Kaarel Kilvits, Alari Purju **
The article examines the role of foreigndirectinvestment (FDI) in a transition economy. The analysis of structure and dynamics of FDI into Estonia and outflow of FDI fromthe country demonstrates the important role of the FDI in capital formation of companies. The reason of Estonian firms being important foreign investors in Latvia and Lithuania is mostly geographical closeness of Estonia to Finnish and Swedish capital. The final goal of Finnish and Swedish firms is not to operate only in Estonia, but to move forward to the other BalticStates. A case study of an Estonian enterprise fromthe food manufacturing industry is presented. The main problems for successful investment abroad have been the difference in business culture and the long distance for operative management of the company.
dominant in Estonia. Banks are the major investors abroad and consequently have higher educated employees than average or manufacturing firms.
Very similarly was evaluated organisational know-how, surprisingly assessed as the least important. Firms claim they have developed specific management advantages partly as result of faster privatisation compared to major destination countries (former SFRY in case of Slovenia, theBalticStates and Russia with less developed banking sector in case of Estonia, Romania in case of Hungary or Slovakia in case of the Czech Republic). Case studies indicate that important competitive advantage has been the knowledge about 'how to do business' in other transition economies due to former ties, established business networks, knowledge of language and culture. The implication of this type of advantage is temporality. Firms have to exploit it fast, before other competitors can catch up or outperform these advantages with other stronger competitive advantages. The analysis showed that investing firms are a very vital part of national economies and have comparative advantages over the rest domestic firms. Their success abroad is based on good products, improving quality and adaptation, flexibility, technological and organisational know-how, knowledge of some foreign markets, but often also on first mover advantage in close, neighbouring and less developed markets. Firm specific advantages are therefore strongly combined by location specific advantages.
The main motivation for this study is to contribute to this body of the literature by empirically testing the causal effects of the decision to invest abroad for the first time on performance at home. There are fewer studies on the ex-post performance (typically on TFP, output and employment) effects of switching to become a multinational firm, i.e. FDI, than on the effects of exporting activities. In the above mentioned literature the direction of causality is generally assumed to run from productivity to internationalization, i.e. that it is the ex-ante productivity that determines the choice of whether or not to export and FDI. In contrast, Clerides et al. (1998) show that exporting firms may further increase their productivity through learning by exporting, by becoming more innovative (as modelled by Holmes and Schmitz, 2001) and/or by reducing X-inefficiencies. Barba Navaretti and Venables (2006) identify three channels through which a firm that becomes multinational may improve productivity at home. First, setting up subsidiaries abroad may affect productivity at home by exploitation of firm-level and plant-level scale economies. Second, MNCs through their subsidiaries may find different ways of using inputs in production. Finally opening to new channels of international sourcing of technology and managerial know-how may also affect productivity at home. However, Barba Navaretti and Venables (2006) argue that the effects on productivity can go in both directions for all three channels. In other words, the effect of investing abroad on home performance is an empirical question.
The database is widely accepted as one of the most exhaustive sources on greenfield FDI and is used in research and as the data source in UNCTAD’s World Investment Report. We note however some caveats. First, some of the planned future greenfield investments may not actually be realized or may be realized in a different form with respect to what was originally announced. While the database is regularly updated and corrected retrospectively, data in the most recent years may not have been revised and thus capture announced rather than actual projects. We deal with this issue by dropping the latest three years of data. Second, the value of the project is allocated towards the first year of theinvestment (unless the company explicitly states a timeline for the project), potentially overstating the amount invested in that year. In addition, in cases where the dollar amount to be spent is unknown, the data provider estimates the values, which may introduce some
Finally, we report results from regression analysis, which allows us to control for additional covariates (other than sector-country fixed effects) that may help explain firm productivity. Table 4 reports OLS regression results for all firms, manufacturing firms only and services firms only. The table reports results when including a number of different fixed effects, with Column (1) including no country or sector fixed effects, Column (2) including country and sector fixed effects separately, and Column (3) including sector-country fixed effects. The results on employment and employment squared are largely consistent with the existing literature and indicate that labour productivity rises with firm size, but at a diminishing rate, while firm age is found to have a positive effect on productivity when significant. Turning to our main variables of interest – and – we observe coefficients that are large, posi- tive and significant irrespective of the fixed effects included and irrespective of whether we look at all firms or whether we split the sample of manufacturing and services firms. Such results provide strong support for a productivity premium from exporting and from under- taking outward (relative to only serving the domestic market). The coefficients on are found to be larger than those on when considering the full sample of countries and the sample of manufacturing firms only. The premium for firms undertaking outward FDI is estimated as being between 101 and 154 per cent for all firms (depending upon the fixed effects included), with that for exporters estimated as being between 62 and 86 per cent. 8 For manufacturing firms the premium is found to be between 158 and 205 per cent for firms undertaking FDI and between 65 and 72 per cent for exporting firms. While this difference is only found to be significant in one case for all firms (when no fixed effects are included), the difference is significant in two of the three cases when only manufacturing firms are considered. When we consider the sub-sample of services firms however we observe a somewhat different pattern. In particular, we observe that the coefficient is al- ways larger for exporters than for firms undertaking outward FDI. The premium for export- ers is estimated as being between 94 and 156 per cent, while that for firms undertaking outward FDI is estimated as being between 59 and 85 per cent. These differences are never found to be significant however.
