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Jannick Damgaard, Thomas Elkjaer, and Niels Johannesen
Macro statistics on foreign direct investment (FDI) are blurred by offshore centers with enormous inward and outward investment positions. This paper uses several new data sources, both macro and micro, to estimate the global FDI network while disentangling real investment and phantom investment and allocating real investment to ultimate investor economies. We find that phantom investment into corporate shells with no substance and no real links to the local economy may account for almost 40 percent of global FDI. Ignoring phantom investment and allocating real investment to ultimate investors increases the explanatory power of standard gravity variables by around 25 percent.
Vito Amendolagine, Mr. Andrea F Presbitero, Roberta Rabellotti, Marco Sanfilippo, and Adnan Seric
The local sourcing of intermediate products is one the main channels for foreign direct investment (FDI) spillovers. This paper investigates whether and how participation and positioning in the global value chains (GVCs) of host countries is associated to local sourcing by foreign investors. Matching two firm-level data sets of 19 Sub-Saharan African countries and Vietnam to country-sector level measures of GVC involvement, we find that more intense GVC participation and upstream specialization are associated to a higher share of inputs sourced locally by foreign investors. These effects are larger in countries with stronger rule of law and better education.
Emma Angulo and Alicia Hierro
This paper analyzes asymmetries in direct investment positions reported in the Coordinated Direct Investment Survey (CDIS) following a top down approach. First, it examines asymmetries at global level; second, it examines asymmetries between CDIS reported and derived data for individual economies; and third, the paper analyzes data at bilateral economy level. Then, the paper explores seven main reasons for asymmetries, including those arising even when economies follow international standards. Finally, the paper includes a section on addressing bilateral asymmetries and concludes with specific planned actions to reduce asymmetries, including initiatives led by international organizations.
Elise Wendlassida Miningou and Mr. Sampawende J Tapsoba
This paper examines the effect of the efficiency of the education system on Foreign Direct Investment (FDI). First, it focuses on the external efficiency and applies a frontier-based measure as a proxy of the ability of countries to optimally convert the average years of schooling into income for individuals. Second, it shows the relationship between the external efficiency of the education system and FDI inflows by applying GMM regression technique. The results show that the efficiency level varies across regions and countries and appears to be driven by higher education and secondary vocational education. Similarly to other studies in the literature, there is no significant relationship between the average years of schooling and FDI inflows. However, this study shows that the external efficiency of the education system is important for FDI inflows. Improving the external efficiency of the education system can play a role in attracting FDI especially in non-resource rich countries, nonlandloked countries and countries in the low and medium human development groups.
Mr. Tidiane Kinda
Using manufacturing and services firm-level data for 30 sub-Saharan African (SSA) countries, this paper shows that taxation is not a significant driver for the location of foreign firms in SSA, while other investment climate factors, such as infrastructure, human capital, and insitutions, are. By analyzing disaggregate FDI data, the paper establishes that, while there is considerable contrast in behavior between vertical FDI (foreign firms producing for export) and horizontal FDI (foreign firms producing for local markets), taxation is not a key determinant for either type of FDI. Horizontal FDI is attracted to areas with higher trade regulations, highlighting interest in protected markets. Furthermore, horizontal FDI is affected more by financing and human capital constraints, and less by infrastructure and institutional constraints, than is vertical FDI.
Mr. Ali J Al-Sadiq
Over the past two decades, the growth rate of outward foreign direct investment (FDI) from developing and transition economies has increased significantly. Given the role of physical capital accumulation in determining the economic growth rate, it is important to assess how domestic investment responds to such outflows. This study empirically examines the effects of outward FDI on domestic investment in developing countries. Using data from 121 developing and transition economies over the period 1990–2010, the results suggest that FDI outflows negatively impact the rate of domestic investment.
Ms. Isabelle Mejean, Thierry Mayer, and Benjamin Nefussi
Economists interested in location choices usually focus their attention on investments abroad. This neglects the fact that multinational enterprises continue to invest domestically while undertaking foreign expansion. This paper compares investments at home and abroad. Our firm-level dataset shows an important home bias in productive investments. Part of this "excessive" domestic investment is explained by standard determinants of location choices. The interdependence between affiliates of the same industrial group however accounts for the lion's share of the home bias. Moreover, French firms' propensity to invest abroad is positively related to their productivity and the size of their intangible assets.
Miss Kinga Z Elo
This paper examines how capital controls affect FDI decisions and how the impact of these restrictive measures varies with different levels of country risk. We construct a model of firms' FDI decisions, broadly in Dunning's "eclectic theory" framework, using "real options" to emphasize economic uncertainty and country risk. Numerical results of the model take the form of "quality statistics" that uncover the underlying dynamics hidden in the aggregate data that is responsible for the low performance of recent empirical studies. We find that increasing levels of capital controls reduce the life-span of FDI investments at each level of country risk and foreign investors' willingness towards risk sharing increases. We reveal a significant interaction between capital control and country risk, resulting in a nonlinear relationship between these and the volatility and volume statistics. We estimate a standard cross-sectional model that provides strong support for our theoretical findings.
International Monetary Fund
This study examines the determinants of entry into 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 o