Roll out the red carpet and they will come : investment promotion and FDI inflows

As red tape in host countries and information asymmetries constitute a significant obstacle to investment flows across international borders, an important policy question is: what can aspiring FDI destinations do to reduce such barriers? This study uses newly collected data on 124 countries to examine the effects of investment promotion on inflows of US FDI. We test whether sectors explicitly targeted by investment promotion agencies in their efforts to attract FDI receive more investment in the post-targeting period, relative to the pre-targeting period and non-targeted sectors. The results of our analysis are consistent with investment promotion leading to higher FDI flows to countries in which red tape and information asymmetries are likely to be severe. The data suggest that investment promotion works in developing countries but not in industrialized economies

Differentiated products and evasion of import tariffs

Emerging literature has demonstrated some unique characteristics of trade in differentiated products. This paper contributes to the literature by postulating that differentiated products may be subject to greater tariff evasion due to the difficulties associated with assessing their quality and price. Using product-level data on trade between Germany and 10 Eastern European countries during 1992-2003, the authors find empirical support for this hypothesis. They show that the trade gap, defined as the discrepancy between the value of exports reported by Germany and the value of imports from Germany reported by the importing country, is positively related to the level of tariff in 8 out of 10 countries. Further, the authors show that the responsiveness of the trade gap to the tariff level is greater for differentiated products than for homogeneous goods. A one-percentage-point increase in the tariff rate is associated with a 0.6 percent increase in the trade gap in the case of homogeneous products and a 2.1 percent increase in the case of differentiated products. Finally, the data indicate that greater tariff evasion observed for differentiated products tends to take place through misrepresentation of the import prices.Free Trade,International Trade and Trade Rules,Water and Industry,Markets and Market Access,Commodities

To share or not to share : does local participation matter for spillovers from foreign direct investment?

This paper examines whether the degree of spillovers from foreign direct investment is affected by the foreign ownership share in investment projects. The analysis, based on an unbalanced panel of Romanian firms from 1998-2000, provides evidence consistent with positive intra-sectoral spillovers resulting from fully-owned foreign affiliates but not from projects with joint domestic and foreign ownership. This finding is consistent with literature suggesting that foreign investors tend to put more resources into technology transfer to their wholly-owned projects than to those owned partially. The data also indicate that the presence of partially foreign-owned projects is correlated with higher productivity of domestic firms in upstream industries, suggesting that domestic suppliers benefit from contacts with multinational customers. But the opposite is true for fully-owned foreign affiliates, which appear to have a negative effect on domestic firms in upstream industries. These results are consistent with the observation that foreign investors entering a host country through greenfield projects are less likely to source locally than those engaged in joint ventures or partial acquisitions. They are also in line with the evidence suggesting that fully-owned foreign subsidiaries use newer or more sophisticated technologies than jointly-owned investment projects, and thus may have higher requirements which only a few, if any, domestic suppliers are able to meet.International Terrorism&Counterterrorism,Environmental Economics&Policies,Economic Theory&Research,Decentralization,Banks&Banking Reform,Environmental Economics&Policies,Economic Theory&Research,Banks&Banking Reform,Health Economics&Finance,International Terrorism&Counterterrorism

Tough Love: Do Czech Suppliers Learn from Their Relationships with Multinationals?

Many countries strive to attract foreign direct investment (FDI) hoping that knowledge brought by multinationals will spill over to domestic industries and increase their productivity. While the empirical studies have cast doubt on the existence of horizontal spillovers from FDI in developing countries, several recent papers have confirmed the presence of vertical spillovers, which take place through contacts between foreign affiliates and their local suppliers. However, the existing studies rely on industry-level proxies for vertical spillovers rather than information on actual relationships between local companies and multinationals. This study goes one step further by employing a unique dataset from the Czech Republic, which allows us to identify local firms supplying multinationals operating in the country. The data suggest that suppliers are different from other firms. They are larger, have a higher capital-labor ratio, pay higher wages and exhibit a higher productivity level. The evidence is suggestive of both high productivity firms having a higher probability of supplying multinationals as well as suppliers learning from their relationships with multinationals.foreign direct investment, technological spillovers, suppliers

Do the biggest aisles serve a brighter future ? global retail chains and their implications for Romania

