Transcript Document

The effects of FDI on host
country export performance
(Austria)
A presentation by; AJang Elvis Ngwesse
Supervised by; Prof. Joseph Francois
Table of Contents
• General Overview
• The Austrian Economy
 Openness
 FDI Performance
Export Performance
• MNC´s & FDI (Theory)
• Model depicting FDI impacts Growth
• Regression Results
Overview
• FDI inflows and export performance (1970-2005).
• MNC and their investment decision determines the inflow of FDI
(UNCTAD 2006).
• These MNC are credited for increasing competition and creating spillover effects to domestic firms (Javorcik, 2004).
• We focus on endogenous growth theory ( main determinant of long-run
growth are technology and Human capital (Markusen et. al 2001).
• The model of quality/expanding variety of product is used to show the
impact of increasing innovation on growth.
• Regression
The Austrian economy
•
Sustained economic growth since WW2 (BMF, 2005).
•
Growth in % GDP;
-(1950´s-70´s). Growth due to nationalization/labour laws.
-(1973/74). Slow down due to oil crisis and stock market crash.
-(1978-81). Average growth of 2.6% real GDP.
-(1984-91). Average growth of 2.8% real GDP.
-(1995-1997). Growth increased due to EU membership (Breuss &
Schebeck 1998).
-(1999-01). Average growth was 2.4% (OECD 2005).
-(2005). Growth was 2.5% (increased exports).
-(2006-07). Growth 3%
-(2008-09). Slow down in growth due to financial crisis (IMF 2008).
Openness of the Austrian Economy
Source:BMF 2005. Openness is calculated as the sum of exports and imports as a share of
GDP %.
**This was due to increase in privitization, increase in M &A and
increase in the number of trading partners (OECD 2008).
FDI inflows in Million Euros
Source: WIFO, 2008.
**Increases have been due to the rise in aqcuisition deals. The Decrease
in the late 90´s was due to stock market bubbles (UNCTAD,2006).
Export in Million Euros
Source: WIFO, 2008.
**Expandsion in world trade, EU accession, increase competitiveness,
appreciation of the euro (OECD, 2007).
Multinationals and FDI
• A MNC is a firm that manages production establishments in two or
more countries (Appleyard and Field, 1998) .
• MNC are the major elements engaged in cross-boarder trade and can
impact a host country +vely or –vely (UNCTAD, 2006).
• Kindle Berger (1969) points out that MNC´s provide a vehicle for the
transfer of technology and Human capital.
• The empirically determined channel of technological transfer from
home to host country is FDI.
• There are also other channels such as foreign licensing but have short
comings on productivity (Yasar and Morrison, 2005).
• There exist Horizontal (non-fragmented) and Vertical (fragmented)
MNC with different impacts on growth (Beugelsdijk et, al. 2008).
• knowledge can be used simultaneously in many plants without
encountering diminishing returns (Markusen et al, 2001).
• Our main finding is; if these international linkages
(technology) have been behind the growth of
Austrian export.
Empirical evidence on FDI and economic growth
Author
Country
Data
Findings
Results
Zhang &
Song 2000
China
(19841997)
Panel data Export
on
growth &
manufacturi FDI
ng
FDI
promotes
export
Jacorcik
2004
Lithuania
Firm level
panel data
MNC &
spillovers
effect
Existence
of positive
spillovers
Markusen
and
Venables
1999
Theoretical
model
MNC and
spillovers
Positive
spillovers
by MNC
Borensztein
et, al. 1998
Theoretical
model
Effects of
FDI on
growth
FDI/tech.
impacts
growth
Model depicting relationship between FDI
and growth.
• We shall use the model of Barro and Sala-i-Martin (1994) to show that
FDI impacts growth positively.
Properties of the model;






