between the owners and the managers. The incentive for FDI and is higher under the incentive contract than under the no incentive contract, and the optimal degree of privatisation is almost always higher under the incentive contract than under the no incentive contract.

Technology Sourcing and Strategic Foreign Direct Investment

AbstractEmpirical evidence suggests that technological spillovers are limited by distance. The present paper investigates the implications of this observation for the investment decisions of a technologically leading and lagging firm, located in different countries. Technological spillovers may induce “technology sourcing” foreign direct investment by the less advanced firm, as it seeks to upgrade its technology. Our main result, however, is that there may be strong incentives for the leading firm to undertake strategic investment abroad in order to prevent technology sourcing by the lagging firm. We analyze how trade costs, the technology gap between firms, technological spillovers, and the ability of a firm to transfer technology between plants affect the two firms’ entry decisions.

Patent Protection, Strategic FDI and Location Choices: Empirical Evidence from French Subsidiaries’ Location Choices in Emerging Economies

This article studies the location choices of French firms in 17 developing countries. Detailed attention is paid to the role of the patent rights in the host country. On the one hand, the reduction in competition that follows greater patent protection can attract foreign subsidiaries. On the other hand, foreign direct investment (FDI) can have the ‘strategic’ purpose of deterring local competitors. In that case, FDI and patent protection are substitutes and a greater enforcement of patent rights may reduce the strategic incentives to invest in a country, especially if the markets are large enough. Our regressions indicate that on average, patent rights exert only a negligible influence on the location choices of French firms. However, if the market potential of the host countries is sufficiently large or if their expenditures on R&D are sufficiently small, a greater effectiveness of patents decreases the probability of location.

Industrial groupings and strategic FDI

We show that industrial ownership structures, such as keiretsu groupings in Japan, may significantly impact firms’ incentives to engage in foreign direct investment (FDI). While the previous literature has mainly focused on the cost of capital advantages enjoyed by keiretsu firms, this paper examines two relatively unexplored channels by which ownership structure matters for FDI incentives. The first channel involves the direct incentives generated via standard product and factor market interactions whereby keiretsu firms with cross-ownership consider more directly the congestion effects of further FDI into a market. The second channel involves the indirect incentives generated by sharing of information across keiretsu firms which reduces entry costs of subsequent FDI. We find that keiretsu firms are more aggressive than non-keiretsu firms in their FDI strategies, that is, for any given parameter values they undertake FDI with a higher probability than independent firms. Furthermore, keiretsu firms adopt a more aggressive investment strategy against independent rivals than amongst themselves.

Foreign direct investment and technological capabilities in Brazilian industry

The purpose of this paper is to make a contribution to a further understanding of the implications of the growing presence of foreign affiliates for deepening technological capabilities (TCs) in Brazilian industry. It proposes a TC classification that emphasises the distinction between the use and generation of knowledge and presents a methodology for composing TC proxies by means of an innovation survey database. The findings suggest that both foreign and domestics firms have accumulated substantial capabilities for using existing technology, but only shallow capabilities for locally generating technologies. However, foreign affiliates score higher than their local counterparts in more complex capabilities, confirming their centrality in the Brazilian learning system. This gives ground for urging the elaboration of strategic foreign direct investment (FDI) policies that strengthen and deepen local TCs.

Strategic export policy with foreign direct investment and import substitution

The paper examines discretionary and strategic foreign direct investment (FDI) incentives in the export sector relative to a non-interventionist policy. The analysis is based on a two-country model with both countries seeking to attract FDI. Countries differ in cost levels and in their levels of tariff protection on intermediate inputs. A shift in the trade policy regime toward the strategic promotion of exports results in a decrease in FDI allocated to the low-cost country when it has a low level of protection on intermediate inputs, and an increase in FDI when it has a high level of protection on intermediates inputs. Furthermore, even if FDI increases with export policy activism relative to non-intervention, welfare may be lower.

Strategic Foreign Direct Investment and Exchange‐Rate Uncertainty

We investigate how exchange‐rate uncertainty affects the foreign direct investment decision of a risk‐neutral multinational firm (MNF). We assume the firm can open plants, each with decreasing average costs, in two different countries. Under certainty, the MNF would open only one plant. We demonstrate that with sufficient exchange‐rate volatility, the firm can increase expected profits by opening several plants. We also show that if the MNF faces a competitor in the foreign market, the exchange risk, by inducing the MNF to open plants in both markets, may prevent entry by the local competitor.

When the tourists flew in: strategic implications of foreign direct investment in Vietnam’s tourism industry

Emphasizes that tourism forms the largest industry in the world and the Vietnamese Government has targeted it for strategic foreign direct investment (FDI). Notes although researchers and policy makers comprehend particular aspects of tourism, they often misperceive how the variables interact within economic and political systems. Elaborates on experiences in similar and related Asian markets that indicate policies necessary to develop a sustainable, socially and ecologically‐desirable tourism industry through appropriate balancing of key stakeholders’ goals. First defines sustainable development in the context of tourism and indicates its relevance for Vietnam. Next, analyses some economic and social costs and benefits associated with tourism; also interprets recent governmental policies’ influences. Finally, provides policy recommendations for the future of sustainable and economically‐viable national tourism development in Vietnam.

An examination of strategic foreign direct investment decision processes: the case of Taiwanese manufacturing SMEs

Proposes that due to the worsening business environment in Taiwan in the 1980s many manufacturing enterprises, the majority being labour‐intensive small and medium‐sized enterprises (SMEs), were moving out to other developing countries. Explores how owner managers in the Taiwanese Electronic and Electric Appliances industry make a foreign direct investment (FDI) decision. Two semi‐structured questionnaires were designed to gather data about the respondents’ decision‐making processes. Field research was undertaken in Taiwan by personal interview over a period of three months and in total 35 companies participated. Discusses how a company’s internationalization experience and its size in terms of sales significantly influence the likelihood of a positive FDI decision. The likelihood of a positive FDI decision is also affected by owners’ personal characteristics. Additionally the decision makers appear to be influenced by friends and partners. States that the companies that make a positive FDI decision perceive the work ethic in Taiwan as deteriorating. Posits that 78 per cent of the most recent FDIs are in China: the major benefits being sought are low production costs and abundant labour supply. Says the most important reason for selecting China as the host country is the same language and cultural similarities. Explains that most FDIs are to produce products which have a price advantage; hence the FDI creates a vertical integration with the mother company in Taiwan. Seems that Taiwanese manufacturing SMEs will continue investing overseas to seek competitive advantages.

International and Multinational Strategic Behaviour

SUMMARYThis paper shows that the recent work introducing the strategic dimension into the analysis of international trade allows a fruitful enlargement of the traditional approach. The first section highlights certain aspects of international strategic relations, including the role played by the public authorities. The second applies this approach to private and public collusive strategies in international trade. Finally the third section introduces the elements of a theory of strategic foreign direct investment in the European context. The conclusion underlines that the central message of the strategic approach is not a support to more activist trade policies but the need for international credible rules and coordination that prevent unilateral strategies leading to ruinous industrial policy and mutually destructive trade wars.