The dragon soars: Micro evidence on Chinese outward direct investment
Heiwai Tang, Wenjie Chen 22 September 2014
Using a new, unique, and comprehensive data set that covers close to 19,000 Chinese ODI deals from 1998 to 2011, we find that in contrast to the common perception, over half of the ODI deals are in service sectors, with many of them appearing to be related to export promotion. Ex ante larger, more productive, and more export-intensive firms are more likely to start investing abroad. Ex post, ODI appears to enhance firm performance (i.e., total factor productivity, employment, export intensity, and product innovation). Empirical analysis based on firms’ trade transaction data shows a significantly positive effect of ODI on firms’ trade performance, but little technology transfer.
China’s active acquisition of foreign assets has raised anxiety and tension across the world. In 2010, it was the world’s fifth largest source of foreign direct investment after the United States, France, Germany, and Japan.1 He et al. (2012) predict that China’s cumulative outward direct investment (ODI) will exceed $5 trillion USD in 2020, compared to a mere $3 billion in 2010. Given the sheer size of China, the volume of its ODI may be expected; but considering its relatively early stage of development, its recent surge in ODI surprised many.
China, FDI, outward FDI
Why developing host countries sign increasingly strict investment agreements
Eric Neumayer, Peter Nunnenkamp, Martin Roy 01 August 2014
Hoping to attract more FDI, developing countries are increasingly entering stricter investment agreements. But there is no conclusive evidence that such agreements serve them well. This column argues that contagion may help explain this trend. Competition between developing countries for FDI from developed ones could drive the diffusion of international investment agreements.
Conclusive evidence is still missing that signing bilateral investment treaties (BITs) and other international investment agreements helps developing host countries attract more FDI – and, yet, the number of such agreements has mushroomed. What is more, developing countries have witnessed a wave of litigation – and yet they increasingly agreed to stricter FDI-related provisions in international investment agreements, in particular with regard to investor-state dispute settlement (ISDS) mechanisms and pre-establishment national treatment (NT) of foreign investors.
Development International trade
developing countries, FDI, international investment agreements
R&D internationalisation during the Global Crisis
Bernhard Dachs, Georg Zahradnik 06 July 2014
The Global Crisis brought a halt to three decades of R&D internationalisation, in which foreign firms’ share of total R&D expenditure had increased in almost all countries where data is available. However, this column argues that the crisis did not lead to a new global distribution of overseas R&D expenditure, despite the erosion of the EU’s share. The persistence of R&D expenditure is attributed to the costs of relocating R&D and to the autonomy of foreign subsidiaries.
Foreign firms’ share of total business R&D expenditure increased during the last three decades in almost all countries where data is available, but this trend stopped with the Global Crisis of 2008–2009. In most countries, R&D of foreign firms was more severely affected by the crisis than R&D of domestic firms. However, the crisis did not lead to a new global distribution of overseas R&D expenditure.
Global crisis Productivity and Innovation
R&D, globalisation, multinationals, FDI, innovation, global crisis, persistence, autonomy, subsidiaries
The economic impact of inward FDI on the US
Theodore H. Moran, Lindsay Oldenski 04 March 2014
The US has once again ranked among the top two recipient countries for foreign direct investment. This column examines the effects of these large FDI inflows on the US domestic economy. Foreign multinationals are – alongside US-headquartered American multinationals – the most productive and highest-paying segment of the US economy. In addition, they provide positive spillovers to US firms. About 12% of the total productivity growth in the US from 1987 to 2007 can be attributed to productivity spillovers from inward FDI.
The US is the second-largest recipient of FDI in the world, behind China, and by far the largest target for FDI among OECD countries (OECD 2013). The numbers are large ($253 billion for the US), and the gap with the next-largest in the OECD is impressive ($63 billion for the UK and $62 billion for France in 2012).
Productivity and Innovation
R&D, US, productivity, wages, multinationals, FDI, spillovers
With a little help from my friends – FDI in Africa
Holger Görg, Christiane Krieger-Boden, Adnan Seric 10 December 2013
An expansion in the scope of foreign direct investment in sub-Saharan Africa promises to promote development in one of the poorest regions of the world. This column investigates the extent to which working with foreign multinationals enhances the capabilities of African firms. Acting as a supplier to a multinational enterprise improves a firm’s labour productivity, product and process innovation, while buying from a multinational improves only labour productivity. Governments should take advantage of these spillovers by promoting trade.
