Regional Integration and the Location of FDI

This paper studies the impact of regional integration agreements (RIAs) on the location of foreign direct investment (FDI), using data on bilateral outward FDI stocks from the OECD International Direct Investment Statistics. The dataset covers FDI from 20 source countries, all of them from the OECD, to 60 host countries, from 1982 through 1999. Using panel data analysis with country-pair fixed effects, we find that common membership in an RIA with a source country increases FDI from that source by around 27 percent. Countries that are more open, and whose factor proportions differ more from those in the source country are likely to benefit more, as they tend to receive FDI of the vertical variety, which responds more favorably to integration. We also find that the increase in the size of the market associated with regional integration initiatives contributes to attract more FDI to the RIA as a whole. However, only the countries in the RIA that offer a more attractive overall environment for FDI are likely to be winners in this game. Finally, we also find evidence of a small FDI diversion effect. Our results suggest that regional integration, on average, contributes to attracting FDI, but the benefits are unlikely to be distributed evenly.

The FTAA And The Location Of FDI

The role of regional integration agreements as a determinant of the location of FDI has become an increasingly relevant issue for emerging economies. In Latin America, the largest effects are likely to be associated with the Free Trade Area of the Americas (FTAA). In this regard, there are a number of highly relevant questions: For instance, what effect will the FTAA have on FDI from the US and Canada to Latin American countries? How will it affect FDI from the rest of the world? What are the implications for a country such as Mexico, whose preferential access to the US may be diluted? Should we expect to see winners and losers, and if so, what determines whether a particular country wins or loses? To address these questions, in this paper we look at the impact of regional integration on FDI, and attempt to derive conclusions regarding the likely impact of the FTAA on countries in Latin America

Emerging Market Business Cycles Revisited: Learning about the Trend

We build an equilibrium business cycle model in which agents cannot perfectly distinguish between the permanent and transitory components of TFP shocks and learn about those components using the Kalman filter. Calibrated to Mexico, the model predicts a higher variability of consumption relative to output and a strongly negative correlation between the trade balance and output for a wide range of variability and persistence of permanent shocks vis-a-vis the transitory shocks. Moreover, our estimation for Mexico and Canada suggests more severe informational frictions in emerging markets than in developed economies.emerging markets, business cycles, learning, Kalman filter

Output Collapses and Productivity Destruction

This paper analyzes the long-run relationship between output collapses—defined defined as GDP falling substantially below trend—and total factor productivity (TFP), using a panel of 71 developed and developing countries during the period 1960-2003 to identify episodes of output collapse and estimate counterfactual post-collapse TFP trends. Collapses are concentrated in developing countries, especially African and Latin American, and were particularly widespread in the 1980s in Latin America. Overall, output collapses are systematically associated with long-lasting declines in TFP. The paper explores the conditions under which collapses are least or most damaging, as well as the type of shocks that make collapses more likely or severe, and additionally quantifies the welfare cost associated with output collapses.Growth, recessions, productivity, recovery

The FTAA and the Location of FDI

The role of regional integration agreements as a determinant of the location of FDI has become an increasingly relevant issue for emerging economies. In Latin America, the largest effects are likely to be associated with the Free Trade Area of the Americas (FTAA). In this regard, there are a number of highly relevant questions: For instance, what effect will the FTAA have on FDI from the US and Canada to Latin American countries? How will it affect FDI from the rest of the world? What are the implications for a country such as Mexico, whose referential access to the US may be diluted? Should we expect to see winners and losers, and if so, what determines whether a particular country wins or loses? To address these questions, in this paper we look at the impact of regional integration on FDI, and attempt to derive conclusions regarding the likely impact of the FTAA on countries in Latin America

El ALCA y el destino de la inversión extranjera directa

(Disponible en idioma inglés únicamente) El papel de los acuerdos de integración regional como factor determinante de la ubicación de la inversión extranjera directa (IED) se ha ido convirtiendo en un problema cada vez más importante para las economías en desarrollo. En América Latina, es probable que los mayores efectos guarden relación con el Acuerdo de Libre Comercio de las Américas (ALCA). Esto suscita una serie de preguntas altamente pertinentes: Por ejemplo, ¿qué efecto tendrá el ALCA en la IED proveniente de EE. UU. y Canadá destinada a países latinoamericanos? ¿Cómo afectará eso a la IED proveniente del resto del mundo? ¿Cuáles son las implicaciones para un país como México, cuyo acceso preferencial a EE. UU. puede verse menoscabado? ¿Hay que anticipar que habrá ganadores y perdedores, y, de ser así, qué es lo que determina si un país dado gana o pierde? Para responder a estas preguntas, en este trabajo analizamos las repercusiones de la integración regional de la IED e intentamos sacar conclusiones sobre los efectos probables del ALCA en los países de América Latina.

