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21. International investment income: patterns, drivers, and heterogeneous sensitivities

Author:
Giovanni Donato and Cedric Tille
Publication Date:
07-2024
Content Type:
Working Paper
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
Financial globalization has led to a large increase in international asset holdings. While the rise of associated dividend and interest flows has until now been muted by the decreasing trend in interest rates, this pattern could change, leading to a larger role of investment income flows in the balance of payments. We use a broad sample of countries to document the heterogeneous evolution of the various components of investment income flows, with a rising role of FDI and equity income, especially in advanced economies. We then assess the impact of various variables on yields with a panel analysis. Various drivers have highly heterogeneous effects across investment categories and country groups, often impacting the yields on both assets and liabilities. This translates into substantial heterogeneity in the response of countries’ income balance, due to different compositions of asset and liabilities. This heterogeneity is amplified if we consider country-specific estimates in complement to the panel ones. Focusing on the impact of changes in interest rates, we find that higher rates only had a limited impact in the 2013 taper tantrum, investment income balances are likely to benefit from higher US rates in the current phase of higher rates, with offsetting effects of higher domestic rates.
Topic:
International Trade and Finance, Foreign Direct Investment, Financial Markets, Investment, Interest Rates, and Financial Integration
Political Geography:
Global Focus

22. Turkey’s Trade and Foreign Direct Investment in Ethiopia: An Insight into Challenges from 2012-2023

Author:
Betselot Adisu Ayal, Nani Debele Dubale, and Esayas Bamlack Bishaw
Publication Date:
12-2024
Content Type:
Journal Article
Journal:
Turkish Journal of Middle Eastern Studies
Institution:
Sakarya University (SAU)
Abstract:
The first decade of the 21st century marks a new phase in relations between Ethiopia and Turkey. During this period, relations between the two countries transformed into an unprecedented stage. The aim of this study is to examine the challenges of Ethio-Turkish economic relations from 2012 to 2023, with particular reference to trade and FDI. To attain its objectives, the study employed a qualitative research approach. Essentially, primary data were collected through key informant interviews, observation, and document reviews. Despite the growth in trade and foreign direct investment between the two countries, various challenges hinder the smooth operation of these economic ties. The main results of this study show that issues like changing exchange rates, lacking access to the Generalised System of Preferences (GSP), corruption, inefficient government, high tariffs, infrastructure issues, companies that can't pay their debts, customs procedures, fluctuating exchange rates, and a lack of data were major problems for trade and investment between Ethiopia and Turkey. The findings of the study suggest that there are certain problems that need policy measures for further industrial development through attracting foreign direct investment.
Topic:
Bilateral Relations, Foreign Direct Investment, and Trade
Political Geography:
Africa, Turkey, and Ethiopia

23. Contribution of Finance and Transport Indicators on Carbon Emissions: Evidence from Eurasian Countries

Author:
Kenan Ilarslan and Tuğrul Bayat
Publication Date:
01-2024
Content Type:
Journal Article
Journal:
Istanbul Journal of Economics
Institution:
Istanbul University Faculty of Economics
Abstract:
Carbon emission is one of the most significant causes of environmental degradation, global warming, and extraordinary meteorological events. It has reached a level that threatens the future of countries and human beings. To combat carbon emission, it is necessary to know the causes for developing policies. Environmental quality is a fundamental aspect of sustainable development in economies worldwide. In this context, Eurasian geography has always been an important region in the history of the world with its location, underground, and surface resources. Today, the region makes its strategic importance even more evident. The communist USSR ruled Eurasian countries, which served as a buffer between the Western world and China for many years. These countries, which gained their independence in the 1990s, have not yet fully captured the values of the modern world, such as democracy and a free market economy. This study focuses on Eurasian countries. This study aimed to determine the factors affecting carbon emissions. Foreign direct investment and transportation contribute significantly to carbon emission, which reduces environmental quality. Therefore, in this study, we investigated whether rail and road passenger transport and foreign direct investment affect carbon emission in Eurasian countries. The concurrent panel quantile regression method was used to estimate this relationship between 1992 and 2020. The results revealed that rail and road passenger transport and foreign direct investment increase emissions. Additionally, no clear result could be obtained regarding the effect of the GDP per capita variable. To support these findings, analyses were performed using the robust quantile regression method, and strong empirical evidence was obtained, particularly for the impacts of foreign direct investment and rail passenger transport on emissions.
Topic:
Economics, Foreign Direct Investment, Transportation, Carbon Emissions, and Quantile Regression
Political Geography:
Eurasia

