For better or worse, in crisis and in
boom…
Does foreign direct investment promote economic
stability in developing and emerging economies?
by Camilla Jensen
Nottingham School of Economics
Faculty of Arts and Social Sciences
University of Nottingham
Malaysia Campus
11/1/2011
1
GEP Conference, Malaysia, February 12-13, 2011
Paper presentation
1.
2.
3.
4.
5.
6.
7.
Research questions
Expected results
Investment, growth and volatility
Foreign direct investment and volatility
Investment equation
Preliminary estimation results
Discussion
11/1/2011
2
GEP Conference, Malaysia, February 12-13, 2011
Research Question(s)



Do foreign firms respond differently to
uncertainty or volatility?
If they respond differently what is the
likely reason for this behaviour?
What role does institutions play in
mitigating the impact of or transmission
of volatility onto the investment function?
11/1/2011
3
GEP Conference, Malaysia, February 12-13, 2011
Expectations

The common opinion about FDI in Europe/Latin
America/Africa has been that foreign investors are
the first to bail out during crisis or at least the first
to stop investing (perhaps because the recent
crisis was emanating from the home countries and
global in character)

FDI was seen to play a somewhat different role
during the Asian Financial Crisis in the late 1990s
(perhaps because the crisis was in the host
countries and more local in characters)
11/1/2011
4
GEP Conference, Malaysia, February 12-13, 2011
Investment, growth and volatility
Ramey and Ramey (1995) AER
Aizenman and Marion (2003) Economica
Nucci and Pozzolo (2006) EER
11/1/2011
5
GEP Conference, Malaysia, February 12-13, 2011
Foreign direct investment and volatility
Campa (1993) RES - Option value of waiting
from perspective of the outside investor
Goldberg and Kolstad (1995) IER – Export
diversification
Aizenman (2003) JDE – Production shifting
11/1/2011
6
GEP Conference, Malaysia, February 12-13, 2011
About the data
Business Enterprise and Economic Performance Surveys + Global Economic Monitor
both published by the World Bank
Figure 1: Volatility and the share of foreign ownership in the sampled countries
6
About the BEEPS datasets
-Cover firms across all regions
-Often comparable and collected using same Q
-Mostly cross sectional
-World regions covered in particular years
-Only one fifth of respondents willing to report
financial data
-Half of the countries drop out because of missing
data
-But to date there is no better data to investigate the
role of institutions in a cross country perspective
with outset in firm level data outside the OECD
VOL_24MONTH
5
4
3
2
1
0
.0
.1
.2
.3
.4
.5
.6
.7
FORSHARE
11/1/2011
7
GEP Conference, Malaysia, February 12-13, 2011
World region
Observations
Africa
11,107
East Asia & Pacific
4,952
Europe & Central Asia
13,286
Latin America
12,732
Middle East
477
South Asia
1,153
11/1/2011
8
GEP Conference, Malaysia, February 12-13, 2011
The Investment Equation
Investrateict   0   o ROA ict   1 Sales _ growthict   2 Leverageict   3Volatility ict   4 Foreign ict   5 Stateict
*
  6 Foreign ict *Volatility ct   7 Stateict *Volatility ct   k K iict   p Pct   ict
*
Investrateict  max( 0, Investrateict
)
11/1/2011
9
GEP Conference, Malaysia, February 12-13, 2011
Equation 1.1
Equation 1.2
Equation 1.3
Equation 1.4
Equation 1.5
Equation 1.6
Method
OLS
OLS
LOGIT
LOGIT
TOBIT
TOBIT
Dependent var.
Log(Investrate)
Log(Investrate)
Prob(Invest>0)
Prob(Invest>0)
Log(Investrate), 0
Log(Investrate), 0
ROA
0.003*** (2.97)
0.003*** (2.87)
-0.004 (-1.13)
-0.007* (-1.80)
0.004** (2.87)
