Privatization, Strategic Foreign Direct Investment and Welfare under Technology Diffusion

How firm heterogeneity affects foreign direct investment location choice: Micro-evidence from new foreign manufacturing firms in the Pearl River Delta

Does direct foreign investment affect domestic credit constraints?

In 2004 the United Nations University World Institute for Development Economics Research (UNU-WIDER) embarked on a large-scale research project on the ‘Impact of Globalization on the World’s Poor’ co-directed by Machiko Nissanke and Erik Thorbecke. The first conference was essentially conceptual in nature, meant to understand better the various mechanisms and channels through which globalization affects the poor either directly or indirectly. The other three conferences focused on each of the major regions of the developing world: Asia, Africa and Latin America. Theobjectivesofthisintroductionarethreefold:first,toreviewbrieflyhow the forces of globalization influence poverty in general; second, to describe and discuss the main transmission channels and mechanisms; and third to analyze the impact of globalization on Africa and present an overview of the six Africa case studies included in this issue. 1. The Impact of Globalization on the World’s Poor Globalization provides a strong potential for a major reduction in poverty in the developing world because it creates an environment conducive to fastereconomicgrowthandtransmissionofknowledge. 1 However,structural factors and policies within the world economy and national economies have impeded the full transmission of the benefits of the various channels of globalization for poverty reduction. In particular sub-Saharan Africa (SSA) hasbeenrelativelylessaffectedbytheforcesofglobalizationthanotherparts of the world. World income distribution continues to be very unequal and many poor countries particularly in Africa are stagnating. Moreover, there is much empirical evidence that openness contributes to more within-country

Cross-country evidence indicates that Japan hosts little inward foreign direct investment (FDI), even after taking into account its size and geographical or cultural distance from potential investors. Hoshi (2018) is a judicious empirical assessment of the impact of Abenomics on Japan's ability to attract inward FDI, and, by extension, increase the nation's rate of economic growth. Hoshi reaches a skeptical conclusion as to whether Abenomics has contributed to increasing inward FDI. The Abenomics target goal for FDI may be attained, but according to Hoshi's analysis, the goal has been set too low and its achievement does not require any positive impact of Abenomics policies. That skepticism may well be justified. However, before accepting this conclusion it may be worth making the simple observation that insufficient time may have elapsed for the effects of Abenomics to manifest. The policy initiative was first announced in 2013, but some of the measures discussed in the present paper were introduced as recently as May 2016. It is possible that Abenomics will eventually work as intended, but it is just too early to tell. Hoshi correctly observes that from a theoretical perspective the impact of inward FDI flows on growth is ambiguous and the empirical literature generally concludes that inward FDI flows are only growth-enhancing conditional on financial sector development and outward orientation. The latter is particularly important, insofar as a plausible theoretical example of immiserizing capital inflows is FDI induced into a protected capital-intensive import-competing sector (Bhagwati & Srinivasan, 1983). The samples used by much of the empirical literature cited by Hoshi include developing countries where capital inflows into a protected sector of comparative disadvantage is a real problem, or are restricted to FDI into the manufacturing sector. Therefore, it is not evident that this cross-country evidence is entirely applicable to Japan. While exchange in differentiated products is pervasive in modern economies, one would not necessarily expect Japan to gain a lot from foreign investment in its dominant sector either directly or via interfirm externalities and spillovers. Yet even in this relatively inauspicious setting, analysis of firm-level Japanese data indicates that there are significant benefits to foreign investment in the manufacturing sector. The positive result for manufacturing suggests that the gains for Japan from investment in its lagging service sector, which has traditionally been sheltered via regulation from entry by either new domestic or foreign service providers, could be even more profound (Fukao, 2013). It is partly due to this lack of local presence by foreign service providers that historically Japan has been a dramatic outlier relative to other major industrial countries in the share of domestic sales accounted for by foreign firms (Bergsten & Noland, 1993). Given the relatively scant presence in Japan of foreign service providers, and Japan's evident competitive challenges in the service sector, increased inward FDI in the service sector could have a significant impact on domestic productivity, and, at least during a transitional period, the economic growth rate, thus fulfilling the promise of Abenomics. So, how could Abenomics increase FDI into Japan? Discouragingly, many of the robust correlates with inward FDI identified in Hoshi's paper such as physical and cultural remoteness, and parent gross domestic product (GDP) and per capita GDP, are exogenous and not susceptible to policy intervention. And even more discouragingly, there appears to be a disconnect between the conditions amenable to policy intervention that might promote FDI and what the government is doing. One approach could be a sharper, if not targeted, approach to inward FDI which would emphasize the removal of barriers to entry in the service sector. A government survey summarized in Hoshi (2018, Table 1) found that the "high cost of doing business" was the single most frequent complaint, with three-quarters of the respondents identifying it as a barrier to FDI. Apart from regulation, capital and labor market imperfections could be important. Addressing labor market policies that discourage interfirm labor mobility appear to be particularly salient. It is striking that among the factors inhibiting FDI into Japan listed in Hoshi's Table 1, "difficulty in securing personnel" is the only one that increased significantly between the 2012 and 2016 surveys, rising more than 10% points to 46%, indicating that the problem is both important and worsening. Such an approach of addressing basic factor market and regulatory inhibitions on business, would not only benefit potential foreign entrants, but could also contribute to revitalizing domestic entrepreneurship by making it easier to establish – and expand – vibrant new businesses (Noland, 2007), precisely the sort of structural change that the third arrow of Abenomics is supposed to promote.

Different types of corporate ownership may affect the environment among firms and could influence the decisions of new entities in the region. This study determines the role of state-owned enterprises (SOEs) in hindering new foreign manufacturing firms in the Yangtze River delta (YRD). The negative binomial regression is used for city-sector level data and the following points summarize the results: Firstly, the unique privileges that SOEs enjoy alongside governmental support create difficulties for foreign firms trying to establish themselves near existing SOEs. Secondly, although core cities are more attractive to foreign firms than peripheral cities, the role of core-periphery reveals that, in spite of all the regional advantages core cities could offer, whenever the share of SOEs is higher, the core-periphery system will have an adverse impact on new foreign firms. In other words, government preference for SOEs can suppress the attraction of foreign startups. However, after 2008, the governmental authorities finally succeeded in implementing their promising policy of fair treatment and competition in only the core cities.

PurposeThe study is an attempt to analyze the impact of foreign direct investment (FDI) on research and development (R&D) behavior of incumbent firms’, both domestic and foreign, operating in Indian manufacturing sector. FDI inflows into the host country escalates the level of competition compelling domestic as well as existing foreign firms to adjust their spending on R&D. The purpose of this paper is to propose that response of domestic and existing foreign firms to the FDI entry vary, with domestic firms increasing their spending on R&D whereas foreign firms reducing it.Design/methodology/approachUsing a rich firm level data set from Indian manufacturing for the period 2000-2012, the study utilizes Heckman’s two- step estimation strategy to estimate the impact of FDI entry on R&D behavior of incumbents.FindingsFDI entry significantly increases the tendency of domestic and foreign firms to invest in R&D; however, the impact on R&D intensity for both domestic and foreign firms appears to be minimal.Originality/valueThe study contributes to the existing literature on two fronts. One, unlike other studies, it examines the impact of FDI entry not only on R&D behavior of domestic firms but also on the R&D behavior of existing foreign firms. Second, it addresses the problem of selection bias that has been largely ignored by majority of empirical studies on R&D.

This paper summarises some of the literature on the links between FDI and the transfer and diffusion of technology. We argue that the positive effects of FDI postulated in much of the recent debate are not automatic, that the effects of FDI will vary depending on the host country's characteristics and policies, and that there is a role for economic policy in maximising the potential benefits of FDI. Many developing countries have traditionally relied on a combination of various fiscal incentives and performance and technology transfer requirements to attract foreign multinational firms and to control their operations. However, these measures may not be sufficient to generate significant knowledge spillovers if the majority of local firms employ technologies that are very different from those used by foreigners. The studies reviewed in the paper suggest two additional areas for host country policy. Firstly, policies to support local technological capability and labour skills may facilitate spillovers of technology from foreign MNCs. The reason is not only that the local industry's ability to absorb foreign technology improves, but also that a skilled local labour force reduces the costs of intra-firm technology transfer within the MNC, which is likely to encourage affiliates to import more technology from their parents. Secondly, policies to ensure that the foreign affiliates operate in a competitive environment appear to be essential. Foreign MNCs that are protected by trade or entry barriers can afford to employ obsolete technologies and still generate significant profits, without generating much diffusion of valuable knowledge and skills to local firms. Foreign MNCs facing national or international competition, by contrast, must continuously adjust their operations and technologies to changing market conditions, which creates a greater potential for spillovers to local industry

This paper investigates the long-run and causal relationships of technology spillovers on manufacturing performance in Nigeria using the share of Foreign Direct Investment (FDI) in gross fixed capital formation as a proxy for technology transfer for the period 1981 to 2019 in a Vector Error Correction Model (VECM). The FDI stock appears to be too low at less than 1% of capital formation to generate any significant positive spillovers on manufacturing performance, resulting in an insignificant negative long-run relationship and the absence of causal relationships. The size of the local market has the most significant positive long-run effect on manufacturing performance, and the causality for this effect is one-way from manufacturing. A one-way causality was also observed from manufacturing to income per capital, though the long-run effect was significantly negative. The paper concluded that FDI technology spillover is presently not a major factor in Nigeria’s manufacturing performance. This may be redressed with policies aimed at increasing FDI inflows, increasing the technology-learning capacity of local firms and their vertical integration with foreign firms, and the creation of national infrastructure for technology development and diffusion

I. INTRODUCTION Even though foreign acquisitions of U.S. assets are predominantly in service sector industries, research on foreign takeovers of U.S. domestic firms has focused on manufacturing firms. As foreign takeovers and new establishments in service sector industries have grown in importance (see Figure 1), research on service sector foreign direct investment (FDI) has fallen behind in part because service FDI and trade in service sector industries are not measured as well as those in the goods producing sector (Jensen 2011). Our paper analyzes the comparative advantage characteristics of foreign takeovers and new establishments in the U.S. service sector providing an insight on service sector FDI in the United States. Economic policies on service sector industries sometimes include large restrictions on foreign investors, particularly in the areas of public utilities, transports, financial services, and wholesale/retail trade. These restrictions have been used in cases such as opposition to an acquisition of a U.S. port by investors in Dubai and refusal to ease restrictions requiring that U.S. airlines must be at least 75% owned by U.S. citizens (Golub 2009). These types of policies may be misguided especially if foreign ownership brings increases in efficiency to those firms and their industries. Moreover, foreign investments in service sector industries may boost the productivity of downstream users and upstream suppliers in manufacturing (Markusen, Rutherford, and Tarr 2005; Arnold, Javorcik, and Mattoo 2011; Javorcik and Li 2013). More research is needed to better understand FDI in U.S. service sector industries and help guide policy. [FIGURE 1 OMITTED] Previous research by Feliciano and Lipsey (2015), shows that both foreign acquisitions and new foreign establishments in manufacturing tend to be in industries of investing country's revealed comparative advantage (RCA) in exporting. Moreover, new foreign-owned establishments tend to be in industries of U.S. revealed comparative disadvantage. This suggests that foreign investors in the manufacturing sector bring intangible assets or skills that make them more competitive. The relationship between foreign takeovers and investments in new foreign establishments and RCA may be different in the service sector because the motivation for foreign investment in service sector firms is different from foreign investment in the manufacturing firms. Decisions on FDI in manufacturing are based on trade costs, coordination costs, and market size. Services are not storable, and thus the provision of some services requires geographic proximity. This feature makes direct investment in service sector necessary as opposed to cross-border trade. Bhattacharya, Patnaik, and Shah (2012) develop a model for the choice of trade and FDI in the service sector and find that, contrary to FDI in manufacturing, less productive firms may engage in FDI in the service sector. The relationship between foreign acquisitions and new foreign establishments in the service sector and the comparative advantage of the country of ultimate beneficial owner (UBO) may not be positive. We analyze data on foreign takeovers of existing U.S. firms and newly formed foreign-owned firms (greenfields) in service sector industries outside of finance, insurance, and real estate from 1998 to 2008 from the Bureau of Economic Analysis (BEA) U.S. Department of Commerce. BE A data are more complete and have more detailed information than the Thomson Financial Securities data, widely used in the study of foreign acquisitions. Unlike the Thomson Financial Securities data, BEA data include smaller not publicly traded firms, contain the value of assets acquired in all transactions, and have information on new foreign establishments. (1) To our knowledge, this is the first study to estimate a relationship between foreign takeovers and new foreign firms, and the RCA of the country of UBO in the U. …

