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Outward foreign direct investment and sovereign risks in developing host country
Abstract
Outward foreign direct investment can affect developing, technology-receiving host countries mainly through tax revenue, technology spillover and the competition effect. With the consideration of these three effects of the outward foreign direct investment on host country, we develop a dynamic game model of interaction between foreign investors and host country from a dynamic perspective, to reveal the dynamic evolution mechanism of the sovereign risk faced by outward foreign direct investment. The result shows that: host governments usually give a specific tax holiday for outward foreign direct investors, and during the period of tax holiday investment decision of investors would be influenced by technology spillover effect, specifically, the greater the technology spillover the slower the growth of investment stock. Once the system reaches a stable state, the host country will impose a tax on multinational corporations. If the equilibrium tax rate of industries or regions which makes it easy to obtain technology spillover is high, then the equilibrium capital stock would be low.
... With the increasingly complex international environment, foreign investment of multinational enterprises is faced with more risks. For example, political violence, geopolitical risk, and terrorism in host countries directly threaten the property security of multinational enterprises [1][2][3]; natural disasters in host countries can raise the production costs [4]; the outbreak of a pandemic may hamper the transport of production materials [5]; and unstable fiscal and monetary policies may disrupt payment and settlement process [6]. Risk identification and avoidance are essential to the success of transnational investment activities. ...
... Aiming to help researchers better and more effectively understand the knowledge structure of risk management in FDI, this study attempts to address the following three questions. (1) What is the annual publishing trend of risk management in FDI? What are the most influential authors, journals, and institutions? ...
Aiming to identify the intellectual structure of risk management in foreign direct investment and its evolving trends, this paper introduces bibliometric analysis to systematically review the 1231 articles published between 1995 and 2022. Through the analysis of publication trends, influential indicators, cooperative networks, and citations, we draw the following important conclusions. From 1995 to 2021, the average annual growth rate of scientific production in the field reached 21.4%, with scholars from the United States and China contributing the most. Regarding the cooperation network, its structure is relatively dispersed, and the deep cooperation among a wide range of researchers has not yet been formed. As for research topics, the popularity of interest in environmental protection, carbon dioxide emissions, energy consumption, and climate change has increased significantly in recent years. Moreover, this paper points out that future research directions include new risks and challenges posed by the COVID-19 pandemic and the effects of climate risks on foreign direct investment. These results are helpful for scholars to systematically understand the current research status, research frontiers, and future trends of risk management in foreign direct investment.
... The advanced professional technology and management concepts of Chinese foreign-invested enterprises will enter local enterprises with training personnel flow, resulting in generating technology spillovers to improve the production efficiency and technical levels of enterprises in B&R countries, as well as GVC positions (Miniesy & Adams, 2016). Moreover, with Chinese foreign-invested enterprises entering B&R countries, the original market equilibrium of B&R countries would be broken, and the competition pressure in domestic market is gradually increasing (AlAzzawi, 2012; F. Chen et al., 2014), which forces local enterprises to accelerate product upgrades and technological innovation to achieve GVCs upgrade and enhance their own competitiveness (Su et al., 2021); Otherwise, they will lose their original market shares. Furthermore, after Chinese foreigninvested enterprises enter B&R countries, they establish contacts with local upstream and downstream industries, and by setting higher technical standards and product quality standards for local enterprises in B&R countries, the enterprises can passively or actively carry out technological innovation and product upgrading, thus generating spillover effects and contributing to the improvement of their GVC positions (Ma & Liu, 2020;Razzaq et al., 2021). ...
In line with previous studies of the relationship between foreign direct investment (FDI) and global value chains (GVCs), this work uses national panel data of 31 countries along the Belt and Road (B&R countries) from 2010 to 2017 to study the impact of Chinese outside foreign direct investment (OFDI) on the GVC positions of B&R countries and examines the threshold effects of infrastructure level and institutional quality on that impact. The results show that the improvement of B&R countries’ GVC positions is related to Chinese OFDI, and Chinese OFDI has significantly positive dynamic effect on improving the GVC positions of B&R countries. Infrastructure level and institutional quality have double threshold effects upon the effect of Chinese OFDI on improving the GVC positions of B&R countries. When infrastructure level successively exceeds the two thresholds, the effect of Chinese OFDI on improving the GVC positions of B&R countries gradually increases, and when institutional quality successively exceeds the two thresholds, the effect of Chinese OFDI on improving the GVC positions of B&R countries gradually decreases. Our study proposes that under the Belt and Road Initiative, to improve the GVC positions of B&R countries, B&R countries should further strengthen their cooperation with China and continue to attract Chinese OFDI. Moreover, to better play the role of Chinese OFDI in enhancing the GVC positions of B&R countries, China should further strengthen the infrastructure connectivity construction with B&R countries and pay attention to the institutional quality of B&R countries when investing in them.
