Bilateral FDI Flows: Threshold Barriers and Productivity Shocks

CESifo Economic Studies (Impact Factor: 0.62). 10/2005; 54(3). DOI: 10.1093/cesifo/ifn025
Source: RePEc


A positive productivity shock in the host country tends typically to increase the volume of the desired FDI flows to the host country, through the standard marginal profitability effect. But, at the same time, such a shock may lower the likelihood of making any new FDI flows by the source country, through a total profitability effect, derived from the a general-equilibrium increase in domestic input prices. This is the gist of the theory that we develop in the paper. For a sample of 62 OECD and Non-OECD countries over the period 1987-2000, we provide supporting evidence for the existence of such conflicting effects of productivity change on bilateral FDI flows. We also uncover sizeable threshold barriers in our data set and link the analysis to the Lucas Paradox.

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Available from: Assaf Razin, Oct 10, 2015
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    • "These models postulate that bilateral international flows (goods, FDI, etc.) between any two economies are positively related to the size of the two economies (e.g., population, GDP), and negatively related to the distance and a set of variables accounting for relative costs (tariffs barriers, information asymmetries, etc.). The gravity model has been widely used in the literature for explaining FDI (Eaton and Tamura, 1995; Habib and Zurawicki, 2002; Head and Ries, 2008; Razin et al., 2005; Wei, 2000; Wei and Wu, 2001). "
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    ABSTRACT: We study the effects of “corruption distance,” defined as the difference in corruption levels between country pairs, on bilateral foreign direct investment (FDI). Using a “gravity” model and the Heckman (1979) two-stage framework on a data set of 45 countries from 1997 to 2007, we find that corruption distance adversely affects the volume of FDI to be invested in a host country. However, we do not find statistical evidence that corruption distance influences FDI’s decision on whether to invest or not. The volume reduction effect of corruption distance varies across different source-host-country-pair samples. Further, we identify the asymmetric effect of corruption distance and find that the positive corruption distance, defined as the corruption distance from a high corruption source to a low corruption host country, is the prominent one that affects the behavior of bilateral FDI. Again, the degree of such asymmetric effect varies across different country-pair samples.
    SSRN Electronic Journal 05/2012; DOI:10.2139/ssrn.2076759
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    • "We expect a positive relationship between FDI and Inf ra jt : Increases in the infrastructure endowment lower production costs and lead ceteris paribus to a higher profitability of the investment; (j) finally, the per capita GDP of the origin countries of FDI, lnGDP cap it [+], is used as an indicator of the capital abundance of the country (see e.g., Egger and Pfaffermayer, 2004). Under standard assumptions FDI outflows should be higher the higher the capital abundance of a country (see e.g., Razin et al., 2008). Thus we expect a positively signed coefficient. "
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    ABSTRACT: Based on a spatially augmented gravity model the current paper isolates spatial interrelationships in Foreign Direct Investment (FDI) to Central and Eastern European Countries (CEECs) not only across the destination but also across the origin country dimension of FDI. Results show that: (i) spatial interrelationships across destination countries are present and are consistent with the predom- inance of vertical-complex FDI in total FDI; (ii) spatial correlation across origin countries is given in earlier years of transition, while demonstration and competition effects cancel over the whole sample period; and (iii) agglomeration forces gain in importance for FDI to CEECs.
    Journal of International Trade and Economic Development 01/2012; 23(8). DOI:10.1080/09638199.2013.861006 · 0.13 Impact Factor
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    • "Hence, out of the available 3,637 observations 22% are zeros and negative values. Provided ''zeros'' represent true lack of FDI, dropping this information would lead to biased estimates of the true model parameters (Razin et al. 2005). Negative values might also carry valuable information. "
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    ABSTRACT: We investigate the effect of the political regime on bilateral FDI flows from advanced to emerging countries in the period 1992–2004. We control for country size, per capita income and privatization proceeds in the host country, and use a random-effect Tobit model to exploit information from zero entries. Our results suggest that democracy does have a positive effect on the amount and probability of FDI flows from developed to emerging countries. Moreover, we find that the effect of democracy on FDI also works through the total factor productivity channel, not only the political risk one as suggested in the literature.
    Review of World Economics 04/2009; 145(1). DOI:10.1007/s10290-009-0004-7 · 0.78 Impact Factor
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