Handout CEPR- RIETI Workshop “New Challenges to Global Trade and Finance”

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CEPR- RIETI Workshop
“New Challenges to Global Trade and Finance”
Handout
Beata Javorcik
University of Oxford and CEPR
8th October, 2013
RIETI, Tokyo
Research Institute of Economy, Trade and Industry (RIETI)
http://www.rieti.go.jp/en/
FDI Promotion:
Why and How?
Beata Javorcik
University of Oxford and CEPR
Is FDI really good for growth?
 “One dollar of FDI is worth no more (and no less) than a
dollar of any kind of investment” (D. Rodrik)
 Yet, 59 out of 108 countries surveyed in the World Bank’s
census of investment promotion agencies offered FDI
incentives in 2004
3
Outline
1.
Why should we expect FDI to stimulate growth in
host countries?
2.
Evidence on knowledge transfer to FDI recipients
3.
Effect of FDI on other firms within the industry
4.
Effect of FDI on firms in the supplying industries
5.
FDI in services and manufacturing performance
6.
Is FDI promotion effective?
4
Technology transfer through FDI =>
economic growth

MNCs are responsible for most of the world’s R&D


700 multinational corporations accounted for 46% of
the world’s total R&D expenditure and 69% of the
world’s business R&D in 2002 (UNCTAD 2005)
R&D budgets of large multinationals may exceed R&D
spending of some countries
5
R&D budgets of some MNCs exceed R&D
spending of transition countries (2003)
8000
7000
millions of US dollars
6000
5000
4000
3000
2000
1000
0
CIS
new EU member
states
Ford Motor
Pfizer
DaimlerChrysler
Siemens
CIS figure includes: Russia, Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Ukraine, Uzbekistan.
New EU member states figure includes: Czech Rep, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Rep, Slovenia.
6
Outline
1.
Why should we expect FDI to stimulate growth in
host countries?
2.
Evidence on knowledge transfer to FDI recipients
3.
Effect of FDI on other firms within the industry
4.
Effect of FDI on firms in the supplying industries
5.
FDI in services and manufacturing performance
6.
Is FDI promotion effective?
7
Effect of FDI on recipient firms

Key question: Is the superior performance of foreign
affiliates due to some intrinsic advantage of foreign
ownership or are foreign investors simply good at
picking acquisition targets?
8
Arnold and Javorcik (JIE 2009)

Examine this question using plant-level information on
400 new FDI recipients in Indonesia (1983-2001)

Compare the differences in the paths of development
between FDI recipients and the control group

Control group: plants with similar observable
characteristics before a foreign acquisition, operating
in the same industry/year
1/n Σ1 to n[(ProductivityFDI recipient, post-FDI - ProductivityFDI recipient, pre-FDI)
- (Productivitycontrol, post-FDI - Productivitycontrol, pre-FDI)]
9
Foreign ownership improves performance
Total factor productivity (in logs)
Pre-acquisition
Year
Acquisition
year
One year
later
Two years
later
FDI recipients
0.864
1.079
1.142
1.215
Control group
0.867
0.976
1.022
1.083
0.106***
(0.034)
0.122***
(0.045)
0.135***
(0.051)
Difference
10
Foreign ownership improves performance


