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The Impact of Foreign Direct Investment on Developing Countries' Terms of Trade
Abstract
This study has been prepared within the UNU-WIDER project on New Directions in Development Economics. UNU-WIDER acknowledges the financial contributions to the research programme by the governments of Denmark (Royal Ministry of Foreign Affairs), Finland (Ministry for Foreign Affairs), Sweden (Swedish International Development Cooperation Agency—Sida) and the United Kingdom (Department for International Development). Abstract This paper first shows that important economic arguments in favor of the Prebisch-Singer hypothesis of falling terms of trade of developing countries have implicitly relied on the role of multinational corporations and foreign direct investment. As of yet, the relationship between the latter and terms of trade has not been empirically investigated. In order to start closing this gap in research, data on 111 developing countries between 1980 and 2008 is analyzed using panel data methods. The empirical results suggest that there is no reason to believe multinationals' activities were responsible for a possible decrease of the developing countries' net barter terms of trade. On the contrary, foreign direct investment seems to play a positive role for developing countries' terms of trade. The paper also investigates other possible variables structurally influencing terms of trade and thus provides fruitful directions for future research.
... Since this would decrease import prices, terms of trade would increase which gives rise to TOTV. In other words, MNCs might have favorable supply channels for input goods, potentially circumventing the problem in many emerging countries that arises when investment surges also cause input prices to increase (Collier 2010;Wacker 2011;Wacker et al. 2013). It is also well known that MNCs pay higher wages than domestic firms (e.g., Lipsey 2002) and to the extent they are reflected in the final good's (export) price, this leads to more favorable terms of trade for the FDI host country. ...
... A MNC can enforce higher prices due to market power which especially matters for terms of trade when FDI comes in the form of export-oriented FDI (Ekholm et al. 2007;Blonigen et al. 2007;Baltagi et al. 2008). The FDI-TOT nexus seems to be stronger for countries with a higher trade/GDP ratio (Wacker 2011). A vertical FDI between industrialized and developing countries (where MNCs can exploit location advantages and factor price differentials) leads to an international trade flow within the multinational production network of the investor. ...
... Among the studies that have concluded that FDI does not cause economic growth are those of Haddad and Harrison (1993), Grilli and Milesi-Ferretti (1995) and Javorcik (2004). Others share the widespread view that FDI generates economic growth, especially Blomström et al. (1996), De Gregorio (1992), Mody and Wang (1997), Luiz and de Mello (1999), Nair-Reichert and Weinhold (2001), Lensink and Morrissey (2006), Li et al. (2007), Wacker (2011), andWacker et al. (2013). 1 Furthermore, previous studies that have investigated the causality between FDI and growth is based on either the generalized method of moments (GMM) or the method developed by the Engle and Granger and the Johansens cointegration techniques. However, it has been shown that these methods have several disadvantages. ...
Despite the fact that previous studies have extensively investigated the foreign direct investment (FDI)-growth nexus, those studies have not considered the role of terms of trade as a proxy for international competitiveness and structural changes. This paper investigates the causal nexus between FDI, growth, and terms of trade volatility (TOTV) in Estonia, Latvia, and Lithuania by constructing a vector autoregression model. On the basis of the Granger non-causality procedure developed by Toda and Yamamoto (J Econom 66:225–250, 1995) and Yamada and Toda (J Econom 86:55–95, 1998), the results show that the causality is bidirectional between FDI and growth in Estonia and unidirectional (running from FDI to growth) in Latvia and Lithuania. The results also confirm causal linkages between FDI and TOTV in the sample countries. The policy implication of these results is that, by promoting growth and structural reforms, the recipient countries can encourage FDI inflows and, this in turn, can affect growth. In addition, multinationals’ activities and TOTV show the presence of a feedback between these two variables.
... donde δ es el promedio de la tasa de depreciación, e I F es la entrada neta de inversión. La tasa de depreciación empleada es de 10% para todos los países (Wacker, 2011). e) Superficie anual agrícola (sa). ...