least the ranking given by the World Bank) will attract more FDI. We have seen that in general this is true. Now we wish to see if it holds for FDI fromthe United States.
In Table 8 we use affiliate sales, a common proxy for FDI, as our dependent variable. 14
We can see that the average association established for FDI in general does not hold for FDI fromthe USA. Neither the overall DB variable nor the TR component are significant. Population is significant whereas it was not before. Distance between the US capital and the host’s is also significant, though this is a different measure of distance to that used in the previous section. Nevertheless, these results suggest that this is a different relationship not just in terms of the ease of doing business. In our WDI results market potential was positive pointing to an export platform story. Using the BEA data, market potential is negative and significant, which, while puzzling, is common in the literature when using this data. 15
be over-recorded by firms in order to gain subsidies from local governments (Li, 2009). New product sales also depend on many other factors such as economic environment and firm’s scale (Prieto & Lee, 2019). However, the patent data are controversial because they cannot measure the level of market application and the quality of innovation output (Acs & Audretsch, 1990). For this reason, some studies (Deng et al., 2019; Pellegrino, G., Piva, M. and Vivarelli, 2012) use new product sales as the proxy of innovation performance. Following the studies, we use new product sales as the proxy of innovation performance in this study in order to check robustness. To control for the possible time effect over the fifteen year period of the study, we use the real amount of new product sales. The real amount of new product sales is calculated by deflating the amount of new product sales with consumer price index of China.
provided they have adequate collateral (Manova 2013) 1 . This proposition has
been verified by the studies on firm specific decisions on outward FDI
(Duanmu 2015) 2 .
Outward FDI from emerging economies like India is increasingly becoming an important component of the world’s investment flows. Figure 1 shows the recent trends in the outflows of FDI from India. India’s outward FDI stock registered a quantum jump during last one decade, from a negligible amount of $ 25 million during the early nineties to $241 billion in 2013. The momentum of these investment outflows picked up during the second half of the 2000s. One can attribute this increasing trend of outward FDI by Indian firms to market oriented reforms undertaken during the early nineties. Indian policy makers have recognized the importance of these investments and have undertaken several measures by easing the stringent regulatory rules
Institutions have an essential role in setting the „rules of game” by which individuals interact in a market economy (North, 1990), especially by ensuring the competiveness of markets.
After the 1989 events, the countries from Eastern Europe looked at foreign examples in building its institutions and reforming their economies. Still, new institutions were created without taking into to consideration that the distinct cultural and systematic inheritance influences especially informal institutions such as norm and values. In many countries weak legal framework permitted a large extent of opportunistic behavior, bribery and corruption (Nelson et al., 1998).
