FDI

How Does Foreign Direct Investment Affect Economic
Growth
Publisher Info
Paper provided by International Monetary Fund in its series IMF Working Papers with
number 94/110. Additional information is available for the following registered author(s):
• Jose De Gregorio
• Jong-Wha Lee
Related research
Keywords: Foreign investment ; Economic growth ; Developing countries ; Economic models ;
Other versions of this item:
• Article
○ Borensztein, E. & De Gregorio, J. & Lee, J-W., 1998. "How does foreign direct investment
affect economic growth?1," Journal of International Economics, Elsevier, vol. 45(1), pages
115-135, June. [Downloadable!] (restricted)
• Paper
○ Eduardo Borensztein & Jose De Gregorio & Jong-Wha Lee, 1995. "How Does Foreign
Direct Investment Affect Economic Growth?," NBER Working Papers 5057, National
Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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2. Inflow Of Funds Through Foreign Direct Investment In India- Analysis

Enclosed please find an abstract and paper on 'Inflow of Funds through Foreign
Direct InveINFLOW OF FUNDS THROUGH FOREIGN DIRECT INVESTMENT IN INDIA
– Analysis for your kind perusal and to become a subscriber in this site. thanks.
M.Ganesh, Faculty in MBA,

Thanthai Hans Roever College, Perambalur
ganeshm67@gmail.com
and
K.Soundarapandiyan, Faculty in MBA,
Sri SaiRam Engineering College Chennai-44
Soundrap_mba@yahoo.com
ABSTRACT
Foreign Direct Investment (FDI) is considered to be the lifeblood for economic
development as far as the developing nations are concerned. Since the
liberalization of the Indian economy inflows of foreign direct investment has
greatly increased. As far as forting direct investment is concerned, its flow in
India is very small as compared not only to China but also to India's potential.
Economic Survey for 2005-06 points out that India has potential to absorb $150
billion FDI in the infrastructure sectors alone by 2010.Most of the FDI inflows
come from a few countries. Between 1991 and 2005, investments of 10 countries
accounted for 71 percent of FDI, the main investor countries being the USA, the
Netherlands, Japan, and the United Kingdom. With regard to FDI, U.S. is one of
the largest foreign direct investors in India. India is becoming an attractive
location for global business on account to its buoyant economy, its increasing
consumption market, and its needs in infrastructure and in the engineering
sector. Opening and FDI have really created new opportunities for India's
development and boosted the performances of local firms as well as the
globalization of some of them. Such a trend has undeniably raised Indian's
stature among developing countries.
FDI Investment Incentive System and FDI Inflows:

The Philippine Experience
Research Paper Series (Philippine Institute for Development Studies) | July 1, 2007 | Aldaba, Rafaelita M | Copyright Philippine Institute for
Development Studies 2008. This material is published under license from the publisher through ProQuest Information and Learning
Company, Ann Arbor, Michigan. All inquiries regarding rights should be directed to ProQuest Information and Learning Company. (Hide
copyright information) Copyright
Abstract
This paper examines the country's investment incentive program for foreign investors and its success in attracting substantial
FDI inflows. The analysis compares the FDI incentive system and FDI performance of the Philippines with other Asian countries.
Since it is difficult to untangle the effect of tax incentives from other factors, the analysis also takes into account other factors
such as level of competitiveness, costs of doing business, and availability of infrastructure. Our experience tends to suggest
that in the absence of fundamental factors such as economic …
Agglomeration Effects in Foreign Direct Investment and the Pollution Haven

Hypothesis
Ulrich J. Wagner
Universidad Carlos III de Madrid - Department of Economics; London School of Economics & Political
Science (LSE) - Centre for Economic Performance (CEP)
Christopher Timmins
Duke University - Department of Economics
Environmental and Resource Economics, Forthcoming

Economic Research Initiatives at Duke (ERID) Research Paper No. 22
Abstract:
Does environmental regulation impair international competitiveness of pollution-intensive industries to
the extent that they relocate to countries with less stringent regulation, turning those countries into
"pollution havens"? We test this hypothesis using panel data on outward foreign direct investment
(FDI) flows of various industries in the German manufacturing sector and account for several
econometric issues that have been ignored in previous studies. Most importantly, we demonstrate that
externalities associated with FDI agglomeration can bias estimates away from finding a pollution
haven effect if omitted from the analysis. We include the stock of inward FDI as a proxy for
agglomeration and employ a GMM estimator to control for endogenous, time-varying determinants of
FDI flows. Furthermore, we propose a difference estimator based on the least polluting industry to
break the possible correlation between environmental regulatory stringency and unobservable
attributes of FDI recipients in the cross-section. When accounting for these issues we find robust
evidence of a pollution haven effect for the chemical industry.
Keywords: agglomeration effects, congestion effects, environmental regulation, foreign direct

investment, German manufacturing, panel data, pollution havens
Determinants of foreign direct investment at the regional level in China
Session Marked List

Article Information:
Title: Determinants of foreign direct investment at the regional level in China
Author(s): Lv Na, W.S. Lightfoot
Journal: Journal of Technology Management in China
Year: 2006
Volume: 1
Issue: 3
Page: 262 - 278
ISSN: 1746-8779
DOI: 10.1108/17468770610704930
Publisher: Emerald Group Publishing Limited

Bilateral Investment Treaties and Foreign
Direct Investment: Correlation versus
Causation
Aisbett, Emma (2007): Bilateral Investment Treaties and Foreign Direct Investment:
Correlation versus Causation. Unpublished.
Full text available as:
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Abstract
The rapid and concurrent increase in both foreign investment and government efforts to
attract foreign investment at the end of last century makes the question of causality between
the two both interesting and challenging. I take up this question for the case of the nearly
2,500 bilateral investment treaties (BITs) that have been signed since 1980. Using data on
bilateral investment outflows from OECD countries, I test whether BITs stimulate investment
in twenty eight low- and middle-income countries. In contrast to previous studies that have
found a strong effect from BIT participation, I explicitly model and empirically account for the
endogeneity of BIT adoption. I also test for a signaling effect from BITs. I find that the
initially strong correlation between BITs and investment flows is not robust controlling for
selection into BIT participation. Furthermore, I find no evidence for the claim that BITs signal
a safe investment climate. My results show the importance of accounting for the endogeneity
of adoption when assessing the benefits of investment liberalization policies.
Item Type: MPRA Paper

Institution: University of California at Berkeley
Language: English
Keywords: International investment agreements; Foreign Direct Investment;

Developing Countries
Subjects: F - International Economics > F2 - International Factor

Movements and International Business > F23 - Multinational
Firms; International Business
F - International Economics > F2 - International Factor
Movements and International Business > F21 - International
Investment; Long-Term Capital Movements
F - International Economics > F2 - International Factor
Movements and International Business > F20 - General
ID Code: 2255
Deposited By: Emma Aisbett
Deposited On: 15. Mar 2007
Last Modified: 07. Nov 2007 02:21
References: Baldwin, R. and Taglioni, D.: 2006, Gravity for dummies and
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regressions with AR(1)
disturbances, Econometric Theory 15, 814–823.
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correlation and the fixed
effects model, Journal of Applied Econometrics 7, 243–257.
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determinants. NBER
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11, 601–622.
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knowledge-capital model of the
multinational enterprise: Comment, American Economic Review
93, 980–994.
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wealthy and poor countries in
empirical FDI studies. NBER Working Paper 10378.
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knowledge-capital model
of the multinational enterprise, American Economic Review 91,
693–708.
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http://www.pdfqueen.com/pdf/cu/current-fdi-in-india/5/
http://www.peerpapers.com/topics/pros-and-cons-of-fdi-in-higher-education/0
http://www.oppapers.com/subjects/benefits-and-cost-of-fdi-to-host-country-
page2.html
research papers on cost of servicing in Foreign Direct Investment
Costs And Benefits Of Foreign Direct Investment For New Zealand

New Zealand – Report
1.0 Introduction
Throughout the production of this report I will aim to explain an analysis of the
costs and benefits of foreign direct investment for New Zealand both in
theoretical and empirical terms. When it comes to defining FDI different
countries may define it differently and because of this it is arbitrary, but foreign
direct investment can be described as:
"Foreign Direct Investment is the purchase by the investors or corporations of

one country of non-financial assets in another country. This involves a flow of
capital from one country to another to build a factory, purchase a business or
buy real estate." (http://www.afsc.org/trade-matters/learn-about/glossary.htm).
In New Zealand foreign direct investment plays a pivotal part in the country's
economy growth, this is shown by the fact that over the past two decades the
flow of F.D.I in New Zealand has increased substantially and that FDI stocks have
risen from around NZ$ 300 million in 1981 (pre-economic reforms) to NZ$49.3
billion for the year ending March 2001, this will be looked at in more detail in
section 1.2. "Foreign direct investment (FDI) has the potential to generate
employment, raise productivity, transfer skills and technology, enhance exports
and contribute to the long-term economic development of the world's developing
countries. More than ever, countries at all levels of development seek to
leverage FDI for development" .
2.0 Multinational Enterprises

A Multinational can be defined as the following:
"A firm, usually a corporation that operates in two or more countries. In practice
the term is used interchangeably with Multinational Corporation".
(http://www-personal.umich.edu/~alandear/glossary/m.html)
The phenomenon of multinationals is not entirely recent as you can go back to
before World War I and see that American firms had factories in foreign
countries, but it became far more common after World War II and today it may
be difficult to find a...
Exchange Rate Volatility And Fdi

INTRODUCTION
Foreign Direct Investment brings various benefits to both investing countries, or

home countries, and recipient countries, or host countries. FDI transfers not only
financial resources, but also technology and managerial know-how from home
countries to host countries. Therefore, FDI are very important for developing
countries, or emerging markets, to grow such as G.C.C countries and some Asian
countries. For this reason, I tried to study the relationship between FDI and
exchange rate volatility and observe how exchange rate changeability could
affect the FDI positively or negatively. In this paper, I have chosen five academic
papers which are related to FDI and currency exchange rate variability and I tried
to present them in the following: (1) Exchange Rate, Exchange Rate Volatility
and Foreign Direct Investment, (2) Untying the Gordian knot: The Multiple Links
Between Exchange Rates and Foreign Direct Investment, (3) Exchange Rate
Volatility and Foreign Direct Investment, (4) Why is China so Attractive for FDI?
(5)The Role of Exchange Rates, Exchange Rate Volatility and Foreign Investment:
International Evidence.
Exchange Rate, Exchange Rate Volatility and Foreign Direct Investment
By: Kozo Kiyota and Shujiro Urata
Literature review
Several empirical studies confirmed the strong impacts of exchange rate on FDI.
Yoshimura and Kiyota (2003) examined the impacts of exchange rate on Japan’s
FDI for different periods. These studies exposed that the appreciation of the
home currency vis-à-vis the host currency encouraged FDI from the home
country to the host country. Bénassy-Quéré, Fontagné and Lahrèche- Révil
(2001) investigated the impacts of exchange rate volatility, which was measured
by the coefficient of variation of quarterly nominal exchange rate over the past
three years, on FDI from developed to developing countries for the 1984–96
periods by using annual data. They found that high exchange rate volatility
discouraged FDI while the...
http://www.oppapers.com/essays/Exchange-Rate-Volatility-Fdi/151946
Evaluate The Costs And Benefits To Modern Business

From Engaging In Foreign Direct Investment.
We have many premium term papers and essays on Evaluate The Costs And Benefits To
Modern Business From Engaging In Foreign Direct Investment.. We also have a wide variety
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Evaluate The Costs And Benefits To Modern Business From Engaging In
Foreign Direct Investment.
Along with the constant deepening of modern international trade globalization,
various economic elements of modern commerce such as: labor, goods, service
and capital etc. have begun to span the geological border of each country and
been widely circulated in the world under the promotion of the globalization.
Especially the capital internationalization whose main form is international direct
investment is the most frequent. The capital internationalization includes two
dimensional contents: on one hand, it's an international of investor structure; on
the other hand, it's also an international of enterprise organization structure,
including the internationalization of enterprise headquarters, area headquarters,
operation headquarters, capital headquarters or branch institution. The above
two internationalizations supplement each other, develop the transnational
operation network of the enterprise, promote the internationalized operation of
the enterprise and reinforce or improve the international competition advantage
of the enterprise.
According to the foreign direct investment questionnaire made by Ministry of
Commerce in Chin in March of 2006, the current purposes of Chinese enterprises
on the foreign direct investment include: 1. To transfer the domestic superfluous
production and technology capacity of the host country. 2. To develop the
foreign resource. 3. To study the latest foreign technology, management and
marketing experience. 4. To explore foreign market to drive the export. 5. To
speed up the enterprise's globalization course. 6. To evade the trade barrier.
The advantages brought by FDI on the modern enterprise operation:
1. FDI is the effective way to evade the international trade barrier
The global economic integration is the main trend of the development of current
world economy. Some international organizations, such as WTO, are always
applied themselves to promoting the trade liberalization and reducing the tariff
wall among the countries....
http://www.oppapers.com/essays/Evaluate-Costs-Benefits-Modern-Business-
Engaging/135985
Exports, Foreign Direct Investment and the Costs of
Corporate Taxation
Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Christian Keuschnigg ( Christian.Keuschnigg@unisg.ch) (University of St.Gallen (IFF-
HSG), CEPR and CESifo)
Additional information is available for the following registered author(s):
• Christian Keuschnigg
Abstract
This paper develops a model of a monopolistically competitive industry with extensive and
intensive business investment and shows how these margins respond to changes in average
and marginal corporate tax rates. Intensive investment refers to the size of a firm’s capital
stock. Extensive investment refers to the firm’s production location and reflects the trade-off
between exports and foreign direct investment as alternative modes of foreign market access.
The paper derives comparative static effects of the corporate tax and shows how the cost of
public funds depends on the measures of effective marginal and average tax rates and on the
behavioral elasticities of extensive and intensive investment.
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Paper provided by Oxford University Centre for Business Taxation in its series Working
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Keywords: Exports; foreign direct investment; corporate taxation; extensive and intensive investment; effective
tax rates; costs of public funds;
Other versions of this item:
• Article
○ Christian Keuschnigg, 2008. "Exports, foreign direct investment, and the costs of
corporate taxation," International Tax and Public Finance, Springer, vol. 15(4), pages 460-
477, August. [Downloadable!] (restricted)
• Paper
○ Christian Keuschnigg, 2007. "Exports, Foreign Direct Investment and the Costs of
Corporate Taxation," CESifo Working Paper Series CESifo Working Paper No. , CESifo
Group Munich. [Downloadable!]
○ Christian Keuschnigg, . "Exports, Foreign Direct Investment and the Costs of Corporate
Taxation," FIW Working Paper series 005, FIW. [Downloadable!]
○ Christian Keuschnigg, 2006. "Exports, Foreign Direct Investment and the Costs of
Corporate Taxation," University of St. Gallen Department of Economics working paper
series 2006 2006-17, Department of Economics, University of St. Gallen. [Downloadable!]
○ Keuschnigg, Christian, 2006. "Exports, Foreign Direct Investment and the Costs of
Coporate Taxation," CEPR Discussion Papers 5769, C.E.P.R. Discussion Papers.
[Downloadable!] (restricted)
Find related papers by JEL classification:
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
F23 - International Economics - - International Factor Movements and International Business - - - Multinational
Firms; International Business
H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production,
Pricing, and Market Structure; Size Distribution of Firms
L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and
Market Structure
FDI In Services And Market Access: A Paradox Of Trade

Liberalization
Topics:
Foreign Direct Investment
Tags:
Currency & Foreign Exchange,
Finance,
Foreign Direct Investment,
Foreign Direct Investment (FDI),

Free Trade,
Investment,
Liberalization,
Microsoft Access,
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Hitotsubashi University
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Overview: In an international oligopoly model, this paper investigates interaction between
trade liberalization in goods and liberalization in service FDI (Foreign Direct Investment).
Since some services are market-specific and have non-tradable nature, a foreign firm has a
higher cost in service provisions compared to its domestic competitor and it can overcome the
disadvantage by either outsourcing services to the domestic competitor or making service
FDI. When the cost of service FDI is high enough, trade liberalization under service
outsourcing may have an anti-competitive effect and benefit both domestic and foreign firms
at the expense of consumers.
(Is this item miscategorized? Does it need more tags? Let us know.)
Format: PDF | Size: 365KB | Date: Dec 2006 | Pages: 33
http://jobfunctions.bnet.com/abstract.aspx?docid=314107
NEWS AND VIEWS
Impact of foreign ownership on innovation
European Management Review Research Note
RESEARCH
FDI by firms from newly industrialised economies in emerging markets:

corporate governance, entry mode and location
Journal of International Business Studies Article
Ownership structure, strategic controls and export intensity of foreign-invested

firms in transition economies
Journal of International Business Studies Article
Chinese FDI in Sub-Saharan Africa: Engaging with Large Dragons
European Journal of Development Research Original Article
http://www.palgrave-journals.com/jibs/journal/v38/n4/abs/8400279a.html
Does FDI Mode of Entry Matter for Economic Developments of a Host Country? The Case of Korea
Seong-Bong Lee
Korea Institute for Economic Policy, 300-4 Yomgok-dong, Seocho-gu, Seoul, 137-747, Korea sblee@kiep.go.kr
Mikyung Yun
School of International Studies Catholic University of Korea 43-1 Yeokgok 2-dong, Wonmi-gu Bucheon, Gyeonggi-do, 420-743, Korea
mkyun@catholic.ac.kr
Abstract
There is an ongoing debate on whether benefits of foreign direct investment (FDI) differ depending on the modes of FDI entry. This paper
examines this debate using firm-level data on FDI in Korea. The paper adopts a new, more accurate classification scheme than the current official
classification system and finds that there is little difference in firm-level performance according to FDI mode of entry. The paper thus argues
against any provision of preferential incentives based on modes of entry.
http://www.mitpressjournals.org/doi/abs/10.1162/asep.2006.5.3.171?prevSearch=allfield%253A%2528FDI%2529&searchHistoryKey=
Pollution Abatement Costs and Foreign Direct Investment Inflows to U.S.