Factors can be substituted and are constant.
Model exhibits constant returns.
Main factors are Labour and Capital.
Existence of monopolistic competition.
Three agents, producers of final goods, R&D firms and household.
There is no diminishing returns in the long run due to increase in
innovation by R&D firms.
 No creative destruction.
Model of Technological progress with an expanding variety
of products.
Producers of final output.
Production function
Yi  ALi
1
N
. ( X ij )
(1.1)
j 1
0>α<1 , Yi = output, Li = labour, A = measure of productivity, Xij =
employment of the jth intermediate good, N = variety of intermediate
goods.
Yi  ALi
1
NX 
1
.    ALi ( NX i ) .N 1
N N
(1.2)
Yi only increases with increases in N1-α (endogenous growth)
Profits of producing firm
Since market is competitive and firms take prices as given, Pj = Marginal
product of Xj . The marginal product of thr jth intermediate good is given
from equation 1.1,
Yi
 1
(1.3)
X ij  Li .( A Pj )1 (1 )
(1.4)
Pj 
X ij
 A Li
1
X ij
R&D firm.
•Increase in N, the variety of intermediate goods requires positve efforts in
R&D
•In order for R&D to occure, the net present value of future expected profits
should be larger than R&Dexpenditure.
• Firms determine their prices.
•Each investor retains monopoly right over her intermediate good as a result
of patents and secrecy.
Monopoly profits;


  V (t )    (v).e r ( v t ) v   ( Pj  1) X j .e r ( v t ) v
t
t
(1.5)
Profit flow is given by;
 j (v)  Pj (v)  1 X j (v)
(1.6)
Substituting equation 1.4 into 1.6 gives us an equation for the
Maximisation of monopoly profits.
max p j
(v)
 j (v)  Pj (v)  1 L  A Pj (v)1 (1 )
(1.7)
First order condition wil be;
X i ( Pj )  ( Pj  1)  1 (1   )  X j ( Pj ) / Pj  0
( Pj  1) Pj  1  
Pj  P  1   1
(1.8)
If we substitude monopoly price into 1.4, we get an expression On
the quantity of each intermediate good produced.
1 (1 )
Xj  A

2 (1 )
L
(1.9)
If we substitute Xj and Pj from equations (1.9) and (1.8) into
equation (1.7), we get a formula for the profit flow.
 1    2 (1 )
V (t )  LA1 (1 )  
 
  
substitute Xj and Pj into equation 1.5 to get the net present
value of monopoly profits over time
(1.10)

1 (1 )  1   
2 (1 )
  V (t )  LA

  e r (v t ) v
 
  
t
(1.11)
 Shows profit margins of investors and also determines the
number of units sold. If rate of interest is constant then value
of integral simplifies to 1/r
1 (1 )
  V (t )  LA
LA
r

1 (1 )
 1    2 (1 )

1 r
 
  
1  
2 (1 )

 
  
The decision to become an R&D firm
R&D cost =
 ,a constant
A firm thus decides to devote resources to R&D if
(1.12)
V (t )  
Free entry condition
Free entry implies any firm can pay the R&D cost to become an
innovator.
V (t )  
(1.13)
House Hold
House hold maximise utility as shown below;

 c1  1   t
U  
 1 
  e dt

0 
(1.14)
House hold budget constraint is given by;

a  ra    c
(1.15)
Households satisfy the familiar Euler equation

C C  1    r   
(1.16)
Then;

1 1
C 1  LA
 1    2 (1 ) 
C   
 


C  
  

Identical firms, production function is
(1.17)
1
Y  AL .NX

Assume all variables are constant, N grows same as Y
ΔY= ΔN
C = Y – NX -  N



C
1 (1 )  1   
2 (1 )
  N  C   1   L    A

  
 
C
  


Regression results
X   0  1 REXD  2 GDIG   3 FDIG   4TOT   5 PCAPITAL HC  D  
-----------------------------------------------------------------------------dlx |
Coef.
Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------lx_1 | -.1545449
.0837873
-1.84**
0.079
-.3283092
.0192195
pcapita | .0123137
.0048809
2.52*
0.019
.0021912
.0224361
gdig | .0036946
.0019238
1.92**
0.068
-.0002951
.0076844
dlfdig | .0185081
.0098472
1.88**
0.073
-.0019137
.0389299
lrexc_1 | .0789022
.0670176
1.18
0.252
-.0600838
.2178883
lfdig_1 | .0254005
.0119134
2.13*
0.044
.0006937
.0501073
EC_1 | .0070612
.0032164
2.20*
0.039
.0003908
.0137316
_cons | -.0827453
.4840336
-0.17
0.866
-1.08657
.9210788
-----------------------------------------------------------------------------Significant levels are defined as ***Significance at 10%, (**) stationarity at 5%
and (*) stationarity at 1%