La integración regional y la ubicación de la inversión extranjera directa

(Disponible en idioma inglés únicamente) En este trabajo se analizan los efectos de los acuerdos de integración regional en el destino de la inversión extranjera directa, empleándose para ello datos del volumen de inversión extranjera bilateral directa tomados de las Estadísticas sobre inversión internacional directa de la OCDE. El conjunto de datos cubre la inversión extranjera directa de 20 países de origen, todos ellos integrantes de la OCDE, a 60 países receptores, desde 1982 hasta 1999. Se empleó el análisis de datos de panel con efectos fijos por par de países y se halló que la afiliación corriente a un acuerdo de integración regional con un país de origen hace aumentar la inversión extranjera directa proveniente de esa fuente en 27%, aproximadamente. Es más probable que los países de mayor apertura y cuyas proporciones de factores difieren más de las del país de origen se beneficien más, ya que tienen a recibir inversión extranjera directa de tipo vertical, el cual responde más favorablemente a la integración. También hallamos que el aumento del tamaño del mercado vinculado con las iniciativas de integración regional contribuye a atraer más inversión extranjera directa al acuerdo de integración regional como un todo. Sin embargo, es probable que sólo los países del acuerdo de integración que ofrezcan un entorno en general más atrayente para la IED obtengan beneficios de esta dinámica. Por último, también hallamos pruebas que sugieren un pequeño efecto de desviación de la inversión extranjera directa. Nuestros resultados sugieren que la integración regional contribuye, en promedio, a la captación de inversión extranjera directa, pero que es poco probable que los beneficios se distribuyan parejamente.

Essays in International Finance

Access to private capital markets is the most salient difference between emerging market economies and other developing countries. However, in contrast to developed economies, emerging markets have had a troubled relationship with capital fows. In particular, balance of payments and debt crises have been a recurrent problem. The three chapters of this dissertation contribute to the literature on emerging markets and their relationship with capital markets. Chapter 1 analyzes the effects of volatility on sovereign default risk. Empirically, the paper establishes a concave relationship between spreads and volatility. While for low levels of volatility an increase in volatility is associated with an increase in the sovereign risk premium, the risk premium increases at a decreasing rate. This empirical relationship is robust to different estimation methods, sam- ples and control variables. Furthermore, the relationship between volatility and risk premia is non-monotonic: while at low levels of volatility an increase in volatility implies an increase also in spreads, for sufficiently high levels of volatility this relationship turns negative. The chapter also presents a quantitative model of sovereign debt with default risk consistent with this feature and other characteristics of EME debt. The intuition for this result is the existence of a trade-off between prudential behavior in order to avoid large consumption fluctuations under autarky and the increased likelihood of a default, given default provides some short-run relief under a very bad realization of shocks. Chapter 2 addresses the determinants of the composition of cross-border investment positions. Using a novel database of bilateral capital stocks for all types of investment - FDI, portfolio equity securities, debt securities as well as loans - for a broad set of 77 countries, we show the importance of two key determinants of the composition of cross-border asset positions: information frictions and the quality of host country institutions. Overall, we find that in particular FDI, and to some extent also loans, are substantially more sensitive to information frictions than investment in portfolio equity and debt securities. We also show that the share as well as the size of FDI that a country receives are largely insensitive to corruption in host countries, while portfolio investment is by far the most sensitive to the quality of institutions. Chapter 3 focuses on a related topic to chapter 2. Using bilateral FDI stocks around the world, we explore the importance of a wide range of institutional variables as determinants of the location of FDI. While we find that better institutions have overall a positive and economically significant effect on FDI, some institutional aspects matter more than others do. Especially, the unpredictability of laws, regulations and policies, excessive regulatory burden, government instability and lack of commitment play a major role in deterring FDI. For example, the effect of a one standard deviation improvement in the regulatory quality of the host country increases FDI by a factor of around 2. These results are robust to different specifications, estimation methods and institutional variables. We also present evidence on the significance of institutions as a determinant of FDI over time