States
Wolfgang Keller
University of Texas
Arik Levinson
Georgetown UniversityThis paper estimates the effect of changing environmental standards on patterns of international investment. The
analysis advances the existing literature in three ways. First, we avoid comparing different countries by examining foreign direct investment
in the United States and differences in pollution abatement costs among U.S. states. Data on environmental costs in U.S. states are more
comparable than those for different countries, and U.S. states are more similar in other difficult-to-measure dimensions. Second, we allow
for differences in states' industrial compositions, an acknowledged problem for earlier studies. Third, we employ an 18-year panel of relative
abatement costs, allowing us to control for unobserved state characteristics. We find robust evidence that abatement costs have had
moderate deterrent effects on foreign investment.
Cited by
J. Ederington. (2010) Should Trade Agreements Include Environmental Policy?. Review of Environmental Economics and Policy 4:1, 84-102
Online publication date: 1-Dec-2010.
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Abay Mulatu, Reyer Gerlagh, Dan Rigby, Ada Wossink. (2010) Environmental Regulation and Industry Location in Europe. Environmental
and Resource Economics 45:4, 459-479
Online publication date: 1-Apr-2010.
CrossRef
L. Tole, G. Koop. (2010) Do environmental regulations affect the location decisions of multinational gold mining firms?. Journal of Economic
Geography
Online publication date: 2-Feb-2010.
CrossRef
Ulrich J. Wagner, Christopher D. Timmins. (2009) Agglomeration Effects in Foreign Direct Investment and the Pollution Haven Hypothesis.
Environmental and Resource Economics 43:2, 231-256
Online publication date: 1-Jun-2009.
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Roberto A. De Santis, Frank Stähler. (2009) Foreign Direct Investment and Environmental Taxes. German Economic Review 10:1, 115-135
CrossRef
Andreas Waldkirch, Munisamy Gopinath. (2008) Pollution Control and Foreign Direct Investment in Mexico: An Industry-Level Analysis.
Environmental and Resource Economics 41:3, 289-313
Online publication date: 1-Nov-2008.
CrossRef
Gary Koop, Lise Tole. (2008) What is the environmental performance of firms overseas? An empirical investigation of the global gold mining
industry. Journal of Productivity Analysis 30:2, 129-143
Online publication date: 1-Oct-2008.
CrossRef
A. B. Whitford. (2008) Institutional Design and Information Revelation: Evidence from Environmental Right-to-Know. Journal of Public
Administration Research and Theory 19:2, 189-205
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Robert J. R. Elliott, Kenichi Shimamoto. (2008) Are ASEAN Countries Havens for Japanese Pollution-Intensive Industry?. The World
Economy 31:2, 236-254
CrossRef
WENHUA DI. (2007) Pollution abatement cost savings and FDI inflows to polluting sectors in China. Environment and Development
Economics 12:06,
CrossRef
David M. Konisky. (2007) Regulatory Competition and Environmental Enforcement: Is There a Race to the Bottom?. American Journal of
Political Science 51:4, 853-872
Online publication date: 1-Oct-2007.
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Erik Dietzenbacher, Kakali Mukhopadhyay. (2007) An Empirical Examination of the Pollution Haven Hypothesis for India: Towards a Green
Leontief Paradox?. Environmental and Resource Economics 36:4, 427-449
CrossRef
Matthew A. Cole, Robert J. R. Elliott, Per G. Fredriksson. (2006) Endogenous Pollution Havens: Does FDI Influence Environmental
Regulations?*. Scandinavian Journal of Economics 108:1, 157-178
Online publication date: 1-Mar-2006.
CrossRef
Javier González-Benito, Óscar González-Benito. (2006) A review of determinant factors of environmental proactivity. Business Strategy and
the Environment 15:2, 87-102
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Matthew A. Cole, Robert J. R. Elliott. (2005) FDI and the Capital Intensity of "Dirty" Sectors: A Missing Piece of the Pollution Haven Puzzle.
Review of Development Economics 9:4, 530-548
Online publication date: 1-Nov-2005.
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Paroma Sanyal, Nidhiya Menon. (2005) Labor Disputes and the Economics of Firm Geography: A Study of Domestic Investment in India.
Economic Development and Cultural Change 53:4, 825-854
Online publication date: 1-Jul-2005.
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Brian R Copeland, M. Scott Taylor. (2004) Trade, Growth, and the Environment. Journal of Economic Literature 42:1, 7-71
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Daniel L. Millimet. (2003) Environmental Abatement Costs and Establishment Size. Contemporary Economic Policy 21:3, 281-296
Online publication date: 1-Jul-2003.
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http://www.mitpressjournals.org/doi/abs/10.1162/003465302760556503?prevSearch=allfield%253A%2528FDI%2529&searchHistoryKey=
Does Inward Foreign Direct Investment Boost the Productivity of Domestic Firms?
Jonathan E. Haskel
Queen Mary, University of London, AIM, and CEPR
Sonia C. Pereira
University College London
Matthew J. Slaughter
Tuck School of Business at Dartmouth and NBER
PDF (127.372 KB) PDF Plus (138.103 KB)
Abstract
Are there productivity spillovers from FDI to domestic firms, and, if so, how much should host countries be willing to pay to attract FDI? To
examine these questions, we use a plant-level panel covering U.K. manufacturing from 1973 through 1992. Consistent with spillovers, we estimate
a robust and significantly positive correlation between a domestic plant's TFP and the foreign-affiliate share of activity in that plant's industry.
Typical estimates suggest that a 10-percentage-point increase in foreign presence in a U.K. industry raises the TFP of that industry's domestic
plants by about 0.5%. We also use these estimates to calculate the per-job value of these spillovers at about £2,400 in 2000 prices ($4,300). These
calculated values appear to be less than per-job incentives governments have granted in recent high-profile cases, in some cases several times less.
Cited by
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http://www.mitpressjournals.org/doi/abs/10.1162/rest.89.3.482?prevSearch=allfield%253A%2528FDI%2529&searchHistoryKey=
Article: FDI and the effects on society.(foreign direct

investment)
Article from: Journal of International Business Research
Article date: January 1, 2005
Author: Herman, Michelle; Chisholm, Darla; Leavell, Hadley
COPYRIGHT 2008 The DreamCatchers Group, LLC. This material is published under license from the
publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights or
concerns about this content should be directed to customer service. (Hide copyright information)
ABSTRACT
The last decade has seen an explosion in Foreign Direct Investment (FDI) especially in developing countries, where the returns on investment can be higher than
in developed countries. Both developing and developed countries have liberalized their policies and introduced new policies to attract FDI inflows. This increase in
FDI has had major effects on the social welfare of the citizens of developing host-countries. The purpose of this paper is to examine both the positive and negative
effects of FDI inflows to developing countries in areas of politics, society, technology, finance, environment and culture, to determine whether or not FDI
contributes to the well-being of society. This paper also provides an overview of the current trends in FDI flows and the relationship between FDI, multinational
corporations, and society.
INTRODUCTION
Foreign Direct Investment (FDI) is the single most important instrument for the globalization of the international economy. Defined, FDI is the investment of real
assets in a foreign country; it is acquiring assets such as land and equipment in another, host country, but operating the facility from the home country. FDI is
viewed by many as necessary to stimulate the economies of both developed and underdeveloped countries. It has even been suggested that FDI will eventually
replace official development assistance to underdeveloped countries. Between 1986 and 2000, the average annual growth rate of FDI was 25 percent. More
recently after the September 11th terrorist attacks in the U.S., the global economy experienced a decrease in foreign investment flows. Developing countries have
been hit the hardest by the decline in FDI as foreign investment is being redirected to more developed countries. In spite of the decline, it is expected that FDI will
continue to be the most significant tool for globalization.
It is widely accepted that FDI inflows provide economic benefits such as increased competition, technological spillovers and innovations, and increased
employment. Yet the impact of foreign investment extends far beyond economic growth. At times FDI can be a catalyst for change to society as a whole, therefore
one must think in terms of economic, political, social, technological, cultural, and environmental factors and examine all the effects of FDI in order to decipher the
true long-term impact. As foreign investment and globalization continues to increase, developing countries desperately seeking to attract foreign investment can
have undesirable outcomes. In this scenario FDI can have numerous negative effects, such as job loss, human rights abuses, political unrest, financial volatility,
environmental degradation, and increased cultural tensions.
The results of FDI on the global economy are complex and unpredictable; they can vary from country to country. This is due in part to the practices that are in
place prior to receiving FDI inflows, such as deep-rooted social customs, political practices, laws and regulations. In more developed countries, such as Singapore,
China and Ireland, the increase in foreign investment resulted in rapid economic growth and social development. Yet in unstable, underdeveloped countries, the
results can be quite different. For the positive effects of FDI to be realized by undeveloped countries, major reforms in domestic policies must also take place.
The purpose of this study is to examine the effects of FDI and to determine whether the benefits of FDI outweigh the costs. Arguments from both sides of the
debate will be taken into account when assessing the true impact of FDI.
LITERATURE REVIEW
There is an abundance of literature regarding the impact of FDI on society. Most literature analyzes the relationships between FDI, multinational corporations, and
governments. A majority of the literature analyzes one side or the other; however, in order to more accurately measure the situation, a more balanced
assessment that examines both sides of the debate is necessary.
Both Kiss (2003) and Hippert (2002), examining FDI from a social standpoint, provide a negative perspective on the impact of FDI in developing countries. Kiss
(2003) analyzes the situation in Hungary when the Hungarian government introduced elements of a parliamentary democracy and market economy that
eventually led to the social and political exclusion of Hungarian women. The author argues that governments must address gender issues as well as implement
official measures and institutional changes to facilitate women's inclusion into production and social systems. Hippert (2002), examines the effect of FDI on
women's health. The author asserts that FDI and Multinational Corporations (MNCs) hamper the economic integrity and sovereignty of the developing world and
states that it is women who bear the brunt of human rights abuses because of their social positions in developing countries, especially in parts of Mexico and Asia.
The author also discusses solutions to these problems that have failed because they have been primarily "top-down approaches," and proposes that the only
plausible solutions are to hold corporations accountable for their employees.
Jones and McNally (1998) provide insight into the environmental degradation that is caused by FDI. The authors consider both sides of the debate on the existence
of "pollution havens" and provide reasons why MNCs do not contribute to environmental pollution. The authors also state that in industries that are involved in
resource extraction, some evidence suggests that MNCs will relocate to countries where environmental regulations are lax or non-existent. Again in 1998
McNalley, along with Mabey, authored a report on FDI and the environment for the World Wildlife Foundation. The report provides instances of environmental
degradation that occurred mostly in extractive industries, along with proposals for reforms to current environmental standards.
In contrast to the negative view of FDI, Rondinelli (2002) explores the public role and economic power of MNCs and the positive ways in which MNCs can influence
governments and provide for the social welfare of host-country citizens. By focusing on their roles as philanthropists and political activists, MNCs provide foreign
aid to developing countries, expand international trade and investment, and influence public policy. The author provides several instances in which an MNC
stepped in and provided foreign aid to developing countries in order to fill the gap that was created when Official Development Assistance was decreased.
Spar (1999), takes a neutral stance when discussing the complexity of the relationship between foreign direct investment and human rights and the ways in which
FDI impacts society both negatively and positively. The author concludes that it is the interaction of governments and MNCs that will lead to economic growth and
social prosperity through FDI. …
Article: The determinants of liberalization of FDI policy in developing countries: a cross-sectional analysis, 1992-2001.(foreign direct investment)
The decade of the 1990s was characterized by widespread liberalization of laws and regulations affecting inflows of foreign direct investment in developing
countries. Using a data base supplied by UNCTAD, this article employs a cross-sectional regression methodology to analyze the determinants of liberalization of
foreign direct investment policies in 116 developing countries from 1992 to 2001. Ninety-five per cent of the changes in such policies over the decade (1,029 of
1,086) were liberalizing rather than restrictive. Two possible explanations of liberalization are suggested: policy makers' beliefs that attracting more foreign direct
investment is in the best interests of their countries, and external pressure to adopt neoliberal economic policies either from the dominant power (the United
States) or international organizations such as the World Bank or International Monetary Fund. Results provide strong support for the "rational" decision (or
"opportunity costs of closure") argument and only limited support for the external pressure thesis. Country size, level of human resource capabilities and trade
openness are found to be the primary determinants of the propensity to liberalize.
Introduction
The 1991 World Development Report (World Bank, 1991, p. 31) concluded that a "sea change" had taken place in thinking about development: by the late 1980s,
many developing countries had moved away from State directed, inwardly focused strategies towards an acceptance of both markets and integration into the
world economy. While the motivations for this marked shift in policy are complex, the failure of import substitution, the success of the relatively open Asian
economies, the collapse of socialism as an alternative, and the economic crises of the 1980s all played a role (Millner, 1999).
In 1990 John Williamson concluded that there was a "Washington Consensus" about the desirability of openness to the world economy, liberalization of domestic
markets and macroeconomic stability (Gore, 2000; Williamson, 2000). In a retrospective article, he argues that "my version of the Washington Consensus can be
seen as an attempt to summarize the policies that were widely viewed as supportive of development at the end of two decades when economists had become
convinced that the key to rapid economic development lay not in a country's natural resources or even in its physical or human capital, but rather in the set of
economic policies that it pursued" (Williamson 2000, p. 254).
Williamson believed that the process of intellectual convergence after the collapse of communism was reflected in ten economic rerforms: the seventh was
liberalization of flows of foreign direct investment (FDI) (1). I He wrote at the start of a period characterized by the widespread liberalization of laws and
regulations affecting flows of both portfolio capital and FDI (Brune et al., 2001). (2) While developing countries began to reduce or remove restrictions on FDI
during the 1980s, the trend became pronounced and widespread during the early 1990s as increasing numbers of policy makers came to believe that integration
into the world economy was a prerequisite to growth and development and that FDI from transnational corporations (TNCs) was the vehicle to accomplish that
end. (3)
A number of factors led to increased efforts by developing countries to attract flows of FDI. First, there was increased recognition by policy makers that the bundle
of assets and capabilities encompassed in FDI could contribute directly to growth and development of the national economy. Second, declining levels of other
forms of assistance increased reliance on FDI, and various financial crises may have led to a preference for longer term, relatively stable and often tangible flows
of direct investment. Last, developing country governments have gained confidence in their ability to maximize the benefits and minimize the liabilities of
investment by TNCs (UNCTAD, 1994, p. 85). As a result, the late 1980s and early 1990s were characterized by a "de facto convergence" of government policy
approaches towards FDI (Noorbakhsh, Paloni, and Youssef, 2001).
The liberalization of FDI policy was both cause and effect of the marked increase in integration of the world economy in the 1990s which, in turn, reflected the
transition of the exsocialist to market economies after the "fall of the Wall", dramatic improvements in communication as a result of the digital/information
revolution, changes in the nature of global production including the internationalization of supply chains and the ideological shift to open market economies,
among other factors. Increasing economic integration, which includes policy liberalization, is reflected in dramatic increases in flows of FDI into developing
countries during the late 1980s and the 1990s. Annual inflows to the developing countries grew by 250% during the 1980s and over five-fold (520%) during the
1990s, reaching $22.9 billion in 1999. FDI inflows as a percentage of gross fixed capital formation in developing countries grew from 3.6% in 1990 to 14.3% by the
decade's end. Last, stocks of FDI as a percentage of GDP doubled during the 1990s, increasing from 15.4% in 1989 to 30.2% in 1999 (UNCTAD, 2004).
This article reports a cross-sectional analysis of the determinants of liberalization of policy affecting inflows of FDI into 116 developing countries during the decade
from 1992-2001. It makes use of a data base provided by UNCTAD described below) that tracks liberalizing and restricting changes in eight categories of FDI
policy by country over the ten year period. The changes were overwhelmingly liberalizing: 95% of the 1,086 regulatory changes in the sample countries either
loosened regulatory restrictions or provided new promotions and guarantees to attract FDI; all but two of the countries included in this study were net liberalizers
of FDI policy.
Liberalization of FDI policy
In their path-breaking study of capital account liberalization, Dennis Quinn and Carla Inclan (1997) note that, while there has been a good deal of research on the
consequences of financial openness, its origins or determinants are much less well understood. That is true for both capital flows in general and FDI in particular.
(4)
While there is a considerable literature dealing with the impact of tax concessions and other incentives to attract FDI (see Morisset and Pirnia, 2001 for a review),
the literature dealing with FDI policy is considerably more modest. Alvin Wint (1992), for example, reviews the liberalization of FDI regulation in ten developing
countries and concludes that there can be a disconnect between formal liberalization and the actual implementation of the screening process. Stephen Golub
(2003) presents a complex scheme summarizing liberalization of restrictions on inward FDI in OECD countries. Jacques Morisset and Olivier Neso (2002) review
administrative barriers to inflows of FDI in 32 least developed countries (LDCs). A larger body of work examines the impact of administrative reform or
liberalization of regulation on either inflow's of FDI or the FDI decision process (Gastanaga, Nugent and Pashamova, 1998; Globerman and Shapiro, 2003; Loree
and Guisinger, 1995; Sin and Leung, 2001; Taylor 2000; Trevino, Daniels, and Arbelaez, 2002).
There are few empirical analyses of the determinants of liberalization of laws and regulations affecting inflows of FDI. A study by the United Nations Centre on
Transnational Corporations in 1091 looked at changes in FDI policies in 46 developed and developing countries over the years 1977-1987. It constructed a data
base of changes in seven categories of regulation affecting FDI, including both restrictions and incentives. The study concluded that there was "[A]n unmistakable
liberalization of foreign direct investment policies in all categories of nations" over the 1980s, with the largest number of policy changes per country occurring in
the newly industrializing countries (UNCTC, 1991, p. 59). While the author argued that the recession of the early 1980s, the relative decline in the position of
developing countries, the increased tightening of the market for loan finance to developing countries, and a generally increased climate of competition for FDI all
contributed to the increase in liberalization, the empirical analysis focuses on the impact of liberalization on future flows of FDI rather than its determinants.
Discussing the globalization of financial markets, Benjamin Cohen (1906, p. 278) asks a very relevant question about the motivations for state behaviour: "Were
states operating as classic rational unitary actors, single-mindedly competing within systemic constraints to maximize some objective measure of national
interest? Or were other, more subtle forces at work to shape government preferences and perceptions?"
Cohen's question certainly applies to the widespread liberalization of FDI policy in developing countries during the 1990s. On the one hand, it is possible that
liberalization reflects a "rational" policy making process, a decision that the benefits of increased flows of FDI are greater than the costs. As Geoffrey Garrett
(2000, p. 943) argues, "... increasing costs of closure probably have been the major motivation for liberalization in the arena of foreign direct investment ..." (5)
Thus, one possibility is that policy makers in developing countries reacted independently to changed technological and economic conditions and decided that
liberalization to promote increased inflows of FDI was in the national interest.
Every economic argument, however, is "two-handed". It is also possible that policy-makers in developing countries responded to other "subtle" (or not so subtle)
forces shaping their preferences and perceptions. External forces rather than a drive for efficiency may have motivated the widespread liberalization of FDI policy
in developing countries during the 1990s (Cohen 1996; Garrett, 2000). External forces could include both coercive pressures to adopt neoliberal economic policies
and/or emulation of actions taken in other comparable countries, a process of diffusion. It is important to note that it is possible for these views to be
complementary as well as competing. Policy makers can be influenced by actions taken in other states or external political pressure and still make "rational"
decisions based on the perceived "national interest".
What motivates liberalization?
A "rational" decision process
FDI can contribute to economic growth and development. It can add to fixed capital formation and have a positive balance-of-payments impact without the risks of
debt creation or the volatility associated with short term portfolio capital flows. It can bring technology, know-how, managerial skills, technology and access to
markets. It can increase the efficiency of local firms and the competitiveness of local markets (Gastanaga, Nugent and Pashamova, 1998; Javorick, 2004;
Noorbakhsh, Paloni and Youssef, 2001; UNCTAD, 1999).
However, as Theodore Moran (1998) notes, FDI can have both malign and benign effects. It may lower domestic savings, crowd out domestic producers, drain
capital from the host country, introduce inappropriate technology and constrain managerial and technological spillovers to the host country. As noted above, a
"rational" decision to liberalize FDI policy assumes that the benefits of increased flows of FDI will outweigh the costs. The question, then, is the conditions …
Article: Does FDI contribute to economic growth?

