The importance of clusters for spillovers from foreign direct investment and technology sourcing

This paper examines the link between cluster development and inward foreign direct investment. The conventional policy approach has been to assume that inward foreign direct investment (FDI) can stimulate significant clustering activity, thus generating significant spillovers. This paper, however, questions this and shows that, while clusters can generate significant productivity spillovers from FDI, this only occurs in pre-existing clusters. Further, the paper demonstrates that foreign-owned firms that enter clusters also appropriate spillovers when domestic firms undertake investment, raising the possibility that clusters are important locations for so called technology, or knowledge sourcing activities by MNEs. © 2006 Oxford University Press.

Regional foreign direct investment and wage spillovers:plant level evidence from the UK electronics industry

This paper examines the extent to which foreign investment in the UK generates wage spillovers in the domestic sector of the economy using a simultaneous dynamic panel data model and focusing on the electronics sector, possibly the most ‘globalized’ sector of UK manufacturing. It finds evidence that the higher wages paid by foreign firms cause wages in the domestic sector to be bid up. This phenomenon is, however, largely confined to the region where foreign direct investment takes place.

Inward investment and host country market structure:the case of the U.K.

Multinational enterprises are seen as vehicles for the international transfer of investment capital, protecting and increasing profits by transferring ownership advantages across national boundaries. As such, the argument often follows that foreign direct investment then exacerbates the monopoly problem in host countries, by increasing concentration and facilitating collusion. This paper however reveals the reverse, that inward investment into the U.K. acts to reduce concentration at the industry level, by increasing competitive pressures on domestic industry.

Hymer and uneven development revisited:Foreign Direct Investment and regional inequalities

Picking up on one of Hymer's key contributions, this paper examines the impact that inward foreign direct investment (FDI) into the UK has on the patterns of development, both within and across regions. Using a panel of data for the manufacturing sector, the paper illustrates that even where one isolates the effect on the domestic sector alone, inward investment acts to increase the demand for skilled, relative to unskilled labour, and also generates the expected agglomeration effects in terms of the demand for capital investment. The paper then goes on to draw certain policy comparisons between these findings and the desired aim of attracting FDI, notably to increase demand for labour in those regions suffering structural unemployment, and secondly to reduce the disparities between regions.

Foreign direct investment and local input linkages in Malaysia

This article examines variations in local input linkages in foreign transnational corporations in Malaysia. The extent to which transnational corporations foster such linkages, particularly in a developing host economy, has become an important issue for policy makers and others concerned with the long-term benefits associated with foreign direct investment. This article employs a unique data set, covering inward investors in the electrical and electronics industry, and analyzes in detail the determinants of variations in local input uses. The article develops a model of local input linkages, based on a transaction-cost framework using firm-specific factors, such as nationality of ownership, the age of the plant and its technology, and the extent to which firms employ locally recruited managers and engineers. In addition, the impacts of various policy measures on local input levels are discussed, and also the importance of the original motivation for investing in Malaysia. The article demonstrates that policy initiatives that target particular outcomes, such as stimulating exports or technology transfer, will result in a greater beneficial impact on the host country economy than more generic subsidies.

The impact of Foreign Direct Investment and trade openness on ICT expansion: A comparative analysis of Asia-Pacific and Middle Eastern countries

This study investigates the impact of foreign direct investment (FDI) inflow and trade openness on the expansion of information and communication technologies (ICTs) for the period of 1996 to 2005, in the Asia-Pacific and Middle East regions. The results of regression analyses conducted indicate that while dissimilarities exist among the countries included in this study in terms of their level of socio-economic and political development, factors such as trade openness, education and the growth of GDP had a positive impact on their ICT development. While FDI inflow had positive impact on the expansion of ICTs on Asia-Pacific countries its impact on Middle Eastern countries was not statistically significant. The study results also show that governmental intervention in economic activities has a negative impact on ICT expansion in both regions. In the Middle East, regional conflict imposes additional negative impact on FDI inflow and trade openness and consequently, ICT expansion. The regression results show that those countries that implemented liberalization of their ICT sector were able to not only reduce the digital divide with other developed countries, but also increase their operations in both local and global markets.