... Economic vulnerability of emerging economies, exposure to internal and external shocks and their ability to weather the shocks would influence their macroeconomic situation and their performance in outward direct investment [8]. Uncertainties in developed countries bring difficulty in international business and economic growth globally [9]. Economic cycle indicate that while developed countries are in recession, the demand of products from developing countries would decline, therefore the economic downturn would transmit from developed countries to developing countries. ...
Based on the provincial panel data from 2004 to 2019, this paper constructs a more comprehensive industrial structure upgrading coefficient and uses a moderated mediation model to verify the mechanism of OFDI reverse green innovation technology on industrial upgrading. It is found that OFDI has a reverse green technology innovation effect, which can positively promote China’s industrial upgrading. From the perspective of a moderated mediating effect, the increase of domestic R&D investment is conducive to shortening the technological gap with developed countries, and the enhancement of domestic environmental regulation also encourages multinational enterprises to implement green technology cooperation. Both of them strengthen the reverse green technology innovation effect of OFDI, and correspondingly have a greater promoting effect on the upgrading of industrial structure. The reverse green technology innovation of OFDI mainly promotes strategic green innovation of noninvention types, but the enhancement of R&D capability and the improvement of environmental regulation can strengthen the reverse substantive green innovation of OFDI. After endogenous processing and replacing the core explanatory variables, the results are still significant.
Bir ülkenin borçlarını ödemekten kaçınması veya ödeyemeyecek duruma gelmesi olarak tanımlanan ülke kredi riskinin gerek yatırımcılar gerekse de diğer ülkeler üzerinde etkisi bulunmaktadır. Kredi temerrüt takasları, ülke kredi riskinin değerlendirilmesinde kullanılan göstergelerden biridir. Ülkelerin finansal piyasalarının derinliği ve izledikleri uluslararası ticaret politikaları ile değişebilen ülke kredi riski; uluslararası ticaret ve doğrudan yabancı yatırımları da etkilemektedir. Borç verenlerin veya yatırımcıların bilgilere hızlıca ulaşmasının önemli araçlarından biri olarak değerlendirilen kredi temerrüt takaslarının, uluslararası ticaret ve doğrudan yabancı yatırımlar üzerindeki etkisinin incelenmesi bu yüzden önem arz etmektedir. Türkiye’de kredi temerrüt risk priminin Türkiye’ye gerçekleştirilen doğrudan yabancı yatırımlar ve ithalat üzerindeki etkileri bu çalışmanın odak noktasını oluşturmaktadır. Çalışmanın analiz bölümünde öncelikle değişkenlerin birim kök analizler gerçekleştirilmiş, ardından kredi risk priminin Türkiye’ye gerçekleştirilen doğrudan yabancı yatırımlar ve ithalat üzerindeki kısa ve uzun dönemli ilişkilerini test etmek için ARDL sınır testine başvurulmuştur. Testler sonucunda, kredi temerrüt risk primindeki artışların Türkiye’ye gerçekleştirilen doğrudan yabancı yatırımlar ve ithalat üzerinde uzun dönemde negatif yönlü bir etkisi olduğu tespit edilmiştir. Frekans alanı nedensellik testiyle gerçekleştirilen analizler sonucunda ise kredi risk priminden Türkiye’nin ithalat hacmine doğru orta ve uzun dönemde, doğrudan yabancı yatırımlara ise orta vadede tek yönlü bir nedensellik ilişkisinin bulunduğu tespit edilmiştir. Sonuçta, kredi temerrüt risk primi kısa dönem borç ödeme yükümlülüklerine ilişkin bir gösterge olmasına rağmen, Türkiye’ye ihracat veya doğrudan yabancı yatırım planlayan firmaların orta ve uzun dönemdeki ekonomik durumu tahmin etmelerinde de önemli bir gösterge olacağı ortaya koyulmuştur.
Bir ülkenin borçlarını ödemekten kaçınması veya ödeyemeyecek duruma gelmesi olarak tanımlanan ülke kredi riskinin gerek yatırımcılar gerekse de diğer ülkeler üzerinde etkisi bulunmaktadır. Kredi temerrüt takasları, ülke kredi riskinin değerlendirilmesinde kullanılan göstergelerden biridir. Ülkelerin finansal piyasalarının derinliği ve izledikleri uluslararası ticaret politikaları ile değişebilen ülke kredi riski; uluslararası ticaret ve doğrudan yabancı yatırımları da etkilemektedir. Borç verenlerin veya yatırımcıların bilgilere hızlıca ulaşmasının önemli araçlarından biri olarak değerlendirilen kredi temerrüt takaslarının, uluslararası ticaret ve doğrudan yabancı yatırımlar üzerindeki etkisinin incelenmesi bu yüzden önem arz etmektedir. Türkiye’de kredi temerrüt risk priminin Türkiye’ye gerçekleştirilen ihracat ve doğrudan yabancı yatırımlar üzerindeki etkileri bu çalışmanın odak noktasını oluşturmaktadır. Çalışmanın analiz bölümünde öncelikle değişkenlerin birim kök analizler gerçekleştirilmiş, ardından kredi risk priminin Türkiye’ye gerçekleştirilen ihracat ve doğrudan yabancı yatırımlar üzerindeki kısa ve uzun dönemli ilişkilerini test etmek için ARDL sınır testine başvurulmuştur. Testler sonucunda, kredi temerrüt risk primindeki artışların Türkiye’ye gerçekleştirilen ihracat ve doğrudan yabancı yatırımlar üzerinde uzun dönemde negatif yönlü bir etkisi olduğu tespit edilmiştir. Frekans alanı nedensellik testiyle gerçekleştirilen analizler sonucunda ise kredi risk priminden Türkiye’ye gerçekleştirilen ihracat hacmine doğru orta ve uzun dönemde, doğrudan yabancı yatırımlara ise orta vadede tek yönlü bir nedensellik ilişkisinin bulunduğu tespit edilmiştir. Sonuçta, kredi temerrüt risk primi kısa dönem borç ödeme yükümlülüklerine ilişkin bir gösterge olmasına rağmen, Türkiye’ye ihracat veya doğrudan yabancı yatırım planlayan firmaların orta ve uzun dönemdeki ekonomik durumu tahmin etmelerinde de önemli bir gösterge olacağı ortaya koyulmuştur.
The role of foreign direct investment has been essential in spurring growth by designing more opportunities in developing countries such as Pakistan. This paper focuses on predicting the effect of Chinese inward Foreign Direct Investment (FDI) with an exceptional and increasing role in Pakistan over the period from 2000 to 2018. As a result, the study examines the relationship that exists among economic development, Chinese investment, trade openness, capital formation, and inflation using the Autoregressive Distributed Lag (ARDL) model. The results show a positive and significant relationship between Chinese investment in the development of Pakistan’s economy by increasing capital and boosting the means of trade in global markets. It was supposed that Chinese investment can provide various opportunities such as firms with new markets, cheaper production facilities, and access to new technology, products, and skills if financed for productive purposes. It was recommended that policymakers should intervene through policy suggestions and implementation so that the economy would be able to take part in the race of becoming a global economy.
Resumen La presente investigación determina el impacto del riesgo país en la inversión extranjera directa para las economías de Ecuador, Perú y Colombia en el periodo 2002-2017 mediante el modelo econométrico ARDL para determinar el equilibrio a largo plazo, el modelo de corrección de errores (VEC) para determinar equilibrio a corto plazo y la prueba de Granger que determina la causalidad. Se utiliza datos del Banco Central de cada país estudiado, la variable dependiente es la inversión extranjera directa y la variable independiente es el riesgo país. Los resultados muestran una relación a largo plazo entre el riesgo país y la inversión extranjera directa, es decir que un alto riesgo país disminuye la inversión y una disminución del riesgo país incrementa la inversión extranjera directa. Bajo estos resultados las políticas que los gobiernos deben implantar deben estar relacionadas a disminuir el aparato burocrático de los países que dificulta el ingreso a nuevos inversionistas, mantener un nivel de crecimiento sostenido, incrementar las reservas internacionales de cada país y mejorar el nivel de apertura comercial.