policy making. Chinese outwardforeigndirectinvestment (OFDI) has been analysed from various theoretical and empirical perspectives since the mid-1990s. Some of the studies have concentrated on the regulatory framework and government influence on the growth and patterns of geographical and sectoral distribution, as well as theinvestment motives of Chinese companies (Zhan, 1995; Wang, 2002; Taylor, 2002; Wong and Chan, 2003; Hong and Sun, 2004; Wu, 2005). Other studies have applied an international management perspective, focusing on the internationalization strategies of Chinese companies (Warner et al., 2004; Child and Rodrigues, 2005; Deng, 2008; Buckley et al., 2007; Rui and Yip, 2008). When categorizing this research according to the kinds of data that are examined, one finds that most works are based on official statistics, and there are only a few questionnaire surveys (Liu and Tian, 2008) and case studies (Warner et al., 2004; Deng, 2008; Rui and Yip, 2008). Among the research based on case studies, two very recently published articles focus on M&A-related issues, analysing the reasons why Chinese companies apply a strategic asset-seeking strategy (Deng, 2008; Rui and Yip, 2008). What is missing to date is a contribution that analyses the overall development of Chinese companies’ cross-border M&As, the geographical and sectoral distribution patterns of Chinese M&As, and Chinese companies’ equity participation in overseas acquisitions. Our paper intends to fill this gap and to contribute to a more comprehensive understanding of the cross-border M&A transactions of Chinese companies.
There are only a few literature on the determinants and motives of the PRC’s outward FDI because it is only at the beginning stage. Hence, it is very difficult to draw any sound conclusions on this issue. What we can give are only observations. According to evidence at the operational level, the PRC’s outward FDI can be divided into four types. First, with central state- owned enterprises (SOEs), which are resource seekers, high economic growth and low energy efficiency present a severe shortage of energy and resources. To guarantee the supply of raw materials, central SOEs seek physical natural resources from abroad. Second, with private companies, which are market seekers, Asia, Africa, and Latin America present target markets, specifically telecommunication, textile, shoe, and car industries. Some enterprises use domestic parts and assemble the final products in the local markets. Most of these enterprises are SMEs, but some big companies like Huawei and ZTE also belong to this category. Third, efficiency seekers such as air-conditioner manufacturer Green and machinery manufacturer Sany established production centers in Latin America to minimize transport costs, and use the local production center as regional base. Fourth, strategic asset seekers for example establish research or design centers in Europe, or acquire technology-intensive competitors through merger and acquisition, to enhance future competitiveness in domestic and global market. This type of investor includes Sany, Gily, Lenovo, Haier, etc.
Researchers often overlook the rela- tion between Russian and Nordic invest- ment capital; and even less attention is paid to studying the competition between the two. Yet this subject can be of particu- lar relevance to the areas that are geo- graphically, historically and culturally close to both Russia and the Nordic coun- tries. Thus, the aim of this article is to analyze how the competition between Russian and Nordic capital investment is played out in theBalticStates. The study discusses the principles of Russian and Nordic investment in theBaltic, and sug- gests ways to regulate these relations. To this end, we compare theinvestment con- ditions created in theBalticStates for both Russian and Nordic investors. The analysis shows that most of theBaltic market is controlled by the Nordic capital, which blocks the arrival of Russian in- vestment to theBalticstates. With a nod to a number of previous studies, the authors of this article suggest some adjustments to the theory of foreigndirectinvestment. The study will be also of practical interest to those Russian investors who are see- king entry points to theBaltic markets.
and show how they differ from general FDI in terms of size, age, labour productivity, and their regional and sectoral distribution. Second, we undertake a regression analysis to see whether the subtypes of patenting FDI deviate from general FDI in their response to a set of location determinants at the country level. In doing so, we use a novel and extremely detailed firm-level dataset on the universe of German outward FDI and patenting activity abroad. The dataset was created by merging the MiDi dataset of the Deutsche Bundesbank (the German Central Bank), PATSTAT and the Bureau van Dijk Amadeus dataset. It contains 12,631 multinational parent firms and their patenting activity, 42,934 linked foreign affiliates, 202 countries and spans the years 1999-2011. We show that within the same multinational parent, foreign affiliates associated with patenting activity are up to 39% larger, 13% older and have 14% higher labour produc- tivity than the average affiliate. Across different parent firms, the differences are even larger. Patenting FDI is much more focused on developed host economies and the manu- facturing sector. Concerning the dynamic relationship between patents and FDI, we find that affiliates where patenting activity occurred before the FDI entry are much larger and hold higher-quality patents than those affiliates where the timing order is reversed. In addition, our results show that patenting FDI reacts very differently to a whole set of lo- cation determinants: At the extensive margin, patenting FDