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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 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11639.

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Date of creation: Sep 2005
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Publication status: published as Razin, Assaf, Efraim Sadka and Hui Tong. "Bilateral FDI Flows: Threshold Barriers and Productivity Shocks." CESifo Economic Studies 54, 3 (2008):451-470.
Handle: RePEc:nbr:nberwo:11639

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  1. Fabio Ghironi & Marc Melitz, 2004. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," 2004 Meeting Papers 451, Society for Economic Dynamics.
  2. Broner, Fernando A & Lorenzoni, Guido & Schmukler, Sergio, 2007. "Why Do Emerging Economies Borrow Short Term?," CEPR Discussion Papers 6249, C.E.P.R. Discussion Papers.
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  4. Kevin H. Zhang & James R. Markusen, 1997. "Vertical Multinationals and Host-Country Characteristics," NBER Working Papers 6203, National Bureau of Economic Research, Inc.
  5. Assaf Razin & Yona Rubinstein & Efraim Sadka, 2003. "Which Countries Export FDI, and How Much?," NBER Working Papers 10145, National Bureau of Economic Research, Inc.
  6. 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.
  7. Amiti, Mary, 1998. "Inter-industry trade in manufactures: Does country size matter?," Journal of International Economics, Elsevier, vol. 44(2), pages 231-255, April.
  8. Javorcik Beata Smarzynska & Wei Shang-Jin, 2003. "Pollution Havens and Foreign Direct Investment: Dirty Secret or Popular Myth?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 3(2), pages 1-34, December.
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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. 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.
  3. 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.
  4. 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.
  5. Aisbett, Emma, 2007. "Bilateral Investment Treaties and Foreign Direct Investment: Correlation versus Causation," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt72m4m1r0, Department of Agricultural & Resource Economics, UC Berkeley.
  6. International Monetary Fund, 2010. "FDI Flows to Low-Income Countries," IMF Working Papers 10/132, International Monetary Fund.
  7. Alexander Jordan & Alex Lenkoski, 2012. "Tobit Bayesian Model Averaging and the Determinants of Foreign Direct Investment," Papers 1205.2501, arXiv.org.
  8. 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).
  9. Lawless, Martina, 2009. "Tax Complexity and Inward Investment," Research Technical Papers 5/RT/09, Central Bank of Ireland.
  10. 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.
  11. 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.

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