Este trabajo analiza la relación de emisiones agrícolas de metano y óxido nitroso en función del producto interno bruto per cápita y su término cuadrático en 26 países latinoamericanos y del Caribe (1990-2019); considera también el stock de inversión extranjera para probar la hipótesis del paraíso contaminante, la superficie agrícola (SA) y el metano para la función de óxido nitroso. El estudio comprendió pruebas de raíz unitaria y cointegración. La estimación de coeficientes se realizó por mínimos cuadrados completamente modificados (FMOLS), efectos comunes correlacionados (CCE) y grupo medio aumentado (AMG). Los resultados por FMOLS muestran evidencia de una probable curva ambiental de Kuznets en el conjunto de países para metano, además sustentan un paraíso contaminante. Los resultados por CCE y AMG indican lo contrario. Para óxido nitroso, los resultados de FMOLS apoyan una curva en U. Lo anterior sostiene una política ambiental conjunta de ambos gases, donde la SA es un elemento clave. Los resultados anteriores se tienen que corroborar con otros métodos y extender los estudios a otros países en el tiempo.
... is paper is to build on this approach to provide up-todate explanation of demand factors that stand behind the strong preference of foreign investors for Brazil, India and China among other emerging economies. The demand determinants cannot be but diverse, and hence are assorted into three main categories: economic/financial, social, and political. Nonnenberg et al (2004) use a panel of 38 developing economies over the period 1975-2000. They find significant and positive effects for size of the economy (as measured by GPD), the average rate of growth in previous years, the level of schooling, and the degree of openness. Inflation and a country's risk rating had a significant and negative effect upon the ...
This paper seeks to find the main incentives which have made Brazil, India and China attractive for foreign direct investment, and for that we consider new untested explanatory variables to assess the hypothesized impact of financial markets and economic conditions, as well as other social and political factors. Regressing net FDI inflows on these variables during the full data series (1980-2008), and after controlling for severe econometric problems, the nested block regression concludes that the economic/financial variables account for 57% of the change in net inward foreign direct investment, followed by social variables. The nested block regression shows that for the past ten-year data series (1999-2008), one social variable (life quality proxied by energy consumption) emerges first followed by financial variables including GDP, inflation, trade balance and sovereign credit risk (R 2 is 49% for life quality and 26% for financials, respectively), and India appear to lag behind China and Brazil. These findings represent our major contribution to the FDI determinants literature. Therefore, we recommend that countries which intend to attract more inward foreign direct investment may want to consider paying more attention to the economic/financial incentives, among others, to be able to optimize the amount of FDI flowing in from foreign investors.
... There are found types of land acquisition (Bickel and Breuer, 2009): countries with large populations and sustained growth (China, India, Japan, South Korea) undertake @BULLET investments to satisfy the increasing internal demand for agricultural products; countries with negative food balances and limited land and water resources but rich in capital (Gulf @BULLET states, Libya); industrialized countries that target land investments for biofuel production; and @BULLET domestic land speculation in developing countries (e.g for tourism). @BULLET The land acquisition strategy is often described as a win-win situation. ...
This paper studies the joint dynamics of foreign direct investments (FDI) and output growth in European regions by using spatially augmented systems of equations modeling framework that incorporates third‐region and spillover effects. The joint framework is used to study the dynamic impacts of regional human capital endowments, which demonstrates the importance of explicitly accounting for an endogenous relationship. The relationship is highlighted in a stylized projection exercise, where the long‐run impacts are pronounced in Eastern Europe and capital cities. Overall, ignoring the relationship of regional economic performance and FDI distorts the implied transmission mechanism, which is of utmost importance for policy makers.