Knowledge about the effects of FDI improves
negotiating positions and reduces risk for firms
investing in developing countries.(Foreign direct
investment)
Article from: Business Economics
Article date: April 1, 2004 Author: Baliamoune-Lutz, Mina N.
CopyrightCOPYRIGHT 1999 The National Association of Business Economists. This material is

published under license from the publisher through the Gale Group, Farmington Hills, Michigan.
All inquiries regarding rights or concerns about this content should be directed to customer service.
(Hide copyright information)Using data from an Arab country, this paper shows that foreign direct investment (FDI) contributes to higher growth
both directly and indirectly through its effects on exports. Knowledge of the positive influence of FDI on growth could enable businesses to have a stronger
negotiation position vis-a-vis the host country. Drawing on the findings and the methodology in this paper, business decision-makers could enhance their
measurement of expected risks by estimating the effects of increased FDI to the host country. The results also highlight the potential for FDI to contribute to
political stability through efficient allocation of corporate resources.
Transnational corporations (TNCs) devote special consideration to country risk. The recent rise in terrorist acts implies that country risk has significantly increased
in some parts of the world, which would lead to significant cuts in foreign direct investment (FDI) to those countries. On the other hand, many analysts believe
that there is a strong link between poverty and terrorism and that if we could reduce poverty, we would be able to curb the spread of terrorism. This suggests that
TNCs may play a major role in fighting poverty and terrorism and underscores the opportunities fostered for business involvement in promoting political stability
through efficient allocation of corporate resources. Thus, it appears there are important complementarities between U.S. foreign policy and U.S. business activity
abroad: foreign policy that contributes to reducing country risk benefits businesses abroad and increases expected profits. FDI further reduces risk by promoting
economic growth and thereby increasing political stability through reduction of poverty, insofar as there is a connection. However, we need to ascertain whether
in ward FDI does indeed contribute to economic growth. This paper uses data from an Arab country, Morocco, and examines the relationship between FDI, exports,
and economic growth.
Why should U.S. business decision-makers care about the effects of FDI on exports and economic growth in a small developing country such as Morocco? This
question may be answered by considering the negotiations that must take place before many governments of developing countries are willing to allow foreign
firms to undertake investment. U.S. firms often need to convince the host government of the range of benefits FDI could have on its country's economy. (1) This
has become even more crucial with the increasingly important role of civil society in developing countries. Thus, knowing the likely effects of FDI on economic
growth improves the firm's negotiating position and increases its success. Furthermore, the findings may help business decision-makers improve their
measurement of country risk through assessment of the influence of FDI on the host country's macroeconomic variables, such as exports and GDP.
In January 2003, the United States announced it was beginning a new round of negotiations on a free trade agreement with Morocco. If this undertaking is
successful, it will make Morocco the second Arab nation (after Jordan) to have such an agreement with the United States. Given the proximity of the country to the
European Union, it is speculated that free trade with the United States will result mainly in higher U.S. investment in Morocco. Thus, it is important to examine
empirically the main effects and determinants of FDI flows to Morocco. The Moroccan case may serve as an example of how FDI promotes exports and economic
growth in developing countries in general and the Middle East and North Africa (MENA) region in particular.
FDI is increasingly being viewed as a major indicator of globalization. In its World Investment Report (1995), the United Nations Conference on Trade and
Development (UNCTAD) states that "[e]nabled by increasingly liberal policy frameworks, made possible by technological advances, and driven by competition,
globalization more and more shapes today's world economy. FDI by transnational corporations (TNCs) now plays a major role in linking many national economies,
building an integrated international production system--the productive core of the globalizing world economy."
There are two major reasons for the growing interest in FDI in the last decade or so. First, the influence of TNCs has been increasing over the last three decades.
This influence was strengthened by the ability of TNCs to have large integrated operations around the world. Second, the role of FDI as a source of capital and a
major tool in the fight against poverty began to be emphasized due to the decline in official development aid. While FDI to developing countries has increased,
official aid has been falling. Currently, there exists a large body of research on the links between FDI and economic growth and on the relationship between
exports and growth. However, little research has been done on the linkages between the three variables in a single model. Moreover, research on Arab countries
is quite limited. This paper tries to fill the void in the literature by using Moroccan data from 1973 to 1999 and a Granger-causality technique to explore the
relationships between FDI, exports, and economic growth.
Determinants of FDI
Most developing countries have low saving …
FDI and Economic Growth in the ASEAN Countries: Evidence from Cointegration Approach and Causality Test
-- P Srinivasan,
Ph.D Scholar,
Department of Economics,
School of Management,
Pondicherry University,
Kalapet, Pondicherry 605014, India;
E-mail: srinivas_eco@yahoo.co.in
-- M Kalaivani,
Ph.D Scholar,
Periyar University, Salem 636011,
Tamil Nadu, India.
E-mail: kalaivani_eco@yahoo.com
-- P Ibrahim,
Senior Professor,
School of Management,
Pondicherry University, Kalapet,
Pondicherry, India.
E-mail: ecoibrahim@yahoo.co.in
Johansen Cointegration technique followed by the Vector Error Correction Model (VECM) and standard Granger Causality test were
employed to investigate the causal nexus between Foreign Direct Investment (FDI) and economic growth in Association of Southeast
Asian Nations (ASEAN) economies. The Johansen Cointegration result establishes a long run relationship between FDI and Gross
Domestic Product (GDP) for the five ASEAN economies, namely, Indonesia, Malaysia, Philippines, Singapore and Vietnam. The empirical
results of VECM exhibits a long run causality running from GDP to FDI for Indonesia, Philippines and Singapore. For Malaysia and
Vietnam, the results reveal long run bidirectional causal link between GDP and FDI. Besides, the evidence from standard Granger
Causality test for rest of the ASEAN economies shows that there was no causality between FDI and GDP for Brunei Darussalam and Lao
People's Democratic Republic. For Myanmar and Thailand, the test results show that there is a one-way short run Granger causal link
from FDI to GDP and GDP to FDI, respectively.
Introduction
Foreign Direct Investment (FDI) is an investment involving a long-term relationship and