Foreign direct investment (FDI) and the emergence of multinational firms (MNEs) have proven successful strategies for the growth performance of host countries. In recent years, developing economies have gained substantial shares of such worldwide FDI flows. Now, a “new wave of FDI” has even swept sub-Saharan Africa, one of the poorest regions of the world (Figure 1).
Development International trade
Is the negative impact of FDI real? Empirical evidence from Japan
Ayumu Tanaka 20 November 2013
Policymakers fear the negative employment effects of foreign direct investment. This column provides recent empirical evidence on FDI and domestic employment. The results show that FDI has positive effects on domestic employment. Furthermore, our new empirical research finds a non-negative relationship between Japanese firms' foreign activities and their suppliers' domestic employment.
The Japanese government is concerned about the so-called “hollowing out of manufacturing,” referring to the negative effects of FDI on domestic employment. A typical story is described below:
"Japanese firms face severe competition with firms in low-wage Asian countries such as China, Korea, and Taiwan. Many Japanese firms, therefore, establish their overseas subsidiaries in low-wage countries, which results in the manufacturing workers in Japan losing their jobs. To protect them, it is necessary for the government to subsidise Japanese firms."
Quid pro quo: Technology capital transfers for market access in China
Thomas Holmes, Ellen McGrattan, Edward C. Prescott 08 November 2013
Why are FDI flows between China and technologically-advanced countries surprisingly small? This column analyses the issue in light of China's quid pro quo policy that makes technology transfer a precondition of foreign firms selling in China. We find that the policy provides significant gains for China, but losses to its FDI partners.
Over the past two decades China’s economy has grown rapidly and the nation has become a major destination for foreign direct investment. Surprisingly, little of China's FDI inflows come from technologically advanced, dominant players in global investment such as the US, Europe, and Japan (Prasad and Wei 2007, Branstetter and Foley 2010). Moreover, while there has been an explosion of patenting in China by domestic applicants, FDI outflows from China to the US, Europe, and Japan remain small.
Global economy International trade
China, patents, FDI, intellectual property rights
Not all capital waves are alike: A sector-level examination of surges in FDI inflows
Dennis Reinhardt, Salvatore Dell'Erba 08 July 2013
FDI flows tend to come in waves and concentrate in certain sectors. This column examines episodes of large gross foreign direct investment inflows - surges – at the sectoral level in emerging markets. It suggests that surges in the financial sector are associated with boom-bust cycles in domestic GDP and with expansions of credit in foreign currency. Moreover, restrictions on other forms of capital inflows tend to increase the likelihood of surges in financial-sector FDI.
Capital flows often come in waves. An extensive literature has documented 'surges' and 'bonanzas' in capital flows (e.g. Forbes and Warnock 2012, Reinhart and Reinhart 2009, Ghosh et al. 2012). While capital flows can bring many benefits the literature has also documented the risks associated with this cyclical nature. Indeed, they can contribute to amplifying economic cycles, fuel credit booms, appreciate the real exchange rate, and can be subject to sudden reversals (Calvo et al. 2008).
FDI, capital flows, surges
How big are productivity gains from FDI?
Sebnem Kalemli-Ozcan, Christian Fons-Rosen, Bent E. Sørensen, Carolina Villegas-Sanchez, Vadym Volosovych 04 June 2013
During the decades of globalisation, flows of foreign direct investment have surged in parallel with extensive policy momentum. This column examines whether the net aggregate gain from FDI is positive using a large panel of firms from 30 European countries. It turns out that even very large increases in FDI are not important for country-level productivity growth.
During the decades of globalisation, flows of foreign direct investment (FDI) to both developed and emerging markets have surged in parallel with extensive policy momentum to increase FDI at the expense of debt as the major source of external financing.
This pro-FDI policy urge is justified by the perceived benefits of FDI on the host country. For example:
Development International trade
Service-sector reforms enhance manufacturing productivity: Evidence from Indonesia
Victor Duggan, Sjamsu Rahardja, Gonzalo Varela 22 May 2013
The ‘manufacturing matters’ movement has gained prominence on the policy agenda even as the nature of manufacturing continues to morph. This column discusses new research showing that opening service sectors to competition and foreign direct investment can be a powerful conduit for productivity gains in manufacturing. The gains depend on both the types of reforms and the specific services sectors in which these are implemented.
Just as Cinderella was the forgotten sister with great potential, so service-sector foreign direct investment may be the neglected sibling of trade policy. As trade and foreign direct investment regimes have become more liberalised in recent decades, tariff reductions and foreign direct investment in manufacturing have hogged the limelight while foreign direct investment in services has often remained a wallflower.
Development Industrial organisation