Week 7 Flashcards
Why is it important that we understand that capital is heterogeneous in regard to FDI flows?
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.
Given FDI is superior to regular capital, how can we expect it to impact host countries?
We can expect the domestic acquisition of advanced tech and an upgrade of skills. This should improve their competitiveness, productivity and economic growth.
Where do we expect FDI to have greater effects?
FDI has potential to increase growth effects more in developing countries by easing their capital constraints as opposed to already industrialised countries.
What is Bhagwati’s first proposition?
The volume of FDI inflows is positively related to the openness of the host-country’s trade policy regime.
What is Bhagwati’s second proposition?
The growth effects of FDI are greater in relatively outward oriented host countries.
Is Bhagwati’s first proposition empirically supported?
Yes, there’s evidence of a positive relationship between trade policy stance and the volume of FDI inflows.
Is Bhagwati’s second proposition empirically supported?
Less concrete empirically. Evidence however of growth effects depending on a threshold stock of capital.
What is a TRIM?
(Trade Related Investment Measure)
Measures introduced by host countries to attract and regulate FDI.
What are the primary objectives of TRIMs?
To increase growth benefits of FDI to the host country.
Give some examples of TRIMs.
- Local content requirements
- Ownership requirements (joint ventures)
- Export requirements
Are TRIMs more common in developing or industrialised countries?
Developing. But TRIMs vary heavily between countries.
How do TRIMs affect MNEs?
TRIMs generally reduce the potential gains for MNEs and therefore reduced the incentive for FDI inflows.
Can host-county policy help MNEs?
Something like protective trade policies would benefit MNEs who’ve engaged in FDI. Can’t have hit-and-run exports.
What are local content requirements? (A TRIM)
How does it impact local firms?
Specify the proportion of inputs that must be sourced locally.
- ensures involvement of local firms
- transfer of tech and know-how
How would a local content requirement affect an MNE?
Would likely raise costs, reduce profitability.
What are minimum export requirements? (TRIM)
Requires foreign firms to export to cover their imports harming the domestic Balance of Payment.
How do minimum export requirements affect different forms of FDI differently?
Generally, efficiency-seeking FDI will not be impacted. For market seeking FDI however, you are in trouble.
What are local equity requirements?
Requires foreign firms to form joint ventures.
What are the three principal forms of direct impact of FDI on the economies of host countries?
- Technology transfer
- Labour market effects
- Trade performance
Talk about technology transfer as a direct effect of FDI on host countries.
FDI inflows embody advanced technology so we raise the stock of technology.
The beneficial domestic growth effects of technology transfer depend on what?
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)
Talk about horizontal technology transfer.
Horizontal transfers are uncommon. There’s potential for negative externalities from disclosure.
Talk about the labour market effects as a direct consequence of FDI.
- FDI increases domestic employment through increasing output. (Unless enclave)
- productivity generally increases with FDI
- Wages kncrease
Talk about FDI affects host country wages.
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.