The main objective of this study is to examine the effects of non-oil exports and foreign direct investment on employment, in a unified framework, by reviewing the information of 14 MENA member states in 2010-2018 using the Spatial econometrics model. The explanatory variables studied in this study include exports, the degree of trade openness, gross domestic product, oil export, fixed capital and real wages, which were examined directly and indirectly and in general. The results of this study showed that exports and Foreign Direct Investment as important variables of this research have a direct and indirect role in increasing the employment of MENA member states. But the degree of trade openness has not had a positive impact on employment. In addition, real and fixed wages have been able to increase the employment of the countries under study. The variable oil export have had a negative impact on employment, which is a negative predicted oil export and according to empirical views. According to the results it is recommended to increase employment, improve international trade and reducing crude oil sales
Based on a new analytical country classification of African economies as fragile, factor and investment driven economies, we identify the main determinants of FDI inflows to Africa. Using a panel co-integration approach for the period 1996–2012 we find market size, availability of natural resources, openness to international trade, a stable macroeconomic environment, better infrastructure and an effective bureaucracy to have a strong positive impact in attracting FDI to Africa. On the other hand, political and macroeconomic instability and high financial and transfer risks have a negative effect in attracting FDI to the continent. However, the effect of these factors varies significantly across the analytical country classification that we have developed. Among all FDI determinants only government effectiveness and natural resource abundance are important across all countries. This suggests the importance of emphasizing different policies in different countries or country groups. Moreover, our analysis also suggests that the new analytical classification developed in this study can be an important guide for operational and analytical works of continental organizations such as the African Development Bank, the Economic Commission for Africa and the African Union.
Based on the lines of the eclectic theoretical framework of Foreign direct investment (FDI) flows, this study investigates the macroeconomic, political, and institutional determinants of FDI inflows
to Ethiopia for the period 1970–2013. Using the ARDL
modeling approach, it finds that political and institutional factors
are crucial both in the long run and the short run in FDI inflows to the country. On the macroeconomic side, the market size of the country, availability of natural resources
, openness to trade, and deprecation in the nominal exchange rate
are found to positively affect FDI inflows to the country. On the other hand, macroeconomic instability is found to effect FDI inflows negatively. In addition, better political stability
, government effectiveness
and regulatory quality
, and better performance of the rule of law
are found to positively affect FDI inflows
to the country. A careful liberalization of the foreign exchange market and that of external trade, sustaining the current growth momentum of the economy, improving institutional quality
, and strengthening the political stability
of the country, among others, are fundamental areas that the government could work on to strengthen Ethiopia’s position in FDI inflows on the continent.
In the present chapter we have made an attempt to identify factors determining the investment attractiveness of the new EU Member States, which may have an impact upon the scale of foreign direct investment (FDI) in these countries. This chapter is structured as follows. First, it explores the existing literature on FDI definition and main effects of its inflow into the host country. Subsequently, we discuss the investment attractiveness and its determinants in theory and based on empirical studies. Further, we review investment attractiveness assessment of the new EU Member States based on selected international rankings. The final part examines relationships between selected determinants of investment attractiveness and FDI inflows to new EU Member States. The presented study is particularly focused on the correlation between selected variables pertaining to investment incentives and the inflow of FDI. The study is based on appropriate statistical methods, such as Spearman’s rank correlation and Pearson correlation. Finally, we present the key conclusions of the chapter.
For much of the twentieth century, less developed countries endured deteriorating terms of trade relative to more advanced nations. During that time, a number of explanations emerged to help explain the “unequal exchange” that occurred between rich and poor countries. We revisit these ideas in light of recent data showing more favorable trade terms for a large number of countries in the developing world. Using panel data covering 132 countries during the 1990–2012 period, our analysis considers the importance of trade composition, productive capacity, labor power, foreign capital, factor endowments, and macroeconomic conditions in affecting a country's net barter terms of trade. In addition, we introduce a measure of trade coreness to this field of work, which indicates the relative bargaining power that countries possess during exchange. Our results show that changes in the terms of trade can be attributed to several factors. Most notably, our findings suggest that foreign capital penetration leads to deteriorating terms of trade via its impact on labor conditions, while countries occupying more core-like positions in the international trade network have come to experience more favorable trade terms.