Foreign direct investment and economic development:an interactive relationship

With the increasing importance of Foreign Direct Investment (FDI), there have been substantial studies on this issue, both empirically and theoretically. However, most existing studies focus on either the impacts of FDI presence or the determinants of FDI inflows, ignoring the fact that inward FDI and economic development may simultaneously affect each other. This thesis sets out to examine the interactive effects between FDI and economic development. The whole thesis is composed of five chapters. Chapter One is an overall introduction to the thesis. Chapter Two presents a theoretical study and chapter Two and Three provide two empirical studies. Chapter Five concludes. Chapter Two presents a theoretical two-sector model that features the importance of human capital in attracting foreign investment. This model theoretically explains why FDI is more likely to occur among countries that are similar in terms of human capital and technology. On the other hand, MNCs must train local employees to work with firm-specific technology and hence improve the technological skills of local workers. In Chapter Two, an empirical model is constructed to detect whether the productivities of foreign and local firms impact each other. The model is tested on China’s data at the industry level. The results indicate that productivity growth of local and foreign firms are jointly determined. Evidence also suggests that the extent to which spillovers occur varies with difference technology levels of local firms. Chapter Four investigates the relationship between FDI and economic grown based on a panel of data for 84 countries over the period 1970-1999. Both equations of FDI inflow and GDP growth are examined. The results indicate that FDI not only directly promotes economic growth by itself, but also indirectly does so via its interaction terms. There is a strong positive interaction effect of FDI with human capital and a strong negative interaction effect of FDI with technology gap on economic growth in developing countries.

Foreign direct investment and corruption

In the last few decades, the world has witnessed an enormous growth in the volume of foreign direct investment (FDI). The global stock of FDI reached US$ 7.5 trillion in 2003 and accounted for 11% of world Gross Domestic Product, up from 7% in 1990. The sales of multinational enterprises at around US$ 19 trillion were more than double the level of world exports. Substantial FDI inflows went into transition countries. Inflows into one of the region's largest recipient, the Russian Federation, almost doubled, enabling Russia to become one of the five top FDI destinations in 2005-2006. FDI inflows in Russia have increased almost threefold from 13.6% in 2003 to 35% in 2007. In 2003, these flows were twice greater than those into China; whilst in 2007 they were six times larger. Russia's FDI inflows were also about 2.5 times greater than those of Brazil. Efficient government institutions are argued by many economists to foster FDI and growth as a result. However, the magnitude of this effect has yet to be measured. This thesis takes a Political Economy approach to explore, empirically, the potential impact of malfunctioning governmental institutions, proxied by three indices of perceived corruption, on FDI stocks accumulation/distribution within Russia over the period of 2002-2004. Using a regional data-set it concentrates on three areas relating to FDI. Firstly, it considers the significance, the size and the sign of the impact of perceived corruption on accumulation of FDI stocks within Russia. Secondly, it quantifies the impact of perceived corruption on the volume of FDI stocks simultaneously estimating the impact of the investment in public capital such as telecommunications and transportation networks on FDI in the presence of corruption. In particular, it addresses the question whether more corrupt regions in Russia are also those that could have accumulated more of FDI stocks, and investigates whether those 'more corrupt' regions would have had lower level of public capital investment. Finally, it examines whether decentralisation increases or decreases corruption and whether a larger extent of decentralisation has a positive or negative impact on FDI (stocks). The results of three studies are as follows. Firstly, along with market potential, corruption is found to be one of the key factors in explaining FDI distribution within Russia between 2002 and 2004. Secondly, corruption on average is found to be related to FDI positively suggesting that it may act as speed money: to save their time foreign direct investors might be willing to bribe the regional authorities so to move in front of the bureaucratic lines. Thirdly, although when corruption is controlled for, the impact of the latter on unobservable FDI is found to be on average positive, no association between FDI and public investment is observed with the only exception of transportation infrastructure (i.e., railway). The results might suggest therefore that it is possible that not only regions with high levels of perceived corruption attract more FDI but also that expansions in public capital investments are not accompanied by an increase of the volume of FDI (stocks) in regions with high levels of corruption. This casts some doubt on the productivity of the investment in public capital in these regions as it might be that bureaucrats may prefer to use these infrastructural projects for rent extraction. Finally, we find decentralisation to have a significant and positive impact on both FDI stock accumulation and corruption, suggesting that local governments may spend more on public goods to make the area more attractive to foreign investors but at the same time they may be interested into extracting rents from foreign investors. These results support the idea that the regulation of FDI is associated with and facilitated by a larger public sector, which distorts competition and introduces opportunities for rent-seeking by particular economic and political factors.

