Policies with Respect to Foreign Investors in the New Member States of the European Union and in the Developing Countries of Asia: A Comparative Aspects

The purpose of this article is to provide a comparative analysis of policies aimed at foreign investors in the new member states of the European Union as well as in the developing countries of Asia. The policies demonstrate certain similarities in spite of the fact that the analyzed world economic regions are subject to different conditions. A common feature is the opening up of economies to foreign investors, coupled with the application of certain incentives intended to increase the attractiveness of the country to foreign investors. Countries strive to modernize their economies with the help of foreign capital. The developing countries of Asia, in contrast to the new member states of the European Union, are not restricted in their policies with respect to foreign investors by the requirements of regional economic integration

Taxation and the Financial Structure of Foreign Direct Investment

The vast increase in foreign assets globally has raised interest in how the home country should tax profits flowing from these investments. Broadly speaking, countries have chosen either to exempt foreign income from taxation or to subject foreign income to taxation with credits/deductions given for foreign taxes paid. Recent research has focused on the effect of these foreign income tax rules on the relationship between aggregate FDI flows and corporate tax rates. In this paper we examine how foreign income tax rules can affect the financial structure of subsidiary-level FDI in Europe. The tax-deductibility of interest payments suggests that higher (host-country) corporate tax rates should be associated with a greater proportion of debt-financed FDI, as foreign income tax credit systems should, in theory, limit the benefits of shielding foreign income from host country taxation. Our results indicate that whilst multinationals from tax exemption countries adjust the financial structure of foreign investments in response to corporate tax rates, the effect of corporate tax rates is insignificant for FDI originating from tax credit countries. These results reveal an additional channel through which foreign income tax credit systems attenuate the forces of tax competition.

Photovoltaic system costs using local labor and materials in developing countries

The use of photovoltaic (PV) technology in countries that do not presently have high technology industrial capacity was investigated. The relative cost of integrating indigenous labor (and manufacturing where available) into the balance of the system industry of seven countries (Egypt, Haiti, the Ivory Coast, Kenya, Mexico, Nepal, and the Phillipines) was determined. The results were then generalized to other countries, at most levels of development. The results of the study imply several conclusions: (1) the cost of installing and maintaining comparable photovoltaic systems in developing countries is less than in the United States; (2) skills and some materials are available in the seven subject countries that may be applied to constructing and maintaining PV systems; (3) there is an interest in foreign countries in photovoltaics; and (4) conversations with foreign nationals suggest that photovoltaics must be introduced in foreign markets as an appropriate technology with high technology components rather than as a high technology system

The 'New Regionalism': Integration as a Commitment Device for Developing Countries

Increasingly, developing countries embrace foreign direct investment (FDI) and simultaneously pursue economic integration with developed countries. Foreign investment is subject to sovereign risk and free trade agreements may serve as a commitment mechanism in order to achieve higher sustainable levels of FDI. This paper shows that such agreements, by inducing sunk investments in expanding export sectors, can indeed increase the level of self-enforcing FDI. While one might expect FDI from any source to increase, the analysis shows that this need not be true for FDI originating in non-partner countries even though export- platform type FDI will rise. The reason is the offsetting effect from trade diversion, which diminishes the ability to retaliate should a host country renege on its ex ante commitment to a foreign investor. The choice of partner is thus crucial for a country's ability to attract FDI through economic integration.Foreign Direct Investment, Economic Integration, Commitment

SHOULD COUNTRIES PROMOTE FOREIGN DIRECT INVESTMENT?

This paper examines whether policies to promote foreign direct investment (FDI) make economic sense. The discussion focuses on whether existing academic research suggests that the benefits of FDI are sufficient to justify the kind of policy interventions seen in practice. For small open economies, efficient taxation of foreign and domestic capital depends on their relative mobility. If foreign and domestic capital are equally mobile internationally, it will be optimal for countries to subject both types of capital to equal tax treatment. If foreign capital is more mobile internationally, it will be optimal to have lower taxes on capital owned by foreign residents than on capital owned by domestic residents. Absent market failure, there is no justification for favouring FDI over foreign portfolio investment. In practice, countries appear to tax income from foreign capital at rates lower than those for domestic capital and to subject different forms of foreign investment to very different tax treatment. FDI appears to be sensitive to host-country characteristics. Higher taxes deter foreign investment, while a more educated work force and larger goods markets attract FDI. There is also some evidence that multinationals tend to agglomerate in a manner consistent with location-specific externalities. There is weak evidence that FDI generates positive spillovers for host economies. While multinationals are attracted to high-productivity countries, and to high-productivity industries within these countries, there is little evidence at the firm or plant level that FDI raises the productivity of domestic enterprises. Indeed, it appears that plants in industries with a larger multinational presence tend to enjoy lower rates of productivity growth over time. Empirical research thus provides little support for the idea that promoting FDI is warranted on welfare grounds. Subsidies to FDI are more likely to be warranted where multinationals are intensive in the use of elastically supplied factors, where the arrival of multinationals to a market does not lower the market share of domestic firms, and where FDI generates strong positive productivity spillovers for domestic agents. Empirical research suggests that the first and third conditions are unlikely to hold. In the three cases we examine, it appears that the second condition holds, but not the first or third conditions. This suggests that Brazil’s subsidies to foreign automobile manufacturers may have lowered national welfare. Costa Rica appears to have been prudent in not offering subsidies in the case of Intel. There clearly is a need for much more research on the host-economy consequences of FDI. The impression from existing academic literature is that countries should be sceptical about claims that promoting FDI will raise national welfare. A sensible approach for policy makes in host countries is to presume that subsidizing FDI is unwarranted, unless clear evidence is presented to support the argument that the social returns to FDI exceed the private returns.