Over time, foreign investments were the decisive factor contributing to the development of nations, but were the hardest hit during economic recessions. Under the circumstances of the world economy globalization and of the quasi-liberalization of international capital movements, leading to a high degree of financial markets interdependence, the impact of the crisis triggered in 2008 on FDI has been severe: decreased investment ability of companies, both on account of restricting access to financial resources and declining corporate profits; increased costs of financing on volatile international capital markets; reduced risk appetite of investors; deteriorated
business climate; re-location of investments portfolio and the pressure of sovereign debts.
Labour market determinants are considered among the main factors attracting FDI in transition countries. The aim of this paper is to to emphasize the importance of the labour market in attracting FDI in both Central and Eastern and Western European countries. Using a fixed-effects panel data approach during 1996-2013, we find that labour market determinants are still important for foreign investors, but that they are different according to the group of countries considered. Also, the quality of the labour market is more important for investors in the new EU countries than for the old EU member states. Finally, we are signaling that the variables used until recently for describing labour market are not enough for assessing its entire complexity; more variables expressing the quality of the labour market should be included in further empirical studies.
This paper combines two fields in the economic literature by examining empirically the pattern of foreign direct investment (FDI) flows within the European Union (EU) and the relevance of trade integration as an influence upon investment flows over the period 1995–2009. We capture trade integration primarily by means of the home bias, rather than by using other indicators such as tariffs and non-tariff barriers. In turn, the home bias is computed for the countries in our sample by a standard gravity model. Our results find a positive and robust correlation between trade integration and FDI activity for the countries in our sample. For the particular case of the EU, it is not possible to strictly discriminate between horizontal or vertical FDI. FDI flows seem to be more consistent with a knowledge-capital hybrid model, where considerations about the market size of the partners and their relative endowment of skilled labour are relevant.
This paper explores the economic relationship between foreign direct investment to developing countries and the export prices of the latter, measured by terms of trade. It is first shown that economic theory suggests such a relationship for various reasons but is inconclusive about the direction of the effect.To address this open issue empirically, I analyze data on more than 50 developing countries throughout the period 1980-2008 using dynamic panel data methods. The results show that multinational corporations, measured by data on foreign direct investment, had an economically relevant and statistically significant positive impact on developing countries’ net barter terms of trade. A higher level of education in the developing country fosters this effect.
Upon its publication in 1989, this was the first systematic and comprehensive analysis of the Latin American School of Development and an invaluable guide to the major Third World contribution to development theory. The four major strands in the work of Latin American Theorists are: structuralism, internal colonialism, marginality and dependency. Exploring all four in detail, and the interconnections between them, Cristobal Kay highlights the developed world's over-reliance on, and partial knowledge of, dependency theory in its approach to development issues, and analyses the first major challenges to neo-classical and modernisation theories from the Third World.
There are three main drivers of economic globalization in the latter half of the 20th century: investment by transnational corporations, international trade, and the Internet. Whereas producer-driven and buyer-driven commodity chains characterize the phases of investment-based and trade-based globalization, respectively, the emergence of the Internet in the mid-1990s heralds a new age of digital globalization. The explosion in connectivity that is enabled by the Internet has launched an e-commerce revolution that is beginning to transform the structure of business-to-business (B2B) as well as business-to-consumer (B2C) transactions in global industries. New infomediaries that navigate access to rich information and greater reach by businesses and consumers are prominent in B2C digital networks. The Internet's most significant impact to date, however, has been in B2B markets, where e-commerce is reshaping the competitive dynamics and power alignments in traditional producer-driven and buyer-driven commodity chains such as automobiles and apparel.
The debate about the Prebisch-Singer thesis has focussed on primary commodities with some extensions to manufactures. As we think that the link between the terms of trade and longrun development, growth and convergence is the ability of exports to enhance investment through importing capital goods we analyse trends in country terms-of-trade. We use two data sets. We find that for the poor countries the terms of trade of goods and services are falling at a rate that is less negative than for net-barter terms of trade and those found earlier for primary commodities.