Industrial districts, inward foreign investment and regional development

This article compares the importance of agglomerations of local firms, and inward FDI as drivers of regional development. The empirical analysis exploits a unique panel dataset of the Italian manufacturing sector at the regional and industry levels. We explore whether FDI and firm agglomeration can be drivers of total factor productivity (separately and jointly), with this effect being robust to different estimators, and different assumptions about inter-regional effects. In particular, we isolate one form of firm agglomeration that is especially relevant in the Italian context, industrial districts, in order to ascertain their impact on productivity. In so doing, we distinguish standard agglomeration and localization economies from industrial districts to understand what additional impact the latter has on standard agglomeration effects. Interaction effects between FDI spillovers and different types of agglomeration economies shed some light on the heterogeneity of regional development patterns as well as on the opportunity to fine tune policy measures to specific regional contexts.

Foreign direct investment and employment in Central Europe

This article investigates the effects of foreign direct investment on employment generation in Central Europe. Foreign affiliates operate as a buffer to reductions in overall employment and show significant cross-country differences. A model analyzing the contribution of foreign direct investment to restructuring is developed. This model helps interpret the empirical evidence on the link between foreign direct investment and employment in Central Europe. Increasing differentiation in employment between manufacturing industries dominated by foreign affiliates suggests the importance of diversified sources of foreign direct investment for employment generation and preservation. A disaggregate analysis indeed reveals a much more complex and differentiated role of foreign direct investment in employment preservation, employment generation and structural change than the aggregate picture would suggest. This diversity has important policy implications for attracting and upgrading foreign direct investment.

Inward investment and the drivers of post recession recovery in Germany

This paper examines changes in the drivers of productivity in Germany over the period 1997-2012. We start by comparing the performance of German firms and inward investors before and during the recovery from the recent global financial crisis of 2008 across a range of sectors, and subsequently examine the channels through which different firms are able to generate productivity. Our results show that foreign investors are more productive than German MNEs and purely domestic firms, with the gap narrowing in the manufacturing sector, but growing in the service sector during the recovery period. We also contrast those firms for whom productivity growth is related to greater use of intangible assets, compared with those for whom productivity is linked to cash flow. Productivity of inward investors is driven by cash flow rather than intangible assets, these being limited to high-technology investors from the EU and the USA.

The causal relationship between information and communication technology and foreign direct investment

This paper investigates the simultaneous causal relationship between investments in information and communication technology (ICT) and flows of foreign direct investment (FDI), with reference to its implications on economic growth. For the empirical analysis we use data from 23 major countries with heterogeneous economic development for the period 1976-99. Our causality test results suggest that there is a causal relationship from ICT to FDI in developed countries, which means that a higher level of ICT investment leads to an increase inflow of FDI. ICT may contribute to economic growth indirectly by attracting more FDI. Contrarily, we could not find significant causality from ICT to FDI in developing countries. Instead, we have partial evidence of opposite causality relationship: the inflow of FDI causes further increases in ICT investment and production capacity. © United Nations University 2006.