Transcript FDI and Growth in Egypt: Effects, Channels and Causality

Bridging the Gap: the Role of Trade
and FDI in the Mediterranean
Effect of FDI on the Productivity of the Egyptian
Industrial Sector
Nada Massoud
Naples, June 2006
Effect of FDI on the Productivity of the
Egyptian Industrial Sector
1. Can Egypt Benefit from FDI Productivity Spillovers?
2. Are there any Productivity Spillovers?
3. What Factors affect the Direction of Spillovers?
Effect of FDI on the Productivity of the
Egyptian Industrial Sector
1. Can Egypt Benefit from FDI Productivity
Spillovers?
A- Comparative Productivity of Foreign and Domestic
firms
B- Egypt’s Absorptive Capacity
Can Egypt Benefit from FDI
Productivity Spillovers?
• Productivity Comparison between Foreign and
Domestic Firms
– Average Productivity per Worker: Real output per worker
– Total Factor Productivity: A residual from regressing the real value
added of the each industry on the capital stock and the number of
employees of the industry
Productivity Comparison between
Foreign and Domestic Firms
Average
Productivity
TFP
Manufacturing Industries
Higher
Higher
Textiles, Garments and Leather
Higher
Higher
Paper & Products and Printing
& Publications
Higher
Higher
Chemical Products
Higher
Higher
Building Material
Higher
Lower
Basic Metal Products
Higher
Higher
Machinery and Equipment
Higher
Higher
Other Manufacturing
Higher
Higher
Source: CAPMAS, GOFI, and GAFI unpublished data
Productivity Comparison between Foreign
and Domestic Firms
• In general, based on the Average Productivity per
Worker and TFP
Foreign firms are more productive
Can Egypt Benefit from FDI Productivity
Spillovers
•
Egypt’s Absorptive Capacity
–
Technology Gap (Controversial)
–
Human Capital
–
Financial Development
–
Institutional Quality
Egypt’s Absorptive Capacity
• Technology Gap: Threshold by Li and Liu 2005: 12.6%
(US GDP per Capita - Egypt GDP per Capita)/Egypt GDP Per Capita
(1984-2005)
30.00
25.00
Gap
20.00
15.00
10.00
5.00
1984
1987
1990
1993
1995
196
1997
1998
1999
2000
2001
2003
Years
Egypt's Technology Gap
Source: Calculated from the WDI, World Bank website, www.worldbank.org
Technology Threshold
2004
2005
Egypt’s Absorptive Capacity
• Human Capital Quality: Threshold by Borensztein 0.52
Average Years of Secondary Schooling of the Male Population above 25 years
Yrs of schooling
(1980-2000)
6.00
4.00
2.00
0.00
1980
1985
1990
1995
years
Average Years of Schooling
Source: Barro and Lee 2000
Borensztein Educational Threshold
2000
Egypt’s Absorptive Capacity
• Financial Development: Threshold by SB: 13%, by HL: 12%
%
Banking Credit to the Private Sector in Egypt as % of GDP (1984-2005)
50.00
45.00
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
1984
1987
1990
1993
1995
196
1997
1998
1999
2000
2001
2003
2004
Years
Domestic credit to private sector (% of GDP)
Financial Development T hreshold (HL)
Source: World Bank website, www.worldbank.org
Financial Development T hreshold (SB)
2005
Egypt’s Absorptive Capacity
• Institutional Quality: Threshold by Kaufmann: -0.84
Egypt’s Institutional Quality Assessment, (1996-2004)
0.4
0
-0.1
0.2
-0.2
0
-0.2
1998
1996
2000
2002
2004
-0.3
-0.4
-0.4
-0.5
-0.6
-0.6
-0.8
-0.7
-1
-0.8
-1.2
-0.9
Voice and Accountability
Political Stability
Governmnet Effectivness
Regulatory Quality
Rule of Law
Control of Corruption
T hreshold
Source: World Bank Governance and Anti-Corruption, http://info.worldbank.org/governance/kkz2004/country_report.asp?countryid=67
Egypt’s Absorptive Capacity
Below Threshold
Technology Gap
Above Threshold
yes
Human Capital
yes
Financial Development
yes
Institutional Quality
yes
Can Egypt Benefit from FDI
Productivity Spillovers?