This paper assesses the achievements and limitations of commodity chain research as it has evolved over the last decade. The primary objectives are two-fold. First, I highlight an important but generally unacknowledged break between the original world-systems-inspired tradition of commodity chain research and two subsequent chain approaches, the global commodity chain (GCC) and global value chain (GVC) frameworks. Second, I argue that contra the macro and holistic perspective of the world-systems approach, much of the recent chains literature, and particularly the more economistic GVC variant, is increasingly oriented in its analytical approach towards the meso level of sectoral logics and the micro level objective of industrial upgrading. I conclude that closer attention to the larger institu-tional and structural environments in which commodity chains are embedded is needed in order to more fully inform our understanding of the uneven social and developmental dynamics of contemporary capitalism at the global-local nexus.
There are two sides to unit value indices. The first is their widespread and unwarranted use based on customs data as surrogates for price relatives of product groups of exports and imports. For the aggregation of heterogeneous items, superlative price indices are best and unit value indices are biased. The second is the widespread and unwarranted use of price indices for homogeneous items, for which unit value indices are best and superlative price indices are biased. Then there is the "in-between": the case of broadly comparable items. This paper examines such issues. Copyright 2010 The International Monetary Fund. Journal compilation 2010 International Association for Research in Income and Wealth.
There are a number of theoretical reasons why foreign direct investment (FDI) into a host country may depend on the FDI in proximate countries. Such spatial interdependence has been largely ignored by the empirical FDI literature, with only a couple recent papers accounting for such issues in their estimation. This paper conducts a general examination of spatial interactions in empirical FDI models using data on US outbound FDI activity. We find that estimated relationships of traditional determinants of FDI are surprisingly robust to inclusion of terms to capture spatial interdependence, even though such interdependence is estimated to be significant. However, we find that both the traditional determinants of FDI and the estimated spatial interdependence are quite sensitive to the sample of countries one examines.
Many countries strive to attract foreign direct investment (FDI) hoping that knowledge brought by multinationals will spill over to domestic industries and increase their productivity. In contrast with earlier literature that failed to find positive intraindustry spillovers from FDI, this study focuses on effects operating across industries. The analysis, based on firm-level data from Lithuania, produces evidence consistent with positive productivity spillovers from FDI taking place through contacts between foreign affiliates and their local suppliers in upstream sectors. The data indicate that spillovers are associated with projects with shared domestic and foreign ownership but not with fully owned foreign investments.
Explicit asymptotic bias formulae are given for dynamic panel regression estimators as the cross section sample size N 8. The results extend earlier work by Nickell (1981) in several directions that are relevant for practical work, including models with unit roots, deterministic trends, predetermined and exogenous regressors, and errors that may be cross sectionally dependent. The asymptotic bias is found to be so large when incidental linear trends are fitted and the time series sample size is small that it changes the sign of the autoregressive coefficient. Another finding of interest is that, when there is cross section error dependence, the probability limit of the dynamic panel regression estimator is a random variable rather than a constant, which helps to explain the substantial variability observed in dynamic panel estimates when there is cross section dependence even in situations where N is very large.
INTRODUCTION, HISTORY, AND DEFINITIONSSIMULATIONSTHEORYSPURIOUS REGRESSIONS WITH STATIONARY PROCESSESRELATED PROCESSES
One of the most widely discussed theories concerning the terms of trade of developing countries is the Prebisch–Singer hypothesis, independently published in 1950 (Prebisch 1950; Singer 1950). This hypothesis proclaimed a structural tendency for the terms of trade of developing countries to deteriorate in their dealings with industrial countries. In the original form this related mainly to the terms of trade between primary commodities and manufactured goods from the industrial countries. The historical statistical basis was an analysis of British terms of trade during the period 1873–1938 which corresponded to this image of exports of manufactured goods in exchange for primary commodities.
Import-substituting industrialization (ISI) has undoubtedly played a central role in the economic development of Latin America in the present century. Nonetheless, the effectiveness of this process as a basis for sustainable output growth, rising living standards and social modernization is still strongly contested. The critique of ISI is thus not only a question of understanding a particular period of economic history, it is also a matter of evaluating the current economic strategy of the region, based on increasing integration into world markets and less state intervention in industry. This is explicitly defined in contrast to what is perceived as the previous ISI strategy (Edwards, 1995).