Direct investment: a doubtful alternative to international debt

The paper considers a model in which private foreign investors make direct long-lived capital investments in a small developing country that is subject to stochastic shocks to production. Depending upon the preferences of the host country, we find that expropriation can occur because of either desperation or opportunism. We show that under reasonable assumptions, increased investment makes expropriation less likely to occur and that the level of investment chosen by atomistic foreign investors may be nonoptimal.International finance ; Developing countries

The Potential of Foreign Aid as Insurance

This paper quantifies the potential of foreign aid as an insurance mechanism against macroeconomic shocks. Within a dynamic model of aid flows between two endowment economies, we show that at least three-fourths of the large welfare costs of macroeconomic fluctuations in poor countries could be alleviated by a simple reallocation of aid flows across time. In developing countries subject to persistent macroeconomic shocks, the resulting welfare improvement is of first-order magnitude. Copyright 2006, International Monetary Fund

A typology of foreign auction markets in sub-Saharan Africa

The authors compare and contrast the design and outcomes of different foreign exchange auctions in four countries in sub-Saharan Africa and present a typology of such auctions. They identify two distinct sets of countries in terms of the auctions'features, policy interventions, and outcomes. In Ghana and Uganda, the exchange rate auctions are judged to have been largely on target in exchange rate unification, exchange rate stabilization,and efficient allocation of foreign exchange. The auctions in Nigeria and Zambia, on the other hand, were subject to frequent policy interventions, resulting in unsustainable auctions, inefficient allocation of foreign exchange (through ad hoc disqualifications), limited unification, and a rather volatile exchange rate. The conclusions reached by the authors are broadly corroborated by a statistical analysis of weekly micro-auction data for all four countries.Economic Theory&Research,Markets and Market Access,Access to Markets,International Terrorism&Counterterrorism,Economic Stabilization

Region Foreign Economic Relations as a Factor of Reindustiralization

At present, the strengthening vector of the developing economies, in particular, of the countries of Eurasian Economic Union and BRICS, in the geographic structure of Russian foreign economic activity is observed. The subject matter of the article is to see, how the development of this direction can be economically favorable. For this purpose, the forms and degree of the development of economic partnership including collaboration with the Russian regions are investigated. The agreements on the economic partnership with the regions of partner countries of Russia, their production relations are considered. The analysis of foreign trade shows that in the case of the partner countries within Eurasian integration and the BRICS group — Russian economy gets the high possibility to become the supplier of products of relatively high degree of processing which is the key factor of development of its processing industry, i.e. the factor of reindustrialization and export-oriented import substitution.The article has been prepared within the project of fundamental research of the Ural Branch of the Russian Academy of Sciences (20152017) No. 15-14-7-13 “Scenario approaches to realization of Ural vector of management and development of the Russian Arctic in terms of world instability”

The Role of FDI in Eastern Europe and New Independent States: New Channels for the Spillover Effect

Policymakers around the world introduce special policies aimed at attracting foreign direct investments (FDI). They motivate their decision by the spillover effect, which FDI have on domestic companies. Empirical literature so far has failed to find any robust evidence of this effect. In this paper, we make an attempt to explain this finding. Using data from Poland, Romania, Russia, and Ukraine, we demonstrate that not all FDI have positive spillover effects on domestic firms. Spillovers are positive only in the case of export-oriented FDI and, more generally, are driven by the more productive foreign companies. Moreover, effects of FDI on domestic firms are not limited to knowledge spillovers: exposure to foreign technologies alters the form of their production functions. Specifically, foreign entry is associated with higher capital intensity and lower labor intensity of domestic firms in relatively more developed countries, such as Poland, while the opposite is the case in the less developed countries, such as Russia. These results are subject to threshold effects: benefits are more likely to materialize once a relatively large stock of foreign capital is accumulated. Absorptive capacity of domestic firms plays a crucial role in reaping the benefits of FDI. Both, knowledge spillovers and production function changes, occur predominantly in the more educated and the less corrupt regions.