The Economics of Foreign Direct Investment Incentives

This paper suggests that the use of investment incentives focusing exclusively on foreign firms, although motivated in some cases from a theoretical point of view, is generally not an efficient way to raise national welfare. The main reason is that the strongest theoretical motive for financial subsidies to inward FDI spillovers of foreign technology and skills to local industry is not an automatic consequence of foreign investment. The potential spillover benefits are realized only if local firms have the ability and motivation to invest in absorbing foreign technologies and skills. To motivate subsidization of foreign investment, it is therefore necessary, at the same time, to support learning and investment in local firms as well.

Regional integration and foreign direct investment : a conceptual framework and three cases

The authors discuss how regional investment agreements may affect the inward and outward flows of foreign direct investments in the integrating region. After describing the multidimensional character of the issue, they provide a conceptual framework for analysis as well as three case studies focused on different kinds of regional integration: (1) North-North integration (Canada joining the CUSFTA); (2) North-South integration (Mexico's accession to NAFTA); and (3) South-South integration (MERCOSUR). They conclude that the response to an integration agreement will, in each case, depend on the environmental change brought about by the regional investment agreements, the locational advantage of the country or region, the competitiveness of local firms in the integrating region, and the motives for foreign direct investment in and by the country or region in question. The creation of the Canada-U.S. Free Trade Agreement (CUSFTA), for example, had relatively little influence on direct investment patterns in Canada, since much of the trade between Canada and the United States had been liberalized long before the CUSFTA was established. By contrast, the Mexican accession to NAFTA brought about significant policy changes, which helps to explain foreign multinationals'increasing interest in the country. Similarly, the establishment of the MERCOSUR Common Market is likely to significantly affect the region's policy environment, which suggests that it may have a notable (although varying) impact on foreign direct investment in the four member countries.Economic Theory&Research,Environmental Economics&Policies,International Terrorism&Counterterrorism,Payment Systems&Infrastructure,Labor Policies,Trade and Regional Integration,Environmental Economics&Policies,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Economic Theory&Research,International Terrorism&Counterterrorism

Policies to Encourage Inflows of Technology Through Foreign Multinationals

Do host countries aiming to maximize the inflows of technology through foreign multinationals have any policy alternatives to formal technology transfer requirements and performance requirements? To answer this question, the present paper examines some possible determinants of the technology imports of U.S. majority-owned foreign affiliates in 33 host countries. The results show that the affiliates' technology imports increase with the host countries' domestic investment levels and education levels, but that various performance requirements are negatively related to technology transfer. This suggests that policies promoting local investment, competition, and education may sometimes be alternatives to direct controls and requirements.

Home Country Effects of Foreign Direct Investment: Evidence from Sweden

This paper examines two broad issues related to foreign investment by Swedish multinationals: first the effects of outward foreign direct investment on domestic investment, exports, and employment, and second, the effects on the domestic economy from the increasing division of labor between the parents and foreign affiliates of Swedish MNCs. The paper summarizes and synthesizes the existing empirical evidence on these matters (much of which has hitherto only been available in Swedish) and discusses some possible long run effects that have not received much attention in the literature.

U.S. Firms in Latin American Service Industries

The participation of U.S. service industry firms in Latin American markets for services consists mainly of the activities of U.S.-owned affiliates operating in Latin America and very little of direct exports of ser- vices from the U.S. The important policy issues thus involve barriers to the establishment and operation of affiliates in host countries rather than trade barriers. Since direct investment rather than trade is at issue, the comparative advantages that are important are those of U.S. multinational firms rather than those of the U.S. as a country. The characteristics we observe in U.S. multinationals in these industries, particularly their low R & D intensity, are not those usually associated with the comparative advantages of U.S. multinationals. However, their skill intensity is relatively high. A more detailed breakdown of the sector does show at least some industries, particularly in finance, in which skill levels are very high, and these are the most likely candidates for major gains for U.S. multinationals. Nevertheless, U.S. shares in the Latin American service sector are very small overall and not likely to reach the levels in manufacturing or petroleum in the foreseeable future.