0.004*** (2.70)
Sales_growth
0.019*** (4.05)
0.019*** (3.96)
0.216*** (6.56)
0.221*** (7.03)
0.049*** (7.55)
0.049*** (7.44)
Leverage
0.001 (0.53)
0.000 (0.31)
0.054***(3.20)
0.042*** (2.81)
0.004** (2.19)
0.003* (1.77)
Vol_USD
-0.009*** (-6.80)
-0.008*** (-6.69)
0.172***(12.94)
0.155*** (10.34)
-0.032*** (-15.23)
-0.031*** (-15.08)
Foreign
-0.005 (-0.21)
-0.017 (-0.79)
0.341** (2.23)
0.065 (0.41)
0.039 (1.21)
-0.010** (-0.31)
Vol_USD*Foreign
0.016* (1.76)
0.016* (1.75)
0.012 (0.21)
0.006 (0.10)
0.022* (1.85)
0.020* (1.72)
State
0.085 (1.10)
0.064 (0.87)
0.359 (0.85)
-0.116 (-0.28)
0.123 (1.17)
0.049 (0.49)
Vol_USD*State
-0.027 (-0.75)
-0.024 (-0.66)
-0.060 (-0.30)
0.018 (0.09)
-0.037 (-0.65)
-0.026 (-0.45)
Exports
0.009 (0.64)
-0.010 (-0.57)
0.700*** (8.59)
0.309***(3.43)
0.097*** (3.89)
0.022 (0.83)
Dollarized
-0.020*** (-4.21)
-0.021*** (-4.31)
0.213*** (6.31)
-0.119*** (-2.83)
-0.221*** (-17.59)
-0.200 (-17.12)
Size
-
Yes (+)***
-
Yes (+)***
-
Yes***
Country
Yes***
Yes***
Yes***
Yes***
Yes***
Yes***
Region
Yes***
Yes***
Yes***
Yes***
Yes***
Yes***
Year
Yes***
Yes***
Yes***
Yes***
Yes***
Yes***
R2
0.06
0.06
0.14
0.17
0.10
0.11
N (obs.)/censored(0)
8,342/0
8,342/0
8,296/0
8,296/0
8,342/4,337
8,342/4,337
No. of countries
51
51
50
50
51
51
Explanatory vars.:
11/1/2011
GEP Conference, Malaysia, February 12-13, 2011
10
Equation 1.6
Equation 1.7
Equation 1.8
Equation 1.9
Equation 1.10
Method
TOBIT
TOBIT
TOBIT
TOBIT
TOBIT
Dependent var.
Log(Investrate), 0
Log(Investrate), 0
Log(Investrate), 0
Log(Investrate), 0
Log(Investrate), 0
Volatility measure
Vol_USD
Vol_RER
Vol_INFL
Vol_HL
Vol_POL
ROA
0.004*** (2.70)
0.004** (2.03)
0.004***(2.75)
0.004***(2.71)
0.004***(2.88)
Sales_growth
0.049*** (7.44)
0.056*** (6.37)
0.049***(6.93)
0.049***(7.43)
0.048***(7.25)
Leverage
0.003* (1.77)
0.003 (1.06)
0.004* (1.87)
0.003* (1.80)
0.003*(1.76)
Vol_
-0.031*** (-15.08)
-0.038*** (-6.58)
0.004***(5.16)
-0.131***(-5.06)
0.012 (0.49)
Foreign
-0.010** (-0.31)
0.021 (0.31)
0.069**(2.32)
0.022 (0.92)
0.017 (0.68)
Vol_*Foreign
0.020* (1.72)
0.015 (0.57)
-0.011**(-1.92)
0.038 (0.87)
0.101**(1.88)
State
0.049 (0.49)
-0.262 (-1.56)
-0.105 (-0.94)
0.008 (0.11)
-0.002 (-0.02)
Vol_*State
-0.026 (-0.45)
0.121 (1.18)
0.027 (1.56)
-0.004 (-0.02)
0.068 (0.50)
Exports
0.022 (0.83)
0.033 (1.44)
0.023 (0.84)
0.022 (0.82)
0.021 (0.78)
Dollarized
-0.200 (-17.12)
-0.041 (-3.79)
-
-0.162***(-14.72)
-0.153***(-9.44)
Size
Yes***
Yes***
Yes***
Yes***
Yes***
Country
Yes***
Yes***
Yes***
Yes***
Yes***
Region
Yes***
Yes***
Yes***
Yes***
Yes***
Year
Yes***
Yes***
No
Yes***
Yes***
R2
0.11
0.14
0.12
0.11
0.11
N (obs.)/censored(0)
8,342/4,337
5,274/2,749
7,737/4,034
8,342/4,337
8,424/4,399
51
24
45
51
52
Explanatory vars.:
11/1/2011
No. of countries
GEP Conference, Malaysia, February 12-13, 2011
11
Discussion

Initial results confirm that FDI can be a factor of stability
during episodes of exchange rate volatility (which is seen as a
proxy for uncertainty and nothing else in this paper)

The potential implications of this result is that it may explain
why we cannot expect to observe any positive correlation
between FDI and growth at the macroeconomic level

Future version should perhaps control for outswings that are
value enhancing (deprecations) or destroying (appreciations)
in a foreign currency holder perspective

Growth equations are not formulated yet

Include more data for the period 2002-2005 (present results
only include the fresh surveys from the period 2006-2010)
11/1/2011
12
GEP Conference, Malaysia, February 12-13, 2011
Questions?
11/1/2011
13