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Bilateral FDI Flows: Threshold Barriers and Productivity Shocks

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  • Assaf Razin
  • Efraim Sadka
  • Hui Tong

Abstract

A positive productivity shock in the host country tends typically to increase the volume of the desired foreign direct investment (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 article. 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 changes on bilateral FDI flows. We also uncover sizeable threshold barriers in our data set. (JEL codes: F2, F3) Copyright , Oxford University Press.

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Bibliographic Info

Article provided by CESifo in its journal CESifo Economic Studies.

Volume (Year): 54 (2008)
Issue (Month): 3 (September)
Pages: 451-470

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Handle: RePEc:oup:cesifo:v:54:y:2008:i:3:p:451-470

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References

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  1. Zhang, Kevin Honglin & Markusen, James R., 1999. "Vertical multinationals and host-country characteristics," Journal of Development Economics, Elsevier, vol. 59(2), pages 233-252, August.
  2. Efraim Sadka & Assaf Razin & Yona Rubinstein, 2004. "Which Countries Export FDI, and How Much?," 2004 Meeting Papers 226, Society for Economic Dynamics.
  3. Barry Eichengreen & Douglas A. Irwin, 1998. "The Role of History in Bilateral Trade Flows," NBER Chapters, in: The Regionalization of the World Economy, pages 33-62 National Bureau of Economic Research, Inc.
  4. Smarzynska Javorcik, Beata & Wei, Shang-Jin, 2001. "Pollution Havens and Foreign Direct Investment: Dirty Secret or Popular Myth?," CEPR Discussion Papers 2966, C.E.P.R. Discussion Papers.
  5. Fabio Ghironi & Marc J. Melitz, 2004. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," NBER Working Papers 10540, National Bureau of Economic Research, Inc.
  6. J. M. C. Santos Silva & Silvana Tenreyro, 2003. "Gravity-defying trade," Working Papers 03-1, Federal Reserve Bank of Boston.
  7. Fernando Broner & Guido Lorenzoni & Sergio L. Schmukler, 2003. "Why do emerging economies borrow short term?," Economics Working Papers 838, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 2011.
  8. Mark J. Melitz, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," NBER Working Papers 8881, National Bureau of Economic Research, Inc.
  9. David L. Carr & James R. Markusen & Keith E. Maskus, 2001. "Estimating the Knowledge-Capital Model of the Multinational Enterprise," American Economic Review, American Economic Association, vol. 91(3), pages 693-708, June.
  10. Loungani, Prakash & Mody, Ashoka & Razin, Assaf, 2002. "The Global Disconnect: The Role of Transactional Distance and Scale Economies in Gravity Equations," Scottish Journal of Political Economy, Scottish Economic Society, vol. 49(5), pages 526-43, December.
  11. Amiti, Mary, 1998. "Inter-industry trade in manufactures: Does country size matter?," Journal of International Economics, Elsevier, vol. 44(2), pages 231-255, April.
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Citations

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Cited by:
  1. Wolff, Guntram B., 2006. "Foreign direct investment in the enlarged EU: do taxes matter and to what extent?," Discussion Paper Series 1: Economic Studies 2006,13, Deutsche Bundesbank, Research Centre.
  2. Lawless, Martina, 2009. "Tax Complexity and Inward Investment," Research Technical Papers 5/RT/09, Central Bank of Ireland.
  3. Aisbett, Emma, 2007. "Bilateral Investment Treaties and Foreign Direct Investment: Correlation versus Causation," MPRA Paper 2255, University Library of Munich, Germany.
  4. Eicher, Theo S. & Helfman, Lindy & Lenkoski, Alex, 2012. "Robust FDI determinants: Bayesian Model Averaging in the presence of selection bias," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 637-651.
  5. Selen Guerin & Stefano Manzocchi, 2009. "Political regime and FDI from advanced to emerging countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 145(1), pages 75-91, April.
  6. Nziramasanga, Mudziviri & Inaba, Frederick S. & Shreay, Sanatan, 2011. "Do Bilateral Investment Treaties Deliver the Goods? Evidence from Developing Countries," Review of Applied Economics, Review of Applied Economics, vol. 7(1-2).
  7. Ayhan Kose, M. & Prasad, Eswar S. & Terrones, Marco E., 2009. "Does openness to international financial flows raise productivity growth?," Journal of International Money and Finance, Elsevier, vol. 28(4), pages 554-580, June.
  8. Alexander Jordan & Alex Lenkoski, 2012. "Tobit Bayesian Model Averaging and the Determinants of Foreign Direct Investment," Papers 1205.2501, arXiv.org.
  9. Razin, Assaf & Sadka, Efraim, 2006. "Vying for Foreign Direct Investment: An EU-Type Model of Tax Competition," CEPR Discussion Papers 5511, C.E.P.R. Discussion Papers.
  10. Markus Leibrecht & Aleksandra Riedl, 2012. "Modelling FDI based on a spatially augmented gravity model: Evidence for Central and Eastern European Countries," Working Paper Series in Economics 239, University of L√ľneburg, Institute of Economics.
  11. International Monetary Fund, 2010. "FDI Flows to Low-Income Countries," IMF Working Papers 10/132, International Monetary Fund.

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