The article developed a basic simulation model of diversification of foreign economic interactions, which makes it possible to assess the mutual influence of key economic indicators and their reaction to changes in the equilibrium in world markets. The peculiarity of the developed model of diversification of foreign economic interactions is its functioning as a complex dynamic system in which many factors are interrelated, and the connections are dynamic. This makes it possible to calculate a simulation model that takes into account hidden and subtle connections. While modeling foreign economic interactions and evaluating the influence of various regulators on them, in addition to the stage of model development itself, mandatory parameterization of this model is proposed, that is, the determination of specific types of dependence between the factors included in the model and the parameters of these dependencies. The implementation of this model can be carried out in any simulation package. © Ihor Hroznyi, Oleh Kuzmak, Olena Kuzmak, Olha Rusinova, 2018.
While a substantial body of literature has grown around the developing economies as the world’s main recipient of foreign direct investment (FDI) and its economic development and management practice consequences, much less attention has been paid to the determinants of outward FDI (OFDI) from developing economies becoming multinationals. Our aim is to assess whether OFDI from developing countries conforms to the mainstream international business literature of OFDI by comparing with new evidences for the character and evolution of recent OFDI found for developing economies. Our results suggest that while the mainstream FDI theories and frameworks regarding OFDI are suitable for developed economies, some important theoretical adjustments and refinements are needed in order to better explain the internationalization strategies of multinational corporations (MNCs) from developing economies.
This paper examines the importance of economic factors in a time-varying beta model of country risk before and after the occurrence of financial integration for South Africa's stock market. We examine how fundamental economic factors impact the variation of South Africa's country risk over the period 1993-2008. We find that exchange rates and gold prices are significant economic variables that induce significant volatility in South Africa's beta during the pre-financial integration period through June 1998. Post-financial integration, South Africa's beta rises and fundamental economic factors cease to be significant in determining its variation, a result consistent with an integrated financial market.
In this paper we view the tax schedule applied to the profits of a Multinational Enterprise (MNE) as the outcome of a sequential bargaining process and show, using modern game theory developments (the "perfect equilibrium" solution concept) that tax holidays will emerge from such a process if a MNE incurs fixed costs upon entry. At the core of our results is the recognition that the existence of sunk costs creates an ex post (entry) bilateral monopoly situation. We show that the tax rate emerging from this form of bargaining has a dynamic structure. We obtain results on the length and discounted value of the tax holiday, its precise form and the way all this responds to changes in fixed costs.
Foreign direct investment can take place through the direct entry of foreign firms or the acquisition of existing domestic firms. Mattoo, Olarreaga, and Saggi examine the preferences of a foreign firm and the host country government with respect to these two modes of foreign direct investment in the presence of costly technology transfer. The tradeoff between technology transfer and market competition emerges as a key determinant of preferences. The authors identify the circumstances in which the choices of the government and the foreign firm diverge-and in which domestic welfare can be improved by restrictions on foreign direct investment that induce the foreign firm to choose the socially preferred mode of entry.
When a transnational corporation invests abroad, it runs the risk that its investment will be expropriated. Any agreements or contracts undertaken by the transnational company and the host country must be designed to be self-enforcing. This paper extends previous work on investment when contracts are incomplete to a dynamic context. It is shown that investment is initially underprovided but increases over time and for certain parameter values tends to the efficient level. The expected future discounted returns to the transnational company decline over time, extending R. Vernon's (1971) observation of the obsolescing bargain. Copyright 1994 by The Review of Economic Studies Limited.
We test the effect of foreign direct investment (FDI) on economic growth in a cross-country regression framework, utilizing data on FDI flows from industrial countries to 69 developing countries over the last two decades. Our results suggest that FDI is an important vehicle for the transfer of technology, contributing relatively more to growth than domestic investment. However, the higher productivity of FDI holds only when the host country has a minimum threshold stock of human capital. In addition, FDI has the effect of increasing total investment in the economy more than one for one, which suggests the predominance of complementarity effects with domestic firms.
The benefits and costs of private investment from abroad are a matter of considerable importance for Australia. This paper suggests one possible method of analysing some general aspects of the problem. It is mainly theoretical and does not attempt to reach clear-cut practical conclusions. This would require much more factual analysis and consideration of many other aspects. Some of these were discussed by Professor Arndt in ‘Overseas Borrowing — the New Model’ (Economic Record, August 1957), an article which also deals with many of the points analysed below.