reflecting a lasting interest and control by a resident entity in one economy (foreign direct
investor or parent enterprise) in an enterprise resident in an economy other than that of the
foreign direct investor (FDI enterprise or affiliate enterprise or foreign affiliate). FDI implies
that the investor exerts a significant degree of influence on the management of the enterprise
resident in the other economy. Such investment involves both the initial transaction between
the two entities and all subsequent transactions between them and among foreign affiliates;
both incorporated and unincorporated. FDI may be undertaken by individuals as well as
business entities (UNCTAD, 2000). FDI is widely viewed as an important catalyst for the
economic transformation of the transition economies. The most widespread belief among
researchers and policy makers is that FDI boosts growth through different channels. It
increases the capital stock and employment, stimulates technological change through
technological diffusion and generates technological spillovers for local firms. As it eases the
transfer of technology, foreign investment is expected to increase and improve the existing
stock of knowledge in the recipient economy through labor training, skill acquisition and
diffusion. It contributes to introduction of new management practices and more efficient
organizations of the production processes which, in turn, would improve productivity of host
countries and stimulate economic growth. The advent of endogenous growth models (Romer,
1986, 1987; Lucas, 1988; 1990; and Mankiw et al., 1992) considered FDI that would
contribute significantly to human capital such as managerial skills and Research and
Development (R&D). Multinational Corporations (MNCs) can have a positive impact on
human capital in host countries through the training courses they provide to their subsidiaries'
local workers. The training courses influence most levels of employees from those with
simple skills to those who possess advanced technical and managerial skills. Research and
development activities financed by MNCs also contribute to human capital in host countries,
and thus, enable these economies to grow in the long-term (Balasubramanyam et al., 1996;
and Blomstrom and Kokko 1998). By and large, there is a direct relationship between inward
FDI in relation to their size and economic development of a country. One of the strongest
statements in that connection was made by Romer (1993) who suggested that for a
developing country that wishes to gain on the developed countries, or at least keep up with
their growth "...one of the most important and easily implemented policies to give foreign
firms an incentive to close the idea gap, to let them make a profit from doing so...The
government of a poor country can therefore help its residents by creating an economic
environment that offers an adequate reward to MNCs when they bring ideas from the rest of
the world and put them to use with domestic resources".
On the other hand, the FDI can exert a negative impact on economic growth of the recipient
countries. The dependency school theory argues that foreign investment from developed
countries is harmful to the long-term economic growth of developing nations. It asserts that
First World nations became wealthy by extracting labor and other resources from the Third
World nations. It also argued that developing countries are inadequately compensated for
their natural resources and are, thereby, sentenced to conditions of continuing poverty. This
kind of capitalism based on the global division of labor causes distortion, hinders growth, and
increases income inequality in developing countries (Stoneman, 1975; Bornschier, 1980; and
O'hearn, 1990). Further, the neoclassical growth models of Solow (1956) typically ascribe
negligible long run growth effects for FDI inflows and, with its usual assumption of
diminishing returns to physical capital, these inflows can only have short run impacts on the
level of income, leaving long run growth unchanged. Moreover, FDI flows may have a
negative effect on the growth prospects of a country if they give rise to substantial reverse
flows in the form of remittances of profits and dividends and/or if the MNCs obtain
substantial tax or other concessions from the host country. These negative effects would be
further compounded if the expected positive spillover effects from the transfer of technology
are minimized or eliminated altogether because the technology transferred is inappropriate
for the host country's factor proportions (e.g., too capital intensive); or, when this is not the
case, as a result of overly restrictive intellectual property rights and/or prohibitive royalty
payments and leasing fees charged by the MNCs for the use of the `intangibles' (see Ramirez,
2000; and Ram and Zhang, 2002).
Literature Review
From the above theoretical arguments, it appears that the debate of whether FDI inflows are
growth-enhancing or growth-retarding in the emerging economies remains largely an
empirical question. Considerable research has been conducted on the subject, but still there
exist conflicting evidences in the literature regarding the FDI-growth relationship. Early
studies on FDI, such as Singer (1950), Prebisch (1968), Griffin (1970) and Weisskof (1972)
supported the traditional view that the target countries of FDI receive very few benefits
because most benefits are transferred to the multinational companies. Bacha (1974) examined
the effects of FDI by the US companies on the host country's growth. Their results revealed a
negative relationship between these two variables, while Saltz (1992) examined the effect of
FDI on economic growth for 68 developing countries and also found a negative correlation
between FDI and growth. Similarly, Haddad and Harrison (1993) and Mansfield and Romeo
(1980) found no positive effect of FDI on the rate of economic growth in developing
countries. As De Mello (1999, p. 148) points out: "whether FDI can be deemed to be a
catalyst for output growth, capital accumulation, and technological progress seems to be a
less controversial hypothesis in theory than in practice." In his study, De Mello (1999) used
both time series and panel data from a sample of 32 developed and developing countries and
found weak indications of the causal relationship between FDI and economic growth.
Similarly, other studies such as Carkovic and Levine (2002) for 72 developed and developing
countries, Mencinger (2003) for eight transition countries and Eric and Joseph (2006) for
Ghana found that FDI has a negative impact on economic growth.
On the other hand, the empirical literature supports the modernization view that FDI can
exert a positive impact on economic growth in emerging economies. Using a single equation
estimation technique with annual data over the period 1960-1985 for 78 developing countries,
Blomstrom et al. (1992) showed a positive influence of FDI inflows on economic growth. In
an empirical study by Borensztein et al. (1998), an endogenous growth model was developed
that measures the influence of the technological diffusion of FDI on economic growth in 69
developing countries over two periods, 1970-1979 and 1980-1989. They found that FDI
inflows positively influenced economic growth. Moreover, the relationship between FDI and
domestic investment in these countries was complementary. Campos and Kinoshita (2002)
examined the effects of FDI on growth for 25 Central and Eastern European and former
Soviet Union economies. Their results indicated that FDI had a significant positive effect on
the economic growth of each selected country. Besides, the other studies by Marwah and
Tavakoli (2004) for Association of Southeast Asian Nations (ASEAN) four countries,
Lumbila (2005) for 47 African countries, Aghion et al. (2006) for 118 countries, Lensink and
Morrissey (2006) for 87 countries, Feridun and Sissoko (2006) for Singapore and Har Wai
Mun et al. (2008) for Malaysia revealed that FDI has a positive impact on GDP growth.
Moreover, the recent study of Faras and Ghali (2009) shows that for most of the Gulf
Cooperation Council (GCC) countries, there is a weak but statistically significant causal
impact of FDI inflows on economic growth.
Some empirical studies indicate that higher economic growth will lead to greater FDI inflows
into host countries. Jackson and Markowski (1995) found that economic growth has had a
positive impact on FDI inflows in some Asian countries. The studies of Kasibhatla and
Sawhney (1996) and Rodrik (1999) for the US reveal unidirectional causal relationship from
economic growth to FDI. Further, Chakraborty and Basu (2002) for India had employed
VECM to find the short run dynamics of FDI and growth for the years 1974-1996. The
empirical results reveal that the causality runs more from real GDP to FDI flows.
Besides, Tsai (1994) employed a simultaneous system of equations to test two-way linkages
between FDI and economic growth for 62 countries for the period 1975-1978, and for 51
countries for the period 1983-1986. He found that two-way linkages existed between FDI and
growth in the 1980s. Bende-Nabende et al. (2001) also investigated the impact of FDI on
economic growth of the ASEAN-five economies over the period 1970-1996 and found that
there exists bidirectional relationship between the two variables. Similarly, Liu et al. (2002)
for China, Basu et al. (2003) for 23 developing countries, Saha (2005) for 20 Latin America
and the Caribbean countries, Hansen and Rand (2006) for 31 developing countries, Nguyen
Phi Lan (2006) for Vietnam and Mahmoud and Fatima (2007) for six GCC found the
bidirectional causality between FDI and GDP.
On the other side, Alam (2000) in his comparative study of FDI and economic growth for
Indian and Bangladesh economies stressed that though the impact of FDI on growth is more
in the case of Indian economy, yet it is not satisfactory. The study of Pradhan (2002) for India
estimated a Cobb-Douglas production function with FDI stocks as additional input variable
for the period 1969-1997 and found that the FDI stocks have no significant impact for the
whole sample period. Similarly, the other studies such as Bhat et al. (2004) for India, Akinlo
(2004) and Ayanwale (2007) for Nigeria, Habiyaremye and Ziesemer (2006) for Sub-Saharan
African (SSA) countries and Jarita Duasa (2007) for Malaysia found no evidence of causal
relationship between FDI and economic growth.
The literature reviewed above pertaining to the causal nexus between FDI and economic
growth in emerging economies is well-established. However, the results appear to be
ambiguous. Most of the studies employed cointegration test and VECM to examine the causal
relationship between FDI and economic growth. It revealed that Johansen's cointegration test
and VEC model are the superior techniques to investigate the issue. Johansen's cointegration
test examines the presence of (cointegrating) long run relationship between economic
variables in the model. A principal feature of cointegrated variables was that their time paths
were influenced by the extent of any deviation from the long run equilibrium (Walter, 1995).
Thus, VECM that incorporates error correction term represents the percent of correction to
any deviation in long run equilibrium in a single period and also represents how fast the
deviations in the long run equilibrium are corrected. Besides, the VECM provides inferences
about the direction of causation between the variables. Thus, the study can be done by