• Higher productivity for foreign firms
• Sufficient absorptive capacity
There is room for Egypt to benefit from FDI productivity
spillovers
Are there Any Productivity Spillovers?
• Horizontal Spillovers: Intra-Industry
• Vertical Spillovers: Inter-Industry
Through regressing a linear function for the period 1984-2005 based
on an unbalanced panel data set of industrial production that
includes 12 industries at the 12-digit ISIC classification
Are there Any Productivity Spillovers?
Variable
Variable Specification
Dependant Variable
Productivity
Total value added / Total # of employees
Independent Variables
Foreign Presence
Employees in foreign firms / Total employees
Capital Intensity
Total Fixed assets / Total # of employees
Human Capital
While-collars / Blue-collars
Scale
Average gross production by domestic plants /
gross production of the largest domestic plant
Concentration
∑ squared individual plants production shares
Horizontal Spillovers
• All sectors had no significant spillovers, except three
sectors:
– Two had positive productivity spillovers to domestic firms:
Oil and Natural Gas – Machinery and Equipment
– One had negative effect on the productivity of domestic
firms: Textiles, Garments and Leather
Vertical Spillovers
• Backward Linkages
• Forward Linkages
Used a cut-off point that the industry i must demand/supply at
least 5% of gross output in industry j, based on Egypt’s InputOutput tables.
Vertical Spillovers
• Backward Linkages
• No backward spillovers in all sectors which implies:
– TNCs depend on importing their inputs (consistent with
FDI effect on imports from other studies and surveys)
Vertical Spillovers
• Forward Linkages:
• Negative Spillovers from three sectors: Oil and Gas,
Manufacturing Industries, and Building Material
• Positive Spillovers from one sector: Machinery and Equipment
Are There Any Productivity Spillovers?
• Intra-industry spillovers in less than 20% of the examined sectors
• No Backward inter-industry spillovers
• Forward inter-industry spillovers in 20% of the studied sectors, and
negative in the rest
Spillovers are not on a large scale despite Egypt’s sufficient absorptive
capacity and the higher productivity of foreign firms
What are the Factors Affecting the
Direction of Spillovers?
• Size of Technology Gap
• Industry Characteristics
• Foreign Market Share in the Industry
Size of Technology Gap within a
specific industry
Gross Value Added per Worker in Foreign Firms to that of Egyptian Firms
(1984-2005)
4.5
4
Technology Gap
3.5
3
2.5
2
1.5
1
0.5
0
31
32
33
34
35
36
Indust ries
Source: GOFI 2005, unpublished data
No Pattern Observed
37
38
39
Industry Characteristics
• Average Capital Intensity
• Average Productivity
Industry Characteristics
Average Capital Intensity in Manufacturing and Extraction Industries
(1984-2005)
300
250
200
150
100
50
0
22
23
29
31
32
33
34
35
36
Source: CAPMAS 2005, unpublished data
No pattern observed
37
38
39
Industry Characteristics
Average Productivity of Manufacturing and Extraction Industries
Productivity
(1984-2005)
30
25
20
15
10
5
0
22
29
31
32
33
34
35
36
Industries
Source: CAMPAS 2005, unpublished data
No pattern observed
37
38
39
Foreign Market Share in the Industry
Average Foreign Participation in the Manufacturing and Extraction Industries
(1984-2005)
0.35
0.3
%
0.25
0.2
0.15
0.1
0.05
0
38
23
29
31
32
33
34
35
36
36
39
Industries
Industries with foreign participation of 5% or more
witnessed horizontal productivity spillovers
22
Conclusion
1. Are Foreign Companies more productive than Domestic
Companies? Yes
2. What is the absorptive capacity of Egypt? Above thresholds
3. Are there horizontal productivity spillovers from foreign to
domestic companies? Mixed Effects
4. Are there vertical productivity spillovers from foreign to
domestic companies? Mixed Effects
5. What are the factors affecting the direction of spillovers?
Foreign market share more than 5%
Conclusion
• Further investigation is needed to test the effect of:
– FDI mode of entry
– Nationality of the existing affiliates
– Institutional/individual nature of FDI