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Multinational investments and product sophistication

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  • Banerjee, Tannista
  • Nayak, Arnab

Abstract

In this paper, we show evidence that increasing per capita stocks of foreign direct investment has a significant positive effect on the quality of exports of developing countries. To study the quality variations, we use two recently developed panels of cross-country quality indexes by Feenstra and Romalis (2014) and Hallak and Schott (2011), as well as the traditional method of looking at the variations of U.S. import prices from 135 countries for the period 1989–2004. A positive and significant effect of per capita FDI stocks on host country export quality is noted for the developing nations using all these methods. The study has important policy implications for developing countries, showing that accumulating foreign direct investment has enabled many developing countries in the last two decades to improve their export sophistication, as demonstrated by Hallak and Schott (2011).

Suggested Citation

  • Banerjee, Tannista & Nayak, Arnab, 2017. "Multinational investments and product sophistication," Economics Letters, Elsevier, vol. 161(C), pages 157-163.
  • Handle: RePEc:eee:ecolet:v:161:y:2017:i:c:p:157-163
    DOI: 10.1016/j.econlet.2017.08.023
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    1. Robert C. Feenstra & Robert Inklaar & Marcel P. Timmer, 2015. "The Next Generation of the Penn World Table," American Economic Review, American Economic Association, vol. 105(10), pages 3150-3182, October.
    2. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    3. David Hummels & Alexandre Skiba, 2004. "Shipping the Good Apples Out? An Empirical Confirmation of the Alchian-Allen Conjecture," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1384-1402, December.
    4. Peter K. Schott, 2008. "The relative sophistication of Chinese exports [‘Manufacturing Earnings and Compensation in China’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 23(53), pages 6-49.
    5. Ricardo Hausmann & Jason Hwang & Dani Rodrik, 2007. "What you export matters," Journal of Economic Growth, Springer, vol. 12(1), pages 1-25, March.
    6. Motta, Massimo, 1993. "Endogenous Quality Choice: Price vs. Quantity Competition," Journal of Industrial Economics, Wiley Blackwell, vol. 41(2), pages 113-131, June.
    7. Robert C. Feenstra & John Romalis, 2014. "International Prices and Endogenous Quality," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 129(2), pages 477-527.
    8. Robert E. Lipsey, 2004. "Home- and Host-Country Effects of Foreign Direct Investment," NBER Chapters, in: Challenges to Globalization: Analyzing the Economics, pages 333-379, National Bureau of Economic Research, Inc.
    9. Haddad, Mona & Harrison, Ann, 1993. "Are there positive spillovers from direct foreign investment? : Evidence from panel data for Morocco," Journal of Development Economics, Elsevier, vol. 42(1), pages 51-74, October.
    10. Beata Smarzynska Javorcik, 2004. "Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers Through Backward Linkages," American Economic Review, American Economic Association, vol. 94(3), pages 605-627, June.
    11. Peter K. Schott, 2004. "Across-Product Versus Within-Product Specialization in International Trade," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(2), pages 647-678.
    12. John K. Mullen & Martin Williams, 2005. "Foreign Direct Investment and Regional Economic Performance," Kyklos, Wiley Blackwell, vol. 58(2), pages 265-282, May.
    13. Hallak, Juan Carlos, 2006. "Product quality and the direction of trade," Journal of International Economics, Elsevier, vol. 68(1), pages 238-265, January.
    14. Alessandro Turrini, 2000. "High-quality bias in vertically differentiated oligopolies—a note on skills, trade, and welfare," Journal of Economics, Springer, vol. 71(2), pages 133-147, June.
    15. Juan Carlos Hallak & Peter K. Schott, 2011. "Estimating Cross-Country Differences in Product Quality," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(1), pages 417-474.
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    Cited by:

    1. Vogiatzoglou Klimis, 2019. "Do Entrepreneurial Attitudes Explain The Rising International Business Orientation In Developing And Emerging Economies?," Studies in Business and Economics, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 14(2), pages 245-256, August.
    2. Hu, Yuanhong, 2020. "Trade Facilitation, R&D Innovation, and Export Sophistication of Manufacturing Industries: Evidence from Russia and Central-Eastern European Countries," EconStor Preprints 222927, ZBW - Leibniz Information Centre for Economics.
    3. Onur A. Koska, 2020. "Sourcing product quality for foreign market entry," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 156(3), pages 669-702, August.
    4. Liu, Yanxin & Li, Huajiao & Guan, Jianhe & Feng, Sida & Guo, Sui, 2019. "The impact of Chinese steel product prices based on the midstream industry chain," Resources Policy, Elsevier, vol. 63(C), pages 1-1.
    5. Nazlioglu, Saban & Huseyni, İbrahim & Tunc, Ahmet & Payne, James E., 2024. "Productivity convergence in international trade: The role of industrial-based policies," Journal of Policy Modeling, Elsevier, vol. 46(1), pages 1-19.

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    More about this item

    Keywords

    Quality of exports; FDI; Panel data; HS-10;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F15 - International Economics - - Trade - - - Economic Integration
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions

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