24. Foreign Direct Investment, Brand Value, and Economic Performance: A Multinational Analysis

Author:
Tuba Yıldız, Ünal Arslan, Zeynep Ökten, Yıldız Sağlam Çelıköz, and Hale Kırmızıoğlu
Publication Date:
06-2024
Content Type:
Journal Article
Journal:
Istanbul Journal of Economics
Institution:
Istanbul University Faculty of Economics
Abstract:
The visibility and dependability of multinational corporations’ products increase with the fact that they introduce their goods to markets in other nations through foreign direct investments. The method for presenting products to international markets through foreign direct investments reveals the product’s reputation and therefore the brand’s development value. This study examines the relationship between foreign direct investments and brand value in Australia, Canada, China, France, India, Japan, Spain, the USA, and the UK for the period 2007-2023. The majority of studies in the literature attempt to explain the impact of brand value on foreign direct investments. However, very few studies explain the impac foreign direct investments on brand value and 1st generation unit root tests were generally used. Unlike existing studies, In this study, the second-generation unit root test, Durbin-Hausman cointegration, and Common Correlated Effects Mean Group estimation methods were used. As a result, it is anticipated that this study will contribute to the literature in this regard. The findings show that increases in foreign direct investments boost brand value.
Topic:
Economics, Foreign Direct Investment, Multinational Corporations, Data, and Branding
Political Geography:
Japan, China, United Kingdom, Canada, India, France, Spain, Australia, Global Focus, and United States of America

25. Europe’s De-risking from China: Dead on Arrival?

Author:
Nicola Casarini
Publication Date:
07-2024
Content Type:
Commentary and Analysis
Institution:
Istituto Affari Internazionali
Abstract:
De-risking ties from China has become a buzzword in European policy circles, amid growing tensions between the West and the Asian giant. While US policymakers and experts continue to focus on the need to decouple ties from Beijing, the concept of de-risking has been largely fashioned in Brussels to avoid the decoupling debate and find a common transatlantic ground. While EU member states have reduced critical dependencies on China to varying degrees, their efforts are resisted by some large companies, local authorities and civil society actors eager to boost ties with Beijing. Recently, several EU governments have been promoting industrial cooperation with China, opening doors to Chinese investments in their territories to boost production of electric vehicles and green technologies. While this form of cooperation brings benefits to Europe’s industrial capacity and competitiveness, it however risks increasing the level of dependency on Beijing, undermining the de-risking strategy being put in place by the European Commission, as well as deepening the rift with the US on how to deal with the Asian giant. Going forward, there is a need for a thorough and frank debate about the EU’s de-risking strategy and its future prospect, also considering a possible return of Trump to the White House.
Topic:
Foreign Direct Investment, European Union, Trade, Transatlantic Relations, Industry, and De-Risking
Political Geography:
China, Europe, and Asia

26. The European China Strategy to Enhance Economic Security

Author:
Hyun Jean Lee
Publication Date:
11-2024
Content Type:
Policy Brief
Institution:
Korea Institute for International Economic Policy (KIEP)
Abstract:
The recent strategy change of the European countries toward China has identifiable triggering factors such as the continuation of high growth in the Chinese economy, rising status of China in the international community, and China’s FDI expansion. The West has criticized the Chinese Communist Party’s dealing with human rights issues and media control, which was further aggravated by China’s pro-Russian stance upon the outbreak of the Russian-Ukrainian war. Eventually, the European countries responded with confrontational strategies against China. This study analyzes these recent de-risking methods of the EU and four European countries – i.e., Germany, France, United Kingdom, and Poland – regarding economic relations with China. Finally, the Brief concludes with an assessment of the impact of the recent changes in Europe’s China strategy on Korea and policy recommendations.
Topic:
Human Rights, Foreign Direct Investment, International Community, Economic Security, and Russia-Ukraine War
Political Geography:
China, Europe, and Asia