Is Foreignness an Asset or a Liability? Explaining the Performance Differential between Foreign and Local Firms

and Key Results What is the expected reaction regarding the stock price of companies which carry out FDIs (Foreign Direct Investments)? Results from previous research focusing on specific entry modes are inconclusive. The aim of this paper is to test whether the stock market reaction to FDIs is dependent not only on the entry mode that the investing firm may have chosen, but also on the interaction between the entry mode and the other FDIs’ attributes. By focusing on the recent international expansion by means of FDIs of listed Spanish firms, we have found that stock market reaction to FDIs depends upon the interaction between the entry mode and the location of the investment, the identity of the investor and the latter’s international experience.

When Does FDI Have Positive Spillovers? Evidence from 17 Emerging Market Economies

The entry mode and location choices are two fundamental decisions made by firms after they decide to proceed with foreign direct investment (FDI). In previous studies, these two strategic concerns have usually been studied separately as independent decisions. Following recent claims, we extend beyond the macro-environment of the host country or geographical space to study the interdependence between these two decisions by comparing the effects of two different colocation strategies on the establishment mode and ownership structure of investors in FDI. We tested our hypotheses based on a sample of 162 Chinese-owned subsidiaries in Germany and found spatial dependence in the entry mode strategies, where the existing theories regarding ownership structure prediction for the sampled firms had limited explanatory power. We also observed that the experience of investors had a negative moderating effect on these interactions. Our results suggest the following: (1) the FDI strategies of foreign investors consider conditions that vary among countries as well as within the host economy and place; (2) the entry mode and location choices can be alternative strategies for overcoming barriers to entry in FDIs where a trade-off between both is required; and (3) more efforts are still needed to interpret the FDI behaviors of investors from emerging economies.

This study revisits the impact of entry timing on the performance of foreign-invested firms. The authors posit that balancing between market share performance and firm survival is critical for foreign firms to capitalize on early-mover advantages. Using a longitudinal data set of 25,513 foreign firms operating in China, the authors find that early entrants enjoy higher market shares but suffer from lower survival rates than late entrants. In addition, foreign firms’ entry mode and investment size affect their market shares and survival. The results also provide supporting evidence of the interaction effects among entry timing, entry mode, and investment size on foreign firms’ market shares and survival.

Institutions are generally perceived as an important determinant of Foreign Direct Investment (FDI). Which institutions matter and why for FDI, remains however one of prominent questions in public policy debate amid complexities related to different institutional dimensions, and incomplete or even vague understanding of underlying mechanism(s) at work. In this paper we account for these ambiguities, and focus on institutions that reveal government efforts to design proper institutional and policy framework to attract FDI, as opposed to considering institutions in broader sense. Specifically, we contribute to FDI policy debate by analysing the impact of institutions measuring Investment policy and promotion on inward FDI flows in South East Europe (SEE). To this end we use a unique dataset that is comprised of specific, FDI related institutional indicators developed and published by the OECD. The results of this empirical investigation deeper our understanding on whether differences in FDI policies and institutional set-up across South East European (SEE) countries explain variations in inward FDI flows relaying on bilateral FDI flows and the gravity modelling technique. We bring novel evidence that investment policy efforts seemingly do pay off, highlighting the importance of progress and reforms embodied not only in FDI regulation, but also in FDI policy variables including FDI Promotion and Facilitation, Transparency, Privatisation policy and Public Private Partnership in attracting FDI in SEE. The analysed institutional effect properly accounts for the possible time-variant and context-dependant effect of institutions. The suggested importance of FDI policy variables seem valuable in terms of general FDI policy issues and trade-offs.