This paper develops a unified framework to analyze the dynamics of firm investment in countries with poor legal enforcement. The firm's technology edge over the government generates endogenous property rights. Industry variation in the technology gap predicts a sectoral pecking order of expropriations. Long-run investment distortions may be Pareto superior relative to persistent investment at the static optimum. The dynamics of investment and transfers depend on whether incentives (backloading) or efficiency (frontloading) concerns dominate at the initial division of surplus. An increase in government efficiency may reduce its welfare. The model provides a technology-driven rationale for the widespread use of conglomerate structures in emerging market countries.
This paper studies the effect of sovereign risk on capital flows from rich to poor nations in the context of a two-country model, where Foreign Direct Investment (FDI) creates positive externalities in domestic production. We show that if externalities are large, a developing country never expropriates foreign assets, and behaves as under perfect enforcement of foreigners' property rights, jumping to the steady state in one period. If externalities are absent, a developing country always expropriates foreign assets and, then, there are no capital flows in equilibrium, as occurs in autarky. If externalities are of a medium size, our model can account for scarce capital flows from rich to poor nations, as well as other key features of the data, such as rising-over-time patterns of foreign capital and FDI in developing countries. In addition, the model offers an economic rationale for the FDI restrictions observed across nations.
We analyze the worker's incentives to acquire skills under technological progress when the costs of education are endogenous and depend on the wage distribution. We show that the agent's intergenerational elasticity of substitution plays then a relevant role in determining how incentives and the long-run wage distribution react to technological progress. Moreover, whenever poverty traps of unskilled workers exist, higher rates of technological progress can even decrease the incentives of low-skill workers to acquire skills. We also analyze the effects of educational subsidies. In contrast with previous analytical findings, we obtain that subsidies always decrease the long-run skill premium. Finally, we study the efficiency of the resulting competitive equilibria.
Foreign direct investment (FDI) can take place either through the direct entry of foreign firms or the acquisition of existing domestic firms. The preferences of a foreign firm and a welfare-maximizing host country government over these two modes of FDI are examined in the presence of costly technology transfer. The trade-off between technology transfer and market competition emerges as a key determinant of preferences. The clash between the foreign firm's equilibrium choice and the local government's ranking of the two modes of entry can provide a rationale for some frequently observed FDI restrictions.
This paper studies the strategic interaction between a foreign direct investor and a host country. We analyze how the investor can use his control rights to protect his investment if he faces the risk of “creeping expropriation” once his investment is sunk. It is shown that this hold-up problem may cause underinvestment if the outside option of the investor is too weak, and overinvestment if it is too strong. We also analyze the impact of spillover effects, we give a rationale for “tax holidays” and we examine how stochastic returns affect the strategic interaction of investor and host country.
The map of political risk has taken on a changing form over the past twenty years. Along with new breeds of risk comes intensified concern over how it is handled. In a survey by the World Bank two years ago, approximately half of the investors said that political risk is a higher priority than it was five years before.
Host country governments often grant investment incentives to foreign firms locating in their territories. We show that such preferential treatment of foreign firms can facilitate transfer of foreign technology, induce entry by the local firm, and increase host country welfare. However, this pro-competitive result occurs when preferential treatment is granted for a limited time; i.e., it takes the form of tax holidays, and is absent under permanent tax concessions.
The extent of multinational activity and the share of world trade accounted for by multinational enterprises has risen steadily over the past two decades. This has led to renewed interest within Europe in the impact of multinational enterprises on employment, investment and trade, and the structure of economic growth. In this paper the authors discuss the factors behind the continued growth of foreign direct investment and its wider consequences on home and host economies. They report evidence on the impact of production relocation on the export performance of a number of OECD economies, and investigate the extent to which technology transfer from foreign-owned firms has affected the rate of technical progress within the German and UK economies. The acquisition of firm-specific knowledge-based assets is found to be an important factor behind the growth of FD, suggesting that such investments are likely to be an important channel for the diffusion of ideas and technologies. Copyright 1997 by Royal Economic Society.
Political risk assessment in Jordanian international firms Foreign direct investment, technological change, and economic growth within Europe
- Al Khattab
Al Khattab, A., 2006. Political risk assessment in Jordanian international firms. (PhD Thesis), University of Huddersfield, Huddersfield, UK. Barrell, Ray, Pain, Nigel, 1997. Foreign direct investment, technological change, and economic growth within Europe. Econ. J. 107, 1770–1786.