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.

Download full-text


Available from: Assaf Razin,
  • Source
    • "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). "
    [Show abstract] [Hide abstract]
    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
  • Source
    • "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. "
    [Show abstract] [Hide abstract]
    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 · 0.34 Impact Factor
  • Source
    • "They argued that factors disrupting the flow of information between specific markets reduce a firm's awareness of business opportunities in other markets, as well as raising the risk that the firm may either be mistaken about the opportunity, or unable to effectively capitalize on it. Since that time, psychic or cultural distance has played a consistent role as a predictor variable for bilateral FDI flows (Habib & Zurawicki, 2002; Razin et al., 2005), the source of inward FDI (Grosse & Goldberg, 1991; Grosse & Trevino, 1996), the destination of outward FDI (Davidson, 1983), and the order of market entries for FDI (Benito & Gripsrud, 1992; Erramilli, 1991). Unfortunately, as highlighted earlier, five of these seven studies used Hofstede as their sole indicator of distance, and only a slim majority (4 of 7) of these studies found a statistically (negative) relationship. "
    [Show abstract] [Hide abstract]
    ABSTRACT: Over the past decade, numerous calls have been made within the international business literature for a broader conceptualization and measurement of non-geographic forms distance amongst countries. One promising response to this call has been a set of psychic distance stimuli scales put forward by Dow, D., & Karunaratna, A. (2006). Developing a multidimensional instrument to measure psychic distance stimuli. Journal of International Business Studies, 37(5), 575–577. However, to date, these new scales have only been tested in one very limited setting – predicting bi-lateral trade flows. This paper extends the generalizability of the Dow and Karunaratna scales by testing their criterion-related validity with respect to three specific foreign direct investment (FDI) issues: predicting market selection, entry mode choice and performance. The results indicate that the Dow and Karunaratna scales are significantly stronger predictors of market selection and FDI performance than the traditional Kogut and Singh index; and that researchers should go beyond using national cultural distance as their sole measure of distance amongst countries. The results for predicting entry mode choice are more ambiguous; however, the authors argue that the ambiguity may reflect the inadequacies of the classic TCE-based approach to predicting entry mode, rather than shortcomings in the measurement of the distance construct.
    International Business Review 02/2010; 19(1-19):46-58. DOI:10.1016/j.ibusrev.2009.11.001 · 1.51 Impact Factor
Show more