Week 7

Question 1

Why is it important that we understand that capital is heterogeneous in regard to FDI flows?

Answer 1

Because FDI flows embody advanced tech, superior know-how, managerial expertise etc. Therefore FDI can be expected to generate additional growth effects over and above that of pure capital.

Question 2

Given FDI is superior to regular capital, how can we expect it to impact host countries?

Answer 2

We can expect the domestic acquisition of advanced tech and an upgrade of skills. This should improve their competitiveness, productivity and economic growth.

Question 3

Where do we expect FDI to have greater effects?

Answer 3

FDI has potential to increase growth effects more in developing countries by easing their capital constraints as opposed to already industrialised countries.

Question 4

What is Bhagwati’s first proposition?

Answer 4

The volume of FDI inflows is positively related to the openness of the host-country’s trade policy regime.

Question 5

What is Bhagwati’s second proposition?

Answer 5

The growth effects of FDI are greater in relatively outward oriented host countries.

Question 6

Is Bhagwati’s first proposition empirically supported?

Answer 6

Yes, there’s evidence of a positive relationship between trade policy stance and the volume of FDI inflows.

Question 7

Is Bhagwati’s second proposition empirically supported?

Answer 7

Less concrete empirically. Evidence however of growth effects depending on a threshold stock of capital.

Question 8

What is a TRIM?
(Trade Related Investment Measure)

Answer 8

Measures introduced by host countries to attract and regulate FDI.

Question 9

What are the primary objectives of TRIMs?

Answer 9

To increase growth benefits of FDI to the host country.

Question 10

Give some examples of TRIMs.

Answer 10

• Local content requirements
• Ownership requirements (joint ventures)
• Export requirements

Question 11

Are TRIMs more common in developing or industrialised countries?

Answer 11

Developing. But TRIMs vary heavily between countries.

Question 12

How do TRIMs affect MNEs?

Answer 12

TRIMs generally reduce the potential gains for MNEs and therefore reduced the incentive for FDI inflows.

Question 13

Can host-county policy help MNEs?

Answer 13

Something like protective trade policies would benefit MNEs who’ve engaged in FDI. Can’t have hit-and-run exports.

Question 14

What are local content requirements? (A TRIM)
How does it impact local firms?

Answer 14

Specify the proportion of inputs that must be sourced locally.

• ensures involvement of local firms
• transfer of tech and know-how

Question 15

How would a local content requirement affect an MNE?

Answer 15

Would likely raise costs, reduce profitability.

Question 16

What are minimum export requirements? (TRIM)

Answer 16

Requires foreign firms to export to cover their imports harming the domestic Balance of Payment.

Question 17

How do minimum export requirements affect different forms of FDI differently?

Answer 17

Generally, efficiency-seeking FDI will not be impacted. For market seeking FDI however, you are in trouble.

Question 18

What are local equity requirements?

Answer 18

Requires foreign firms to form joint ventures.

Question 19

What are the three principal forms of direct impact of FDI on the economies of host countries?

Answer 19

• Technology transfer
• Labour market effects
• Trade performance

Question 20

Talk about technology transfer as a direct effect of FDI on host countries.

Answer 20

FDI inflows embody advanced technology so we raise the stock of technology.

Question 21

The beneficial domestic growth effects of technology transfer depend on what?

Answer 21

Extent to which linkages (horizontal and vertical) are formed between foreign and domestic firms.

Technology gap. Growth effects from technology transfer are greater when this technology gap is smaller (absorptive capacity of skilled labour)

Question 22

Talk about horizontal technology transfer.

Answer 22

Horizontal transfers are uncommon. There’s potential for negative externalities from disclosure.

Question 23

Talk about the labour market effects as a direct consequence of FDI.

Answer 23

• FDI increases domestic employment through increasing output. (Unless enclave)
• productivity generally increases with FDI
• Wages kncrease

Question 24

Talk about FDI affects host country wages.

Answer 24

Studies find that FDI has a positive impact on wages. Foreign firms generally pay efficiency wages to recruit best talent and reduce labour turnover.

This generally results in a spillover whereby other firms pay higher wages to retain talent.

Question 25

How can FDI crowd-out in host countries?

Answer 25

Labour in a host country is limited and FDI can crowd out domestic firms by snatching up talent.

Question 26

Talk about the direct effects of FDI with international trade.

Answer 26

Impacts can be expected to be related to trade policy AS WELL AS the objective of the FDI.

Question 27

How would we expect horizontal FDI to affect host-country trade?

Answer 27

Horizontal FDI is likely market seeking (tariff-jumping) and so production is transferred to host country.

In this case, we’d expect trade to fall. Could be argued however that they’ll increase imports of inputs however.

Question 28

How would we expect vertical FDI to affect host country trade?

Answer 28

Vertical FDI is generally efficiency/resource seeking. These can be expected to generate additional trade.

Question 29

Talk about technology spillover as an indirect effect of FDI.

Answer 29

Tech transfer may generate additional spillover effects to local firms

• Vertical (up and downstream) supply linkages
• Horizontal spillovers
• Agglomeration
  -Human capital
• competition spillovers

Question 30

What determines the extent to which technology spillovers occur?

Answer 30

How willing/required are local firms to create local linkages? TRIM policy

Question 31

Talk about vertical supply linkage spillovers. (Upstream)

Answer 31

Vertical spillovers have less risk. This could involve the transfer of tech and knowledge to local suppliers to improve their quality and reliability.

Question 32

Talk about vertical supply linkage spillovers (downstream)

Answer 32

Arise as a result of better quality/lower cost intermediate goods being supplied locally.

Question 33

Talk about horizontal spillovers as indirect effects of FDI.

Answer 33

MNEs have strong incentive to limit horizontal spillovers. However, spillovers can still occur from demonstration effects where domestic firms watch, learn and copy.

Question 34

Talk about agglomeration economies as an indirect effect of FDI.

Answer 34

MNEs generate positive spillovers through the creation of clusters of technologically advanced firms

Question 35

Talk about human capital as an indirect effect of FDI.

Answer 35

FDI inflows improve the host country’s stock of humans capital. Locals are trained but also learn from doing.

Question 36

Talk about competition spillovers as an indirect effect of FDI.

Answer 36

Could increase competitive intensity. Could also crowd out local firms though.

Question 37

How do enclave activities affect host countries?

Answer 37

Much less potential for spillovers

Question 38

How do host country FDI policies fall short?

Answer 38

Devote too much resource to attracting FDI rather than nurturing linkages.

Question 39

Host countries need to ensure that they have explicit policies to promote linkage creation and spillovers.

Answer 39

Okay?

Question 40

What is immiserising growth?

Answer 40

The idea that under certain conditions, a host country will be worse off after FDI.

Question 41

What can cause immiserising growth?

Answer 41

• Monopoly market power of foreign firms
• Over expansion of protected sectors. Encourages tariff jumping which absorbs excessive domestic resources (labour)
• Insufficient linkage creation + transfer pricing abuse