During the past two decades many economies have opened their retail sector to foreign direct investment, yet little is known about possible implications of such liberalization on the economies of developing host countries. Using firm-level data from Romania, this study examines how the presence of global retail chains affects firms in the supplying industries. Applying a difference-in-differences method, the econometric analyses yield the following conclusions. The expansion of global retail chains leads to a significant increase in the total factor productivity in the supplying industries. Their presence in a region increases the total factor productivity of firms in the supplying industries by 15.2 percent and doubling the number of chains leads to a 10.8 percent increase in total factor productivity. However, the expansion benefits larger firms the most and has a much smaller impact on small enterprises. This conclusion is robust to several extensions and specifications, including the instrumental variable approach. These results suggest that the opening of the retail sector to foreign direct investment may stimulate productivity growth in upstream manufacturing and extend our understanding of foreign direct investment in service sectors.Food&Beverage Industry,Markets and Market Access,E-Business,Economic Theory&Research,Access to Markets

Liquidity constraints and linkages with multinationals

Using a unique data set from the Czech Republic for 1994-2003, this study examines the relationship between a firm's liquidity constraints and its supply linkages with multinational corporations (MNCs). The empirical analysis indicates that Czech firms supplying MNCs are less credit constrained than non-suppliers. A closer inspection of the timing of the effect, however, suggests that this result is due to less constrained firms self-selecting into becoming MNC suppliers rather than the benefits derived from the supplying relationship. As recent literature finds that productivity spillovers from foreign direct investment (FDI) are most likely to take place through contacts between MNCs and their local suppliers, our finding suggests that well-developed financial markets may be needed in order to take full advantage of the benefits associated with FDI inflows. --foreign direct investment,cash flow,liquidity constraints

Liquidity Constraints and Linkages with Multinationals

Using a unique data set from the Czech Republic for 1994-2003, this study examines the relationship between a firm’s liquidity constraints and its supply linkages with multinational corporations (MNCs). The empirical analysis indicates that Czech firms supplying MNCs are less credit constrained than non-suppliers. A closer inspection of the timing of the effect, however, suggests that this result is due to less constrained firms self-selecting into becoming MNC suppliers rather than the benefits derived from the supplying relationship. As recent literature finds that productivity spillovers from foreign direct investment (FDI) are most likely to take place through contacts between MNCs and their local suppliers, our finding suggests that well-developed financial markets may be needed in order to take full advantage of the benefits associated with FDI inflows.foreign direct investment, cash flow, liquidity constraints

A Touch of Sophistication: FDI and Unit Values of Exports

The debate on trade and growth increasingly focuses on the composition of exports. Exports of more “sophisticated” products appear to be positively correlated with growth, and upgrading the quality of exports is high on the policy agenda of many countries. This study presents evidence suggesting that attracting inflows of FDI offers potential for upgrading a country’s export basket. The empirical analysis relates unit values of exports measured at the 4-digit SITC level to data on sectors treated by investment promotion agencies as priority in their efforts to attract FDI. The sample covers 116 countries over the period 1984-2000. The findings are consistent with a positive effect of FDI on unit values of exports in developing countries. However, such a relationship is less evident in developed countries. These results suggest that FDI can help bridge gaps in production and marketing techniques between developing and high income economies.export quality, unit values, FDI, investment promotion, industrial policy

Trade costs and location of foreign firms in China

The authors examine the determinants of entry by foreign firms using information on 515 Chinese industries at the provincial level during 1998-2001. The analysis, rooted in the new economic geography, focuses on market and supplier access within and outside the province of entry, as well as production and trade costs. The results indicate that market and supplier access are the most important factors affecting foreign entry. Access to markets and suppliers in the province of entry matters more than access to the rest of China, which is consistent with market fragmentation due to underdeveloped transport infrastructure and informal trade barriers.TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Economic Theory&Research,Environmental Economics&Policies,Trade and Regional Integration,Access to Markets

Technological asymmetry among foreign investors and mode of entry

How does the preferred entry mode of foreign investors depend on their technological capability relative to that of their rivals? The authors develop a simple model of entry mode choice and evaluate its main testable implication using data on foreign investors in Eastern European countries and the successor states of the former Soviet Union. The model considers competition between two asymmetric foreign investors and captures the following tradeoffs: while a joint venture helps a foreign investor secure a better position in the product market compared with its rival, it also requires that profits be shared with the local partner. The model predicts that the efficient foreign investor is less likely to choose a joint venture and more likely to enter directly relative to the inefficient investor. The authors'empirical analysis supports this prediction: foreign investors with more sophisticated technologies and marketing skills (relative to other firms in their industry) tend to prefer direct entry to joint ventures. This empirical finding is robust to controlling for host country-specific effects and other commonly cited determinants of entry mode.International Terrorism&Counterterrorism,Environmental Economics&Policies,Economic Theory&Research,Microfinance,Small and Medium Size Enterprises,International Terrorism&Counterterrorism,Environmental Economics&Policies,Economic Theory&Research,ICT Policy and Strategies,Microfinance