Three potential consequences of trade liberalisation are often argued to take place: (1) an increase in aggregate productivity, (2) an expansion of the most productive …rms and (3) an exit of the least productive …rms. In recent years much research within trade has taken place on this phe- nomenon, mainly due to Melitz (2003). He designed a model in which intraindustry reallocation of production achieves these three results. This paper utilises a natural experiment to test this model as well as alterna- tive models. The experiment in question is the construction of a bridge connecting Malmö in Sweden with Copenhagen in Denmark across the Öresund Strait (previously only connected through a ferry link). The pa- per …nds evidence for an increase in aggregate productivity, an expansion of the most productive …rms and an increased likelihood for the most productive …rms to become exporters due to the increase in trade that took place after the bridge was opened. It fails to show evidence for an exit of the least productive …rms as well as for alternative theories in the literature.
Contrary to the classical proposition, the works of Prebisch and Singer launched the controversial hypothesis of long-term decline in the terms of trade of primary products vis-à-vis manufactures and a corresponding decline in the terms of trade of the South vis-à-vis the North. The present study traces the origin and evolution of the hypothesis and reviews the related statistical debate. It concludes that the empirical base of the Prebisch-Singer hypothesis is much stronger than it appeared in earlier decades. Reviewing some of the North-South models, the study also finds theoretical support for the Prebisch-Singer hypothesis.
Recently, methods for detecting unit roots in autoregressive and autoregressive-moving average time series have been proposed. The presence of a unit root indicates that the time series is not stationary but that differencing will reduce it to stationarity. The tests proposed to date require specification of the number of autoregressive and moving average coefficients in the model. In this paper we develop a test for unit roots which is based on an approximation of an autoregressive-moving average model by an autoregression. The test statistic is standard output from most regression programs and has a limit distribution whose percentiles have been tabulated. An example is provided.
International trade is of very considerable importance to underdeveloped countries, and the benefits which they derive from trade and any variations in their trade affect their national incomes very deeply. The opposite view, which is frequent among economists, namely that trade is less important to the underdeveloped countries than it is to industrialized countries, may be said to derive from a logical confusion — very easy to slip into — between the absolute amount of foreign trade, which is known to be an increasing function of national income, and the ratio of foreign trade to national income. Foreign trade tends to be proportionately most important when incomes are lowest. Second, fluctuations in the volume and value of foreign trade tend to be proportionately more violent in trade of underdeveloped countries and therefore a fortiori also more important in relation to national income. Third, and a fortissimo, fluctuations in foreign trade tend to be immensely more important for underdeveloped countries in relation to that small margin of income over subsistence needs which forms the source of capital formation, for which they often depend on export surpluses over consumption goods required from abroad.
This paper examines jointly the Prebisch–Singer hypothesis of a long-term decline in the relative price of primary commodities and the appropriate framework in which it is tested. A general model is estimated which nests the univariate and bivariate time-series models used in the past literature. The results suggest that the econometric models estimated in the majority of previous studies were misspecified. The evidence strongly supports the Prebisch–Singer hypothesis and rejects recent findings—that the terms of trade are characterized by infrequent negative shocks—in favor of a long-term negative trend.
The paper investigates the dynamic relationship between external and internal shocks and the current account in selected small islands developing states. External shocks, defined as terms of trade fluctuations, explain a significant proportion of the variation in the current account balances. The external shocks have a temporary negative impact on the current account balances with a subsequent improvement, generating a J-curve type reaction. In contrast, real output shocks have a positive and significant effect on the current account.
Research on economic growth has exploded in the past decade. Hundreds of empirical studies on economic growth across countries have highlighted the correlation between growth and a variety of variables. Determinants of Economic Growth, based on Robert Barro's Lionel Robbins Memorial Lectures, delivered at the London School of Economics in February 1996, summarizes this important literature. The book contains three essays. The first is a survey of the research on the determinants of long-run growth through the estimation of panels of cross-country data. The second essay details the interplay between growth and political freedom or democracy and finds some evidence of a nonlinear relationship. At low levels of political rights, an expansion of rights stimulates growth; however, once a moderate level of democracy has been obtained, a further expansion of rights reduces growth. The final essay looks at the connection between inflation and economic growth. Its basic finding is that higher inflation goes along with a lower rate of economic growth.