The Export Performance of Swedish and U.S. Multinationals

While the U.S. and Sweden both lost more than 20 per cent of their shares of world and developed countries' exports of manufactures over the 15 years or so after the mid-1960's, the export shares of their multinational firms stayed fairly stable or even increased. The multinationals, while first increasing and then holding fairly constant their shares of exports by their home countries, raised the proportion of their worldwide exports that they supplied from their overseas affiliates. These developments suggest that the declining trade shares of the U.S. and Sweden were not due mainly to deterioration in the innovativeness or inventiveness of American and Swedish firms or declines in their management ability or in their technological capabilities, but rather to economic developments in the firms' home countries. The finding that firms have done better as exporters than their home countries 4s strengthened when we look at different industry groups. In both the U.S. and Sweden, and in all industry groups, with one exception, the multinationals' export shares increased relative to those of their home countries. The margins were often wide, and were mostly larger for Swedish firms than for U.S. firms. In general, though the basic story was quite similar for the U.S. and Sweden, there were some notable differences. One was that the share of exports originating in affiliates was lower for Sweden than for the U.S. To a large extent, this difference in the siting of export production reflected the much greater export orientation of Swedish parents relative to U.S. parents, presumably a consequence of the relatively small size of the Swedish domestic market. Another difference between U.S. and Swedish multinationals was that while the U.S. firms' share in world manufacturing exports remained stable over the studied period, the Swedish firms' share rose by 14 per cent. We are so far not in a position to say whether this was because Swedish firms increased their competitiveness more than U.S. firms or because there was a higher conversion of Swedish firms into multinational status.

FDI in the Restructuring of the Japanese Economy

This paper examines how inward and outward foreign direct investment (FDI) have influenced the restructuring of the Japanese economy and can be expected to continue to do so in the future. We find that outward investment has helped Japanese firms to sustain foreign market shares and contributed to the restructuring of the Japanese economy away from older industries. By shifting from exporting to affiliate production, there has been a geographical reallocation of the activities of Japanese firms, particularly those of multinational manufacturing firms. However, Japanese outward FDI is still not very large relative to the Japanese economy, despite the rapid growth since the mid-1980s, and there is still scope for significant increase when compared with the levels of most other OECD countries. Inward FDI will presumably have an even stronger impact on the restructuring of the Japanese economy. Although the stock of inward foreign direct investment is still very small, there are important changes under way. Deregulation has opened up much of the industrial and service sectors to foreign multinationals.

U.S. and Swedish Direct Investment and Exports

Overseas production in a country by affiliates of Swedish and U.S. firms rarely appears to displace exports from the two home countries and in most cases either has no effect or tends to increase home country exports. The positive effect on Swedish exports is evident not only with respect to levels of exports to different countries at one time but also with respect to changes in exports over time. The positive effect on U.S. exports can be observed for minority-owned as well as majority-owned foreign operations.

Outward FDI and Parent Exports and Employment: Japan, the United States, and Sweden

Within Japanese multinational firms, parent exports from Japan to a foreign region are positively related to production in that region by affiliates of that parent, given the parent's home production in Japan and the region's size and income level. This relationship is similar to that found for Swedish and U.S. multinationals in parallel studies. A Japanese parent's worldwide exports tend to be larger, relative to its output, the larger the firm's overseas production. In this respect also, Japanese firms resembled U.S. multinationals. A Japanese parent's employment, given the level of its production, tends to be higher, the greater the production abroad by the firm's foreign affiliates. Japanese firms' behavior in this respect is similar to that of Swedish firms, but contrasts with that of U.S. firms. U.S. firms appear to reduce employment at home, relative to production, by allocating labor-intensive parts of their production to affiliates in developing countries. Swedish firms seem to allocate the more capital-intensive parts of their production to their foreign affiliates, mostly in high-wage countries. We conclude that in Japanese firms and ancillary employment at home to service foreign operations outweighs any allocation of labor-intensive production to developing countries.