27. EFFECT OF CORRUPTION ON FOREIGN DIRECT INVESTMENT INFLOWS IN COUNTRIES OF THE WESTERN BALKANS

Author:
Artan Hajdini, Lum Collaku, and Safet Merovci
Publication Date:
03-2023
Content Type:
Journal Article
Journal:
Journal of Liberty and International Affairs
Institution:
Institute for Research and European Studies (IRES)
Abstract:
The purpose of this study was to investigate the effect of corruption on Foreign Direct Investment (FDI) in the Western Balkans countries, including Bosnia and Herzegovina, Croatia, Kosovo, Montenegro, North Macedonia, Serbia, and Albania. Secondary data from The World Bank, Transparency International, and International Monetary Fund databases were utilized to complete this study for 2012-2020. The built model of multiple linear regression included four independent variables, namely: Corruption Perception Index (CPI), Western Balkan Corruption Ranking (WBCR), Exchange Rate (EXG), and Inflation Rate (INFL), as well as FDI as a dependent variable, and data effects were analyzed through the SPPS scientific research software program. The results found that if CPI and WBCR were to increase by one unit, FDI would decrease by 0.088, namely 0.624, while if EXG and INFL were to increase by one unit, FDI would increase by 0.165, namely 0.236. In order to fight corruption and potentially attract more foreign direct investment, the governments of these countries should work to harmonize their anti-corruption laws with those of the European Union. In order to prevent the negative consequences of FDI inflows, they should also maintain a balanced rate of inflation, which entails stabilizing exchange rate fluctuations.
Topic:
Corruption, Foreign Direct Investment, Exchange Rate Policy, and Inflation
Political Geography:
Eastern Europe and Balkans

28. Time to say goodbye? The impact of environmental regulation on foreign divestment

Author:
Haiou Mao, Holger Görg, and Guopei Fang
Publication Date:
09-2023
Content Type:
Working Paper
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
We look at divestments by foreign firms – a topic that has received comparatively little attention in the literature – and investigate how changes in the regulatory environment in the host country may impact on such divestment decisions. We use the implementation of China’s Two Control Zone (TCZ) policy as a “quasi-natural experiment”, using detailed firm level combined with city level data for the empirical analysis. Our results show that the implementation of TCZ policy has led to higher probabilities of divestments by foreign firms in targeted TCZ cities and industries. The mechanism behind this seems to be a TCZ-induced increase in discharge fees and efforts to reduce SO2 emissions. Allowing for heterogeneity of effects, we find that the effect is particularly strong for firms from source countries with less stringent environmental regulation, and those using less advanced technology. We furthermore show that firms using intermediates from polluting industries also experience a higher probability of divestment.
Topic:
Climate Change, Environment, Foreign Direct Investment, Regulation, Business, and Divestment
Political Geography:
China and Asia

29. The Great Supply Chain Shift from China to South Asia?

Author:
Ganeshan Wignaraja
Publication Date:
07-2023
Content Type:
Research Paper
Institution:
Gateway House: Indian Council on Global Relations
Abstract:
Global supply chains connect world industry and international trade in manufactures. East Asia’s dominance with China as the preferred assembly hub in global supply chains has brought unprecedented regional prosperity, but South Asia remains a latecomer. However, pandemic-related and post-pandemic continuing disruptions to supply chains and slowing growth are being keenly felt, dampening China’s attractiveness. In an uncertain global economy, increasingly footloose foreign investors are looking for alternative production locations. Is it South Asia’s turn to prosper through supply chains in this uncertain world? This is the topical public policy question facing India and the others in South Asia. This paper discusses the concept of global supply chains, the industrial rise of East Asia, drivers of supply chain relocation from China, South Asia’s prospects, India as a complementary hub and policy lessons from East Asia’s industrial success. For the purposes of this paper, South Asia is broadly defined as the India and its contiguous countries: Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.
Topic:
Industrial Policy, Monetary Policy, Foreign Direct Investment, Industrialization, COVID-19, Supply Chains, and Geoeconomics
Political Geography:
China, South Asia, Asia, Southeast Asia, and United States of America

30. Xi Jinping’s Vision for the Middle East

Author:
Yair Albeck
Publication Date:
07-2023
Content Type:
Policy Brief
Institution:
Hudson Institute
Abstract:
Chinese leader Xi Jinping clearly aspires to establish a new global economic order centered around Beijing, not Washington. However, a new global economic order cannot be built in a day. The immensity of this challenge has forced Xi to set his sights on a set of interim goals. These include cementing the Communist Party’s control of the Chinese economy and shielding supply chains, capital flows, and strategic bilateral and multilateral relationships from hostile American policies. These goals equate to the creation of a Sinocentric global economic subsystem. This would be partially integrated into the current Western-led system but would be sufficiently decoupled from the West to protect the pillars of the Chinese Communist Party’s political economy. In Beijing’s grand design, the Middle East plays an indispensable role. But Western analysts have often misjudged China’s interests in the region as purely commercial. While Xi values the region for its economic potential, he sees it as one of the most important arenas of competition with the United States. Yet when United States National Security Advisor Jake Sullivan recently discussed American leadership of the global economy, he focused on Europe and the Indo-Pacific and mentioned Africa and Latin America. He did not mention the Middle East once.1 Washington’s persistent blind spot in the Middle East has obscured its view of Beijing’s global ambitions. If the US does not rectify this mistake, it risks losing more influence in the region and aiding China’s effort to supplant the US atop the global economic order.
Topic:
Foreign Policy, National Security, Political Economy, Foreign Direct Investment, and Xi Jinping
Political Geography:
China and Middle East

31. Sunny side up: Maximising the European Green Deal’s potential for North Africa and Europe

Author:
Laura El-Katiri
Publication Date:
01-2023
Content Type:
Policy Brief
Institution:
European Council on Foreign Relations (ECFR)
Abstract:
North African states hold great potential to become important partners in Europe’s energy transition in the medium and long term. The EU and its member states can make stronger use of the European Green Deal to direct investment in North Africa in support of clean energy. Governments in the region are worried about the impact of some EU decarbonisation tools, such as the carbon border adjustment mechanism. Europeans can allay some of these fears by providing political commitment, financial investment, and advice on the energy transition. New partnerships between the EU and North African states also offer the opportunity to make progress on wider environmental considerations, including biodiversity, and to embed a human rights-based approach.
Topic:
Climate Change, Foreign Direct Investment, Partnerships, Solar Power, Green Deal, Energy, and Energy Transition
Political Geography:
Europe and North Africa

32. Impacts of FDI Presence and Product Sophistication on the Demand for Skilled and Unskilled Labour: Evidence from SMEs in Viet Nam

Author:
Quang Hoan Truong and Van Chung Dong
Publication Date:
02-2023
Content Type:
Working Paper
Institution:
Economic Research Institute for ASEAN and East Asia (ERIA)
Abstract:
This study employs data from the Viet Nam Enterprise Survey (VES) for 2007 and 2011) to examine the effect of foreign direct investment (FDI) and product sophistication as well as the interaction between these two factors on the skilled and unskilled labour demand on Viet Nam’s small and medium-sized enterprises (SMEs). It finds that the FDI presence in the same industry but different regions – and FDI in the same region but different industries – has a positive effect on the skilled labour demand and a negative impact on the unskilled labour demand. FDI in the same industry has a negative effect on the skilled labour demand and an advantageous impact on the unskilled labour demand. The product sophistication index is found to positively affect the skilled labour demand but decreases the demand for unskilled labour. When interacting with product sophistication, FDI presence in the same industry and region positively affects the skilled labour demand. The study also finds the opposite impacts of different types of FDI presence as well as the interaction between FDI presence and product sophistication on the demand for highly, medium-, and basic-skilled labour. Thus, it is important to consider the opposite effects of different types of FDI and the interaction between FDI presence and product sophistication on SME labour demand by skills level.
Topic:
Foreign Direct Investment, Skilled Labor, Small Industries, and Unskilled Labor
Political Geography:
Vietnam and Southeast Asia

33. Foreign Direct Investment, Agglomeration, and Production Networks in Indonesian Manufacturing

Author:
Dionisius Narjoko
Publication Date:
05-2023
Content Type:
Working Paper
Institution:
Economic Research Institute for ASEAN and East Asia (ERIA)
Abstract:
This study examines the importance of globalisation – defined by international production networks – in determining foreign direct investment (FDI) flows into Indonesian manufacturing since 2000. It is motivated by the fact that the extent of connection between the Indonesian and the global economy had increased after the 1997–98 Asian financial crisis. Models of FDI are estimated by utilising plant-level data and various trade and tariff data. Production networks or agglomeration are found to play an important role in driving FDI in Indonesia’s manufacturing sector, at least for the period 2000–2015. This study provides the insight that agglomeration could be utilised to increase FDI in Indonesia. This not only improves the productivity of the sector targeted by the investment but also promotes productivity growth. Creating more agglomeration areas could therefore be a policy direction taken by Indonesia to help increase FDI.
Topic:
Foreign Direct Investment, Investment, Manufacturing, and Production
Political Geography:
Indonesia and Southeast Asia