The share of US output held by foreign-controlled firms tripled during the 1980s, but the growth of foreign direct investment in the United States fell sharply after 1990. Graham and Krugman provided the first analysis of the growth of this investment, and its economic and national security implications, in the first and second editions. The third, extensively revised edition analyzes the post-1990 downturn in FDI, updates all statistics, provides new analysis based on statistical series not previously available, and assesses recent legislative proposals to restrict FDI.
The asymptotic properties of parameter estimators which are based on a model that has been selected by a model selection procedure are investigated. In particular, the asymptotic distribution is derived and the effects of the model selection process on subsequent inference are illustrated.
This paper reviews econometric methods for dynamic panel data models, and presents examples that illustrate the use of these procedures. The focus is on panels where a large number of individuals or firms are observed for a small number of time periods, typical of applications with microeconomic data. The emphasis is on single equation models with autoregressive dynamics and explanatory variables that are not strictly exogenous, and hence on the Generalised Method of Moments estimators that are widely used in this context. Two examples using firm-level panels are discussed in detail: a simple autoregressive model for investment rates; and a basic production function.
During the last 40 years since the Prebisch-Singer terms of trade deterioration hypothesis was first proposed, the commodity composition of exports of developing countries has undergone a major change in the direction of dominance of manufactures in their nonfuel exports, with strong growth in the volume of their manufactured exports. But this did not allow developing countries to escape unequal exchange relations with the industrial countries. Their barter terms of trade in manufactures showed signs of weakness rather than improvement, and clearly failed to reflect the respective productivity trends, leading to deterioration in factoral terms of trade.
We examine how multinational firms with heterogeneous total factor productivity (TFP) self-select into different host countries. Both aggregate- and firm-level estimates suggest that more productive French firms are more likely than their less efficient competitors to invest in relatively tough host countries. Countries with a smaller market potential, higher fixed costs of investment or lower import tariffs tend to have higher cutoff productivities and attract a greater proportion of productive multinationals. This self-selection mechanism remains largely robust when we control for unobserved firm and country heterogeneity and address potential TFP endogeneity.
Despite the fairly widespread move towards more open trade policies in developing countries relatively little attention has been paid to the effect of these policies on the terms of trade. Using a large sample of countries this paper tries to assess empirically the validity of the “small country assumption” which underlies the Washington consensus on development strategies. Our evidence suggests that there is a sizable group of countries (LDCs and non-LDCs) for which the assumption of exogenous traded-goods prices can be rejected. One implication is that terms of trade considerations should be included in the assessment of trade-liberalization policies. These effects might rise considerably when several countries liberalize simultaneously.
Recent research on trade and multinationals highlights that multinational firms’ integration strategies are complex and the degree of vertical integration varies in a multilateral world with many possible locations of activity. In particular, multinationals control a large fraction of trade within the block of developed countries. The most important regional trade agreements (RTAs) are signed between members of the very same block of economies. This gives rise to the question asked in the present paper: what is the impact of RTAs on FDI in an interdependent world? Recent spatial HAC estimation techniques are applied to both estimation and testing.
Estimation of the dynamic error components model is considered using two alternative linear estimators that are designed to improve the properties of the standard first-differenced GMM estimator. Both estimators require restrictions on the initial conditions process. Asymptotic efficiency comparisons and Monte Carlo simulations for the simple AR(1) model demonstrate the dramatic improvement in performance of the proposed estimators compared to the usual first-differenced GMM estimator, and compared to non-linear GMM. The importance of these results is illustrated in an application to the estimation of a labour demand model using company panel data.
