Foreign Direct Investment: Analysis of Aggregate Flows

159 Pages·2012·1.132 MB·English

by  Razin, Assaf;Sadka, Efraim

May7,2007 Time: 11:31am prelims.tex
Foreign Direct Investment
i
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May7,2007 Time: 11:31am prelims.tex
Foreign Direct Investment
ANALYSIS OF AGGREGATE FLOWS
AssafRazinandEfraimSadka
PrincetonUniversityPress
PrincetonandOxford
iii
May7,2007 Time: 11:31am prelims.tex
Copyright(cid:1)c 2007byPrincetonUniversityPress
PublishedbyPrincetonUniversityPress,41WilliamStreet,
Princeton,NewJersey08540
IntheUnitedKingdom:PrincetonUniversityPress,3MarketPlace,
Woodstock,OxfordshireOX201SY
AllRightsReserved
LibraryofCongressCataloging-in-PublicationData
Razin,Assaf.
Foreigndirectinvestment:analysisofaggregateflows/AssafRazin,EfraimSadka.
p. cm.
Includesbibliographicalreferencesandindex.
ISBN-13:978-0-691-12706-4(cl:alk.paper)
1.Investments,Foreign. 2.Investments,Foreign—Mathematicalmodels.
3.Capitalinvestments. 4.Capitalmovements. I.Sadka,Efraim. II.Title.
HG4538.R292007
332.67(cid:1)3—dc22 2006049714
BritishLibraryCataloging-in-PublicationDataisavailable
ThisbookhasbeencomposedinTimes
Printedonacid-freepaper.∞
pup.princeton.edu
PrintedintheUnitedStatesofAmerica
10 9 8 7 6 5 4 3 2 1
iv
May7,2007 Time: 11:31am prelims.tex
Contents
ListofFigures ix
ListofTables x
Preface xi
1 Overview 1
1.1 ChannelsofInternationalCapitalFlows 1
1.2 Micro-LevelStudies 5
1.3 Macro-FinanceStudies 6
1.4 ScopeandPurpose 8
1.4.1 BilateralFDIFlows 9
1.4.2 Roadmap 9
PartI.ForeignDirectInvestorsandLiquidityShocks
2 ForeignDirectInvestmentandForeignPortfolioInvestment:
Theory 15
2.1 Introduction 15
2.2 TheModel 18
2.2.1 ManagementandEfficiency 19
2.2.2 LiquidityShocksandResalePrices 20
2.3 Ex-AnteChoicebetweenFDIandFPI 22
2.3.1 ExpectedValueofFDI 22
2.3.2 ExpectedValueofFPI 23
2.3.3 FDIandFPI 24
2.4 MarketEquilibrium 24
2.4.1 AllocationofInvestorsbetweenFDIandFPI 24
2.4.2 ProbabilityofEarlyWithdrawals 27
2.4.3 WelfareAnalysis 28
2.5 Extension:AggregateLiquidityShocks 29
2.6 Conclusion 30
Appendix2ADerivationofFigure2.1 31
3 ForeignDirectInvestmentandForeignPortfolioInvestment:
Evidence 34
3.1 Introduction 34
3.2 Data 34
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vi Contents
3.3 TheEconometricModel 35
3.4 Results 38
3.5 Conclusion 39
PartII.ForeignDirectInvestmentwithThresholdBarriers:
Theory
4 ForeignversusDomesticDirectInvestment:
Cream-Skimming 43
4.1 Introduction 43
4.2 FDIandSkimmingHigh-ProductivityFirms 44
4.3 FPIInflowsversusFDIInflows 48
4.3.1 GainstotheHostCountry 48
4.3.2 TheSizeofInvestmentinCapacityintheHost
Country 50
4.4 Conclusion 51
5 FDIFlowswithEndogenousDomesticWages:
HeterogeneousFirms 53
5.1 Introduction 53
5.2 WageDetermination 53
5.3 M&AandGreenfieldInvestments 56
5.4 Conclusion 59
Appendix5A.1SomeComparableStaticsDerivations 59
Appendix5A.2ReconciliationoftheInternationalFlow
ParadoxaccordingtoLucas 61
6 Country-SpecificAggregateShocks:RepresentativeFirm 63
6.1 Introduction 63
6.2 Country-SpecificProductivityShocks 64
6.3 ConflictingEffectsofSource-andHost-Country
ProductivityShocks 65
6.4 Conclusion 69
PartIII.ForeignDirectInvestmentwithThresholdBarriers:
Empirics
7 OverviewoftheEconometricEquations 73
7.1 Introduction 73
7.2 TheHeckmanSelectionModel 73
7.3 TheTobitModel 76
7.4 Conclusion 77
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Contents vii
8 ApplicationtoaBaselineSample:OLS,Tobit,andthe
HeckmanSelectionModels 79
8.1 Introduction 79
8.2 DataandVariables 79
8.3 Estimation 80
8.4 EvidenceforFixedCosts 85
8.5 Conclusion 88
9 ProductivityShocks 89
9.1 Introduction 89
9.2 Data 90
9.3 EmpiricalEvidence 91
9.4 Conclusion 97
10 SourceandHostCorporateTaxRates 99
10.1 Introduction 99
10.2 SourceandHostTaxation 100
10.3 EmpiricalEvidence 102
10.4 Conclusion 106
Appendix10ABasicPrinciplesofInternationalTaxation
ofCapitalIncome 106
PartIV.PolicyinaGlobalizedEconomy
11 TaxCompetitionandCoordination 111
11.1 Introduction 111
11.2 ASource-HostCountryModelofTaxesandPublic
Goods 112
11.2.1 Production 112
11.2.2 PrivateConsumption 114
11.2.3 Government 116
11.3 TaxCompetition 117
11.4 TaxCoordination 118
11.5 Conclusion 122
Epilogue 124
Notes 127
Bibliography 135
Index 141
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List of Figures
Figure1.1.(a)FDIOutflows;(b)FDIInflows 3
Figure1.2.ShareofDifferentFinancingComponentsinWorldFDI
Inflows,1995–2004(percent) 7
Figure2.1.AllocationofInvestorsbetweenFDIandFPI 26
Figure6.1.FDI:FlowandSelection;(a)FDIFlows;
(b)Selection 68
Figure7.1.BiasedOLSEstimatesoftheFlowEquation 76
Figure9.1.MarginalEffectofHost-CountryProductivityShockin
ExpectedBilateralFDIFlowsfromtheU.S. 97
Figure10.1.SelectionEquation(fromtheU.S.toFourEU
Countries) 105
Figure10.2.FlowEquation(fromtheU.S.toFourEUCountries) 105
Figure11.1.EffectofIncomeGap(IS/IH)onTax-Expenditure
Policies 118
Figure11.2.EffectofSetupCostonTax-ExpenditurePolicies 119
Figure11.3.TheGainsfromTaxCoordination:(a)TheEffectof
theSetupCosts;(b)TheEffectoftheIncomeGap 120
Figure11.4.ComparisonbetweenCompetitiveandCoordinated
TaxRates:(a)TheEffectofSetupCosts;(b)TheEffectofthe
IncomeGap 121