employing Johansen's cointegration test and VECM to investigate the causality between FDI
and economic growth in the ASEAN countries. Understanding the causal relationships
between FDI and economic growth should help policy makers of ASEAN to plan their FDI
policies in a way that enhances growth and development of their economies.
An Overview of FDI Inflows into ASEAN Countries
During the past two decades, FDI has become increasingly important in the developing
world, with a growing number of developing countries succeeding in attracting substantial
and rising amounts of inward FDI. Amongst developing world nations, the ASEAN countries
have had a significant share of FDI inflows in the last three decades. Like other developing
countries, ASEAN economies focus their investment incentives exclusively on foreign firms.
Over the last two decades, market reforms, trade liberalization as well as more intense
competition for FDI have led to reduced restrictions on foreign investment and expanded the
scope for FDI in most sectors in the ASEAN countries. Table 1 presents the FDI inflows into
ASEAN by host country. The table reveals that the 2005 was a strong year for ASEAN with
inflows of $60,512.92 mn. Still, Singapore is found to attract larger FDI among the member
countries over the period 1997-2007. Thailand, Malaysia, Indonesia and Vietnam were the
largest FDI recipients, together accounting for more than 90% of flows to the subregion.
Flows to the Philippines relented significantly in the early 2000s but rebounded somewhat in
2005 and picked up in the following years. However, FDI flows into Brunei Darussalam have
been volatile. While FDI growth in 2007 differed considerably between countries, the newer
ASEAN member countries in particular (Vietnam, Myanmar and the Lao People's
Democratic Republic, in that order) recorded the strongest FDI growth. The increasing FDI
flows into ASEAN nations are reflective of increasing interest and confidence of investors in
investing and doing business in the region. Aside from the regional initiatives that have so far
been made by ASEAN to increase FDI, each ASEAN member country continues to devote its
investment climate in accordance with regionally and multilaterally accepted principles
through the new investment measures enacted individually. These individual measures are
encouraged by various regional agreements and multilateral bodies to increase the
competitiveness of the region in attracting FDI. These include the improvements of the
overall investment policy framework, granting of incentives, opening up of sectors for
foreign investments, reduction of business cost through lowered taxation, streamlining and
simplification of the investment process, and other investment facilitation measures.
TABLE 1
As pointed out by Uttama (2005), the greater FDI inflow into ASEAN nations is driven as a
result of continued and pursued schemes under ASEAN cooperation agreements in order to
become a global attractive FDI destination. Especially the ASEAN Investment Area (AIA)
agreement signed on October 1998 was regarded as a significant milestone to stimulate the
surge of FDI into ASEAN member countries. In fact, the AIA aims to enhance FDI inflow
from Intra- and Extra-ASEAN sources by making ASEAN as a region of competitiveness and
attractiveness for investment and business operations. In order to reach the goal to becoming
an attractive investment destination, ASEAN has closely continued the implementation of the
framework agreement on the AIA. Thus, the continued success of schemes under the AIA
agreement as well as effective measures regarding the establishment of ASEAN Free Trade
Area (AFTA) among Intra- and Extra-ASEAN regions provided the influx of FDI to ASEAN
nations.
Table 2 reports the FDI inflows as a percentage of GDP in ASEAN member economies. It
shows that FDI as a percentage of GDP in ASEAN economies seems to be relatively lower in
1991 except Singapore, Myanmar and Malaysia. However, these three nations have not
shown any progress in FDI as percentage GDP during 1995. In 2001, the ASEAN countries
have shown the meager performance as compared to 1995. This is due to the fact that the
Asian Financial Crisis in 1997 left severe implications to the ASEAN countries where
majority of the countries achieved very low GDP growth rate. Although ASEAN countries
gradually recovered from the crisis in 1999, the GDP growth rate in the region still continues
to grow at a slow pace, largely due to economic down turn in the US and Europe, and the
recession in Japan, in 2001. Still, Singapore has the highest FDI openness to GDP amongst
the ASEAN countries. During 2001 and 2003, Indonesia saw a negative percentage of FDI to
GDP ratio, and then it picked up in 2005 and slowed down thereafter. For Philippines and
Laos, it also relented significantly in the early 2000s but rebounded in 2006. FDI openness to
GDP for Vietnam and Malaysia has been relatively stable and it went up to 9.47 and 4.50% in
2007, respectively. In the case of other transitional economies (Brunei, Myanmar and
Thailand), the percentage of FDI to GDP ratio remained to be volatile.
TABLE 2
Broadly speaking, the trend of FDI inflows in both absolute and relative terms in ASEAN
economies does not reveal any clear discernible pattern involving GDP and FDI. It is far from
being conclusive in drawing any causal relationship. Thus, a formal econometric analysis is
required to empirically examine the FDI-GDP relationships for our sample countries.
Methodology
Johansen's (1988) Cointegration and VECM were employed to examine the causal nexus
between FDI and economic growth in ASEAN countries for the period 1970-2007. Before
implementing the cointegration and VECM, econometric methodology needs to verify the
stationarity of each individual time series since most macro economic data are non-stationary,
i.e., they tend to exhibit a deterministic and/or stochastic trend. Though the cointegration
approach applies to non-stationary series, it requires that all variables in the system are
integrated of the same order I(1). The first step in the analysis is to test for non-stationarity of
the data series. Variables that are non-stationary can be made stationary by differencing the
number of differencing (d) required to make the series stationary identifies the order of
integration I(d). For the purpose, Augmented Dickey-Fuller (1979) and Phillips-Perron
(1988) tests were employed to verify the stationarity of the data series and to determine the
order of integration of each of the data series studied. If the selected data series are found to
be integrated in an identical order, Johansen's cointegration test is employed to examine long
run (cointegrating) relationship among the selected variables.
Once we identify a single cointegration vector among the selected variables, the VECM can
be employed to establish the Granger causal direction. VECM allows the modeling of both
the short run and long run dynamics for the variables involved in the model. Engle and
Granger (1987) show that cointegration is implied by the existence of a corresponding error
correction representation which implies that changes in the dependent variable are a function
of the level of the disequilibrium in the cointegrating relationships (captured by error
correction term) and changes in other independent variables. According to Granger
representation theorem, if variables are cointegrated then their relationships can be expressed
as VECM. Provided that variables in our case are cointegrated, the VECM can be written as:
where D is the first difference operator and efdit and egdpit are white noise disturbance terms.
FDIt and GDPt are FDI and GDP of individual ASEAN economies at time `t', respectively,
and ECTt-k is the lagged error correction term.
In terms of the VECM of Equations (1) and (2), GDPt Granger causes FDIt, if some of the 2i
coefficients, i = 1,2,3,..n-1 are not equal to zero and the error coefficient r1 in the equation of
FDI flows is significant at convention levels. Similarly, FDIt Granger causes GDPt, if some
of the 2i coefficients, i = 1,2,3,..n-1 are not zero and the error coefficient r2 in the equation of
GDP is significant at convention levels. These hypotheses can be tested by using either t-tests
or F-tests on the joint significance of the lagged estimated coefficients. If both FDIt and
GDPt Granger cause each other, then there is a feedback relationship between FDI and GDP.
The error correction coefficients, r1 and r2 serve two purposes. They are (1) to identify the
direction of causality between FDI and GDP and (2) to measure the speed with which
deviations from the long run relationship are corrected by changes in the FDI and GDP.
On the other hand, if FDI and GDP are not cointegrated, the standard Granger (1969)
bivariate causality is performed without including error correction term. One variable GDP is
said to Granger cause another variable, FDI, if GDP can be explained by using past values of
FDI. The superiority of the explanation is then investigated if additional lagged values of
GDP improve the explanation of FDI. Estimating the following equations, performance of the
standard Granger causality is tested:
Testing causal directions among the variables of interest, in the Granger sense, causality can
be found by testing the null hypothesis H0: 2i = 2i = 0. The null hypothesis is accepted or
rejected based on the standard Wald F-test to determine the joint significance of the
restrictions under the null hypothesis. There is bidirectional causality if both 2i and 2i are
significant. GDP Granger causes FDI if 2i is statistically significant but 2i is not; and FDI
Granger causes GDP if 2i is statistically significant but 2i is not. This is called unidirectional
causality. Hence, from the above Equations (3) and (4), it is clear that GDP Granger causes
FDI if >0 and FDI Granger causes GDP if
2i >0. If FDI and GDP do not cause each other,
2i
all the coefficients of GDP in Equation (3) and of FDI in Equation (4) should be statistically
insignificant.
Finally, the Impulse Response Function (IRF) has been employed to investigate the time
paths of Log of Foreign Direct Investment (LFDI) in response to one-unit shock to the Log of
Gross Domestic Product (LGDP) and vice versa. The impulse response function analysis is a
practical way to visualize the behavior of a time series in response to various shocks in the
system (Walter Enders, 1995). The plot of the IRF shows the effect of a one standard
deviation shock to one of the innovations on current and future values of the endogenous
variables. This study includes two variables, FDI and GDP of the individual ASEAN
economies for the Impulse Response Function technique. Plotting the impulse response
function can trace the effects of shocks to fdit or gdpit on the time paths of the GDPt or FDIt
sequences.
The data used for the study consist of net FDI inflows and GDP from the ASEAN economies
which include Brunei Darussalam, Indonesia, Lao People's Democratic Republic, Malaysia,
Myanmar, The Philippines, Singapore, Thailand and Vietnam. The data on FDI inflows are
limited and time series of most countries start in the late 1960s and early 1970s, which
prevent the consideration of longer time span for the analysis. Hence, the annual time-series
data on net FDI inflows and GDP for Brunei Darussalam, Indonesia, Malaysia, Philippines,
Singapore and Thailand were considered for the period 1970-2007. For Lao People's