To explain why trade restrictions sometimes speed up worldwide growth and sometimes slow it down, we exploit an analogy with the theory or consumer behavior. Substitution effects make demand curves slope down, but income effects can increase or decrease the slope, and can sometimes overwhelm the substitution effect. We decompose changes in the worldwide growth rate into two effects (integration and redundancy) that unambiguously slow down growth, and a third effect (allocation) that can either speed it up or slow it down. We study two types of trade restrictions to illustrate the use of this decomposition. The First is across the board restrictions on traded goods in an otherwise perfect market. The second is selective protection of knowledge-intensive goods in a world with imperfect intellectual property rights. In both examples, we show that for trade between similar regions such as Europe and North America, the first two effects dominate; starting from free trade, restrictions unambiguously reduce worldwide growth.
Explicit asymptotic bias formulae are given for dynamic panel regression estimators as the cross section sample size N→∞. The results extend earlier work by Nickell [1981. Biases in dynamic models with fixed effects. Econometrica 49, 1417–1426] and later authors in several directions that are relevant for practical work, including models with unit roots, deterministic trends, predetermined and exogenous regressors, and errors that may be cross sectionally dependent. The asymptotic bias is found to be so large when incidental linear trends are fitted and the time series sample size is small that it changes the sign of the autoregressive coefficient. Another finding of interest is that, when there is cross section error dependence, the probability limit of the dynamic panel regression estimator is a random variable rather than a constant, which helps to explain the substantial variability observed in dynamic panel estimates when there is cross section dependence even in situations where N is very large. Some proposals for bias correction are suggested and finite sample performance is analyzed in simulations.
The paper analyses the regression of two independent random walks with drifts. Applying the nonsense regression results to panel data, it is shown that the convergence to pseudo true values also applies to the estimation of (spurious) fixed-effects models. Simulated evidence reveals potential interpretation problems in finite samples.
This paper presents a parameter covariance matrix estimator which is consistent even when the disturbances of a linear regression model are heteroskedastic. This estimator does not depend on a formal model of the structure of the heteroskedasticity. By comparing the elements of the new estimator to those of the usual covariance estimator, one obtains a direct test for heteroskedasticity, since in the absence of heteroskedasticity, the two estimators will be approximately equal, but will generally diverge otherwise. The test has an appealing least squares interpretation.
This paper develops a dynamic industry model with heterogeneous firms to analyze the intra‐industry effects of international trade. The model shows how the exposure to trade will induce only the more productive firms to enter the export market (while some less productive firms continue to produce only for the domestic market) and will simultaneously force the least productive firms to exit. It then shows how further increases in the industry's exposure to trade lead to additional inter‐firm reallocations towards more productive firms. The paper also shows how the aggregate industry productivity growth generated by the reallocations contributes to a welfare gain, thus highlighting a benefit from trade that has not been examined theoretically before. The paper adapts Hopenhayn's (1992a) dynamic industry model to monopolistic competition in a general equilibrium setting. In so doing, the paper provides an extension of Krugman's (1980) trade model that incorporates firm level productivity differences. Firms with different productivity levels coexist in an industry because each firm faces initial uncertainty concerning its productivity before making an irreversible investment to enter the industry. Entry into the export market is also costly, but the firm's decision to export occurs after it gains knowledge of its productivity.
This paper presents specification tests that are applicable after estimating a dynamic model from panel data by the generalized
method of moments (GMM), and studies the practical performance of these procedures using both generated and real data. Our
GMM estimator optimally exploits all the linear moment restrictions that follow from the assumption of no serial correlation
in the errors, in an equation which contains individual effects, lagged dependent variables and no strictly exogenous variables.
We propose a test of serial correlation based on the GMM residuals and compare this with Sargan tests of over-identifying
restrictions and Hausman specification tests.
We employ a unique data set and new time-series techniques to reexamine the existence of trends in relative primary commodity prices. The data set comprises 25 commodities and provides a new historical perspective, spanning the seventeenth to the twenty-first centuries. New tests for the trend function, robust to the order of integration of the series, are applied to the data. Results show that eleven price series present a significant and downward trend over all or some fraction of the sample period. In the very long run, a secular, deteriorating trend is a relevant phenomenon for a significant proportion of primary commodities. (c) 2010 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.