34. Structural Changes and the Impact of FDI on Singapore’s Manufacturing Activities

Author:
Shandre Mugan Thangavelu
Publication Date:
06-2023
Content Type:
Working Paper
Institution:
Economic Research Institute for ASEAN and East Asia (ERIA)
Abstract:
This chapter examines the investment and foreign direct investment (FDI) policy of Singapore’s economy in terms of the structural transformation of the economy from 1998 to 2018. The study also examines the impact of FDI on the productivity of the Singapore manufacturing industries in a panel framework from 2017 to 2019. The results indicate that FDI activities have a positive impact on labour productivity. The export activities of multinational businesses have a positive impact on labour productivity. We also observe agglomeration effects from FDI activities (average FDI activities over 3 years) in Singapore’s manufacturing industries. However, we observe a negative impact of outsourcing labour productivity. The study also derives policy implications for forward-looking policies in terms of the position of Singapore in the global production value chain.
Topic:
Foreign Direct Investment, Manufacturing, and Industry
Political Geography:
Singapore and Southeast Asia

35. How does the level of success of a transition of power impact Foreign Direct Investment in African countries?

Author:
Maria Fossas, Jack Moore, and Alexandra Tomlinson
Publication Date:
05-2023
Content Type:
Journal Article
Journal:
Journal of Public and International Affairs (JPIA)
Institution:
School of Public and International Affairs (SPIA), Princeton University
Abstract:
Transitions of power mark an inflection point in any society. They come about in all forms—elections, successions, coups, and conflicts—but in each case, it is an instance of a country embarking on a new path. In the field of development economics, it is thus essential to understand how the level of success of these power transitions impact the development of the nation. Specifically, the authors of this paper set out to determine to what extent change in foreign direct investment flows can be explained by the level of success of a transition of power. We conclude that maintaining or increasing good governance practices during a transition of power is a significant explanatory factor for changes in Foreign Direct Investment (FDI) and discuss the potential policy implications.
Topic:
Development, Economics, Foreign Direct Investment, Governance, and Transition of Power
Political Geography:
Africa

36. Foreign Linkages, Innovation & Productivity: Evidence from Enterprise Surveys

Author:
Anmol Kaur Grewal
Publication Date:
09-2023
Content Type:
Working Paper
Institution:
Centre for Trade and Economic Integration, The Graduate Institute (IHEID)
Abstract:
This paper estimates a three-stage structural model of how foreign linkages affect innovation which in turn affects firm productivity. Using harmonized firm-level data from the World Bank Enterprise Surveys, I construct a panel dataset for 47 developing countries spanning 2003 to 2019. I distinguish between four types of foreign linkages (exports, imports, inward foreign direct investment (FDI) and the use of foreign-licensed technology), and two types of innovation (product innovation and process innovation). To mitigate concerns regarding sample selection and endogeneity biases, I employ advanced panel data methods. In the first stage, I find that being an exporter, using foreign inputs, and using foreign-licensed technology makes firms more likely to invest in R&D, relative to other firms. I also find evidence of sample selection bias which is corrected by using a two-step Heckman selection model. In the second stage, I find that while increases in the R&D intensity increase the probability of product innovation, they have no statistically significant effect on the likelihood of process innovation. In the third stage, I find that product or process innovation is associated with increases in firm-level productivity. These results remain robust across alternative measures of innovation and firm productivity.
Topic:
Development, Foreign Direct Investment, Exports, Innovation, Imports, Productivity, and Foreign Linkages
Political Geography:
Global Focus

37. Timing Is Everything: Italy Withdraws from the Belt and Road Initiative

Author:
Aurelio Insisa
Publication Date:
12-2023
Content Type:
Commentary and Analysis
Institution:
Istituto Affari Internazionali
Abstract:
After months of rumours and speculations, on 6 December 2023, the Italian newspaper of record, the Corriere della Sera, broke the news that Rome had finally withdrawn from China’s Belt and Road Initiative (BRI), via a note sent to Beijing three days earlier.[1] In the absence of an explicit request to withdraw before the end of December, the memorandum of understanding (MoU) instrumental to Italy’s participation in the BRI would have automatically been renewed for another five years starting from March 2024. Italy’s subdued withdrawal from the BRI marked the epilogue of a long, laborious, yet ultimately successful diplomatic process that reflected a reassessment of its bilateral relations with China. The origins of this reassessment can be traced back to the government led by Mario Draghi between 2021 and 2022. In June 2021, during the first post-pandemic, post-Trump G7 Leaders’ Summit in Carbis Bay, Draghi stated that his government would “examine […] carefully” the MoU.[2] Draghi’s words reflected a deeper awareness of the broader implications of Beijing’s assertiveness in international politics and a close alignment with the Biden administration in Rome. This shift also reflected the absence of tangible economic benefits from BRI membership for Italy, although this was also due to the devastating effect of the Covid-19 pandemic on the designed trajectory of Sino-Italian economic relations.[3] Furthermore, the security-driven decision of the Draghi government to repeatedly exercise its “golden power” to veto Beijing’s investments in Italy’s strategic sectors contributed to shaping the MoU’s outcome.[4] This course correction in Rome’s China policy survived the fall of the Draghi government in July 2022 and the victory of the centre-right coalition led by Giorgia Meloni and her Fratelli d’Italia (Brothers of Italy, FdI) party in the legislative elections of September that year. After all, Meloni and her party had consistently opposed the MoU with China from the very beginning, a decision arguably also linked to the perceived need to bolster the party’s credentials as a reliable partner in the eyes of Washington – as in the case of the clear support for Ukraine well before the September electoral victory.
Topic:
Foreign Policy, Foreign Direct Investment, Belt and Road Initiative (BRI), and International Politics
Political Geography:
China, Europe, Asia, and Italy

38. The Effects of Robotization on Foreign Direct Investment

Author:
Sungwoo Hong, Wongi Kim, and Yeo Joon Yoon
Publication Date:
08-2023
Content Type:
Working Paper
Institution:
Korea Institute for International Economic Policy (KIEP)
Abstract:
This study aims to investigate the effects of robotization on foreign direct investment (FDI). We address this research question by providing a theoreti-cal prediction derived from a simple model and then empirically testing our prediction. Theoretically, we found that an exogenous rise in industrial robots depresses both the robot rental rate and the domestic cost of task execution. Thus, it is more profitable to perform more tasks at home, leading to a de-crease in FDI. Empirical results are summarized as follows. First, an increase in robotization in source countries negatively affects outward FDI. Second, this negative effect is not consistent across global regions.
Topic:
Economics, Foreign Direct Investment, and Industrial Structure
Political Geography:
Global Focus

39. Mekong Subregion-RoK Cooperation to Build Stable Supply Chains in Southeast Asia

Author:
Sungil Kwak, Jaewan Cheong, Mingeum Shin, and Jegook Kim
Publication Date:
08-2023
Content Type:
Policy Brief
Institution:
Korea Institute for International Economic Policy (KIEP)
Abstract:
The Mekong subregion has emerged as a key hub in the global value chain (GVC), driven by a surge in foreign direct investment (FDI). This development is rooted in the Mekong subregion's robust economic growth, positioning it strategically amid the ongoing competition between the United States and China for global hegemony. The RoK recognizes the strategic significance of the Mekong subregion and has embarked on cooperative efforts in this context. We delve into the potential of harnessing the Mekong subregion to enhance RoK's supply chain diversity. While it may pose challenges for the Mekong subregion to promptly function as a target for RoK's supply chain diversification due to its developmental and infrastructural status, we proactively explore potential avenues of RoK-Mekong cooperation to determine feasibility.
Topic:
Foreign Direct Investment, Economic Growth, Global Value Chains, and Supply Chains
Political Geography:
Asia, South Korea, and Southeast Asia

40. Securing Foreign Markets: Exports, Relational Specificity and New Investment Locations

Author:
Giorgia Giovannetti, Gianluca Santoni, and Giulio Vannelli
Publication Date:
02-2023
Content Type:
Working Paper
Institution:
Centre d'Etudes Prospectives et d'Informations Internationales (CEPII)
Abstract:
In this article we examine how the need to secure profit streams from exports has affected the location choice of new foreign investments by French manufacturing firms. Motivated by the observation that most firms entering a new foreign country do not establish a production unit there or decrease their exports, we develop a simple theoretical framework to guide our analysis and provide empirical evidence to support this “market securing” mechanism. Our results confirm that companies tend to locate new investments in countries that account for a larger share of their past exports; allowing for better monitoring of the foreign market, the investment prevents the disruption of the relationship, whose impact on profits would be more detrimental in the case of more important foreign partners. A 10 percent increase in bilateral exports increases the probability of investing by 3.4 percent. Consistent with our mechanism, given the same volume of exports, firms prefer countries that purchase goods with higher relational specificity as finding new buyers for these goods would imply higher costs if the relationship was broken.Exporting at least one good with relational specificity above the 75th percentile increases the probability of investing by 2.2 times compared to exporting more generic goods (below the 50th percentile).
Topic:
Markets, Foreign Direct Investment, Investment, Exports, and Manufacturing
Political Geography:
Europe and France