Democratic Republic, Myanmar and Vietnam, it was carried out from 1980-2007 because of
lack of availability of data on FDI inflows prior to 1980. The inward FDI series were
compiled from United Nations Commission for Trade and Development (UNCTAD) reports.
The real GDP series were obtained from International Monetary Fund's International
Financial Statistics (IFS) database. The values of both series are expressed in terms of
millions of US dollars in current prices.
Empirical Results and Discussions
The unit root property of the data series is crucial for the cointegration and causality analyses.
The standard Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests were employed
to examine stationary property of the selected data series. Table 3 depicts the results of ADF
and PP tests for the GDP and FDI series of the ASEAN economies. Both the unit root test
results reveal that the null hypothesis of unit root for the selected variables such as FDI and
GDP in case of each individual country was not rejected at levels. But, when the series are
first differentiated, both the series are found to be stationary and integrated at the order of one
I(1).
Proven that both the series are integrated of same order I(1), the Johansen cointegration test
was performed to examine the presence of long run relationship between FDI and GDP for
the individual ASEAN economies and its results is presented in Table 4. In the table, the
Johansen's maximum eigen and trace statistics for five ASEAN economies namely,
Indonesia, Malaysia, Philippines, Singapore and Vietnam indicate that the null hypothesis of
no cointegrating vector (r = 0) can be rejected at 5% significance level, and the alternative
hypothesis of at the most one cointegrating vector (r ³ 1) can be accepted. Therefore, the
results support the hypothesis of cointegration between FDI and GDP, implying that there are
stable long run relationships between the two variables in case of five ASEAN countries.
While in Democratic Republic, Myanmar and Thailand, the results of Johansen's maximum
eigen and trace statistics fail to reject the null hypothesis of no cointegrating vector (r = 0),
implying that FDI and GDP are not cointegrated, so there are no stable long run relationship
between the two variables in case of four ASEAN economies.
After confirming the existence of single cointegrating vector among FDI and GDP for five
ASEAN economies namely, Indonesia, Malaysia, Philippines, Singapore and Vietnam, we
should search for proper VECM to determine the direction of long run causation. By using
the definition of cointegration, the Granger Representation Theorem (Engle and Granger,
1987), which states that if some variables are cointegrated, then there exist valid error
correction representations of the data. For the purpose, the VECM is estimated and it is
presented in Table 5. Besides, the VECM is sensitive to the selection of optimal lag length
and the necessary lag length of FDI and GDP series is determined by the Schwarz
Information Criterion (SIC) and it reveals optimal lag of one and two for Indonesia and
Philippines and Malaysia, Singapore and Vietnam, respectively. In Table 5, the VECM
results for Indonesia show that the error correction coefficient, ECT t-1, (-0.432) in FDI
equation is negative and statistically significant at 1% level. This suggests the validity of long
run equilibrium relationship among the variables. It also implies that 43% of disequilibrium
from the pervious period's shock converges back to the long run equilibrium in the current
period. Besides, the coefficient of GDPt-1 is statistically significant at 5% level, implying that
there exists unidirectional long run causality runs from GDP to FDI. Similarly, the VECM
results for Philippines and Singapore confirm the presence of long run equilibrium
relationship between FDI and GDP and one-way causality runs from GDP to FDI. For
Malaysia, the results of VECM show that error correction coefficient, ECTt-1, in GDP
equation is found to have expected negative sign and significant at 1% level. Also, the lagged
coefficients of FDI are statistically significant at 5% levels, implying that the direction of
causality runs from FDI to GDP. Besides, the lagged coefficients of GDP in FDI equation are
statistically significant at 1 and 5% levels, signifying that direction of causality also runs
from GDP to FDI. This indicates the presence of long run causality between FDI and GDP
that runs in both directions for Malaysia. Similarly, the VECM results for Vietnam exhibit
long run relation between FDI and GDP and bidirectional causal linkage exists between FDI
and GDP.
TABLE 5
For the rest of the ASEAN economies, namely Brunei Darussalam, Lao People's Democratic
Republic, Myanmar and Thailand, since FDI and GDP are not cointegrated by the Johansen
cointegration test, we applied for the standard Granger causality test (Equations 3 and 4) to
determine short run causal relation between the variables. The results of the Granger causality
test for these countries have been reported in Table 6. The results for Brunei Darussalam and
Lao People's Democratic Republic show that the null hypothesis of `FDI does not Granger
Cause GDP' and `GDP does not Granger Cause FDI' cannot be rejected, implying that the
relationship between FDI and GDP is independent of one another. Besides, the results of the
Granger Causality test for Myanmar show that the hypothesis that GDP does not Granger
Cause FDI cannot be rejected but the hypothesis that FDI does not Granger Cause GDP can
be rejected. Therefore, one-way Granger causation runs from FDI to GDP in the short run.
Further, the Granger Causality test results for Thailand indicate that the null-hypothesis, `FDI
does not Granger Cause GDP', cannot be rejected but the hypothesis, `GDP does not Granger
Cause FDI', is rejected. Therefore, one-way short run causality runs from GDP to FDI and
not the other way.
Finally, the impulse response functions were applied to reveal the dynamic causal
relationships between FDI and economic growth. In Appendix 1, Figures 1 to 9 show the
impulse response functions for each country. These illustrate the response of GDP to the
innovation in FDI and by GDP itself and also show the response of FDI to the innovation in
GDP and by FDI itself. Figure 1 presents the impulse response function for the Brunei
Darussalam. It reveals that positive impact of GDP from a FDI shock is minimal for three
years and then starts declining and becomes zero in five years. Besides, the response of FDI
to GDP shock begins with negative and becomes zero in two years. This indicates that there
is no impact of FDI on GDP or vice versa. This result is consistent with the earlier finding of
standard Granger Causality test. For Indonesia, Figure 2 shows that FDI shock has created
positive impact on GDP and it declines and dies out after the eighth period. But the positive
GDP shock has immediate positive impact on FDI for the longer time period. In the case of
Lao People's Democratic Republic, Figure 3 indicates the negative response of GDP from a
FDI shock. Besides, the GDP shock has a positive response of FDI, but only for the two years
and then it declines and becomes zero in the sixth year and dies out thereafter. Figure 4 shows
that FDI shock has a positive effect on GDP for the longer time-period. Similarly, positive
GDP shock has an immediate positive impact on FDI. This implies that the impact of GDP on
FDI and vice versa is found to be positive in case of Malaysia. For Myanmar, Figure 5 shows
that the response of GDP to a shock in FDI is found to be more significant compared with
other sample countries, implying that FDI shock has greater impact on GDP. But the shock in
GDP has negative effect on FDI inflows. In the case of the Philippines, Singapore and
Thailand, Figures 6 to 8 show that FDI shock has a positive effect on GDP. Besides, the
figures reveal that the positive GDP shock has an immediate positive impact on FDI. Finally,
in case of Vietnam, Figure 9 shows that FDI shock has created positive impact on GDP.
Besides, the response of FDI to GDP shock begins with negative but has greater positive
effect on FDI inflows for the longer time period. These findings from impulse response
functions for each ASEAN economies are consistent with the results of VECM and the
Granger causality test.
Conclusion
Johansen Cointegration technique followed by VECM and standard Granger Causality test
were employed to investigate the causal nexus between FDI and economic growth in ASEAN
economies. The Johansen Cointegration results establish a long run relationship between FDI
and GDP for the five ASEAN countries, namely, Indonesia, Malaysia, Philippines, Singapore
and Vietnam. The empirical results of VECM exhibit a long run causality running from GDP
to FDI for Indonesia, the Philippines and Singapore. For Malaysia and Vietnam, the results
reveal long run bidirectional causal link between GDP and FDI. Besides, the evidence from
standard Granger Causality test for rest of the ASEAN countries shows that there was no
causality between FDI and GDP for Brunei Darussalam and Lao People's Democratic
Republic. For Myanmar and Thailand, the test results show that there is a one-way short run
Granger causal link from FDI to GDP and GDP to FDI, respectively. The present study
suggests that the enhancement of country's economic growth performance was much needed
to attract FDI flows rather than liberalized FDI-oriented policy efforts in the case of
Indonesia, the Philippines, Singapore and Thailand. Besides, the study implies that
Myanmar's capacity to progress on economic development depends on country's performance
in attracting FDI flows. For Malaysia and Vietnam, the economic growth performance is the
driving force behind the surge in FDI inflows in addition to being a consequence of these
inflows. Hence, these two countries pursue the ongoing economic policies with regard to
growth and FDI more vigorously. Moreover, the study suggests that the governments of
Brunei Darussalam and Lao People's Democratic Republic should formulate adequate
liberalized policy frameworks to attract stable foreign investment inflows. In addition, they
should adopt effective policy measures that would substantially enlarge and diversify their
economic base, improve local skills and build up a stock of human capital resources
capabilities, enhance economic stability and liberalize their market in order to attract as well
as benefit from long-term FDI inflows.
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How Does Foreign Direct Investment Affect Economic

2. Inflow Of Funds Through Foreign Direct Investment In India- Analysis

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FDI Investment Incentive System and FDI Inflows:

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Determinants of foreign direct investment at the regional level in China

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Title: Determinants of foreign direct investment at the regional level in China

Author(s): Lv Na, W.S. Lightfoot

Journal: Journal of Technology Management in China

Page: 262 - 278

Publisher: Emerald Group Publishing Limited

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Item Type: MPRA Paper

Keywords: International investment agreements; Foreign Direct Investment;

Subjects: F - International Economics > F2 - International Factor

Deposited By: Emma Aisbett

Deposited On: 15. Mar 2007

Last Modified: 07. Nov 2007 02:21

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