While best performers tend to receive FDI,
foreign ownership also leads to increased
productivity
FDI recipients exhibit a 13.5% higher
productivity growth by the end of the 3rd year
under foreign ownership
11
Foreign ownership improves performance
Labor productivity (in logs)
Pre-acquisition
Year
Acquisition
year
One year
later
Two years
later
FDI recipients
4.28
4.50
4.60
4.62
Control group
4.20
4.14
4.06
4.05
0.280***
0.459***
0.489***
(0.072)
(0.074)
(0.088)
Difference
12
FDI induces rapid changes
(d) Employment
(c) Output
6.00
11.40
11.20
11.00
10.80
10.60
10.40
10.20
10.00
5.80
5.60
5.40
t-1
t0
t+1
t+2
t-1
t0
t+1
t+2
(e) Average wage
9.00
8.80
8.60
8.40
8.20
8.00
7.80
7.60
t-1
t0
t+1
t+2
13
FDI leads to higher investment
(f) Investment
(g) Investment in machinery
5.00
4.50
4.50
4.00
4.00
3.50
3.50
3.00
3.00
2.50
2.50
2.00
2.00
t-1
t0
t+1
t+2
t-1
t0
t+1
t+2
14
FDI facilitates integration into
global markets
(i) Import input share
(h) Export share
45
35
40
30
35
30
25
25
20
20
15
15
t-1
t0
t+1
t+2
t-1
t0
t+1
t+2
15
Outline
1.
Why should we expect FDI to stimulate growth in
host countries?
2.
Evidence on knowledge transfer to FDI recipients
3.
Effect of FDI on other firms within the industry
4.
Effect of FDI on firms in the supplying industries
5.
FDI in services and manufacturing performance
6.
Is FDI promotion effective?
16
0
Hired former
MNC employees
Information
about marketing
techniques
Information
about new
technologies
Worsened
access to credit
Loss of
employees
Loss of market
share
Increased
competition
% of respondents
FDI affects domestic firms through
multiple channels (Czech Rep.)
60
50
40
30
20
10
17
0
Hired former MNC
employees
Information about
marketing
techniques
20
Information about
new technologies
Worsened access
to credit
Loss of
employees
30
Loss of market
share
Increased
competition
% of respondents
Relative magnitudes of the effects
differ by country
60
50
40
29
24
Czech Rep.
Latvia
15
10
18
Intra-industry spillovers more
likely in industrialized countries

Haskel, Pereira and Slaughter (REStat 2007) - UK plant-level data
1973-1992


Increase in FDI presence positively affects TFP of local plants in the same
sector
Lesser performers benefit more

Keller and Yeaple (REStat 2009) – US firm-level data 1987-1996

Javorcik (AER 2004) - Lithuanian firm-level data 1996-2000
 No evidence of intra-industry effects




Evidence of positive spillovers, particularly in high-tech sectors
Absent in low-tech sectors
Lesser performers benefit more
Accounted for 14% of productivity growth in U.S. firms
19
Outline
1.
Why should we expect FDI to stimulate growth in
host countries?
2.
Evidence on knowledge transfer to FDI recipients
3.
Effect of FDI on other firms within the industry
4.
Effect of FDI on firms in the supplying industries
5.
FDI in services and manufacturing performance
6.
Is FDI promotion effective?
20
Effect of FDI on firms in the
supplying industries


While MNCs have an incentive to prevent
leakage of knowledge to their competitors, they
may want to promote knowledge transfer to
local suppliers
FDI boosts productivity in the supplying
industries


Evidence from Lithuania (Javorcik AER 2004)
Evidence from Indonesia (Gertler and Blalock JIE
2007)
21
MNCs’ requirements vis a vis potential
suppliers
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Improve
Acquire ISO
Improve
Use new
quality
9000
timeliness of technology
assurance
deliveries
Purchase
new
equipment
Improve the
product
22
Assistance received by Czech firms
from MNCs
Equipment repairs
Provision of patented technologies
Help with finding export opportunities
Assistance with technology
Help with quality assurance
Help with organizing production lines
Provision of inputs
Leasing of machinery
Advance payment
Personnel training
Any type of assistance
0%
5%
10%
15%
20%
25%
30%
35%
40%
Suppliers reporting a particular type of assistance
23
Outline
1.
Why should we expect FDI to stimulate growth in
host countries?
2.
Evidence on knowledge transfer to FDI recipients
3.
Effect of FDI on other firms within the industry
4.
Effect of FDI on firms in the supplying industries
5.
FDI in services and manufacturing performance
6.
Is FDI promotion effective?
24
What makes services different


Producer services are an input into many
manufacturing industries
Cross-border tradability of services is
limited, so manufacturing firms are often at
the mercy of local services providers
25
Evidence from the Czech Rep.



There is a positive relationship between services sector
reform and the performance of domestic manufacturing
firms
Allowing foreign entry appears to be the key
channel through which services liberalization may
affect performance of downstream manufacturing
sectors
A one-standard-deviation increase in FDI in services =>
a 7.7% increase in the average productivity of Czech
firms in downstream manufacturing
Arnold and Javorcik (JIE 2011) 26
Evidence from India

A one-standard-deviation change in the
services reform index corresponds to the
following increase in productivity of
manufacturing firms



banking 6.6%
telecommunications 8.4%
transport 18.8%
Arnold, Javorcik, Lipscomb and Mattoo (2012)
27
Global Chain in Romania:
Regional Distribution 1997
1
28
Global Chain in Romania:
Regional Distribution 2005
29
What were the effects of the entry of foreign
retail chains on the market in your city?
30
Evidence from Romania



The opening of the retail sector to FDI has
stimulated productivity growth in upstream
manufacturing in Romania
Presence in a region increases TFP by 3.84.7%
The effect took place through within firm
productivity growth and reallocation
Javorcik and Li (JIE 2013)
31
Outline
1.
Why should we expect FDI to stimulate growth in
host countries?
2.
Evidence on knowledge transfer to FDI recipients
3.
Effect of FDI on other firms within the industry
4.
Effect of FDI on firms in the supplying industries
5.
FDI in services and manufacturing performance
6.
Is FDI promotion effective?
32
Why do investment promotion?




Knowledge externalities as justification for policy
intervention
Information asymmetries between host countries and
potential foreign investors are significant obstacles to
investment flows across international borders
What can aspiring FDI destinations do to reduce such
barriers?
Is investment promotion the answer?
33
Almost all countries are
engaged in FDI promotion
120
100
IPAs in developing countries
IPAs in developed countries
no. of IPAs
80
60
40
20
0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
34
Harding and Javorcik (EJ 2011)

Conducted a Census of IPIs on behalf of the World Bank

Point of departure


Information on sector targeting


Standardized list of targeted sectors with dates when the policy was in place
Data on FDI from the U.S. by country, sector and year


Sector targeting considered best practice in investment promotion
(124 countries, 15 sectors, 1990-2004)
Did FDI inflows to targeted sectors increase during targeting?

(relative to non-targeted sectors)
35
Estimation results



Investment promotion generates higher FDI flows to
developing countries and emerging markets:

Targeting increases FDI by 155%

Additional $17 mn dollars of FDI
Investment promotion does not appear to be effective in
industrialized countries
Investment promotion has a larger impact in countries…

where information asymmetries are large

with burdensome bureaucratic procedures
36
Policy conclusions



FDI is good for growth
Investment promotion is effective in emerging
markets, but less likely to be so in industrialized
economies
Stay away from FDI subsidies



No evidence that they work (Harding and Javorcik 2011)
Easy to overpay (an affiliate operating for 10 years => benefits of
£18,841 per job – Haskel et al. 2007)
Liberalize services industries
37
Restrictions in the retail sector
(OECD index)
6
5
4
3
2
1
0
1998
2008
38
Thank you
39
References
Arnold, Jens and Beata S. Javorcik (2009). Gifted Kids or Pushy Parents? Foreign Acquisitions and Firm
Performance in Indonesia. Journal of International Economics 79(1)
Arnold, Jens, Beata S. Javorcik and Aaditya Mattoo (2011). Does Services Liberalization Benefit
Manufacturing Firms? Evidence from the Czech Republic. Journal of International Economics 85(1):
136-146
Arnold, Jens, Beata S. Javorcik, Molly Lipscomb and Aaditya Mattoo (2012). Services Reform and
Manufacturing Performance: Evidence from India. Mimeo
Blalock, Garrick and Paul J. Gertler (2008). Welfare Gains from Foreign Direct Investment through
Technology Transfer to Local Suppliers. Journal of International Economics 74(2): 402-421
Harding, Torfinn and Beata Javorcik (2011). Roll out the Red Carpet and They Will Come: Investment
Promotion and FDI Inflows. Economic Journal 121(557)
Haskel, Jonathan E., Sonia C. Pereira, and Matthew J. Slaughter (2007). Does Inward Foreign Direct
Investment Boost the Productivity of Domestic Firms? Review of Economics and Statistics, 89(2)
Javorcik, Beata (2004). Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In
Search of Spillovers through Backward Linkages. American Economic Review 94(3): 605-627
Javorcik, Beata S. and Yue Li (2013). Do the Biggest Aisles Serve a Brighter Future? Global Retail Chains
and Their Implications for Romania. Journal of International Economics 90(2): 348-363
Keller, Wolfgang and Stephen R. Yeaple, 2009. Multinational Enterprises, International Trade, and
Productivity Growth: Firm-Level Evidence from the United States. Review of Economics and Statistics,
91(4): 821-831
UNCTAD (2005). World Investment Report: Transnational Corporations and the Internalization of R&D. New
40
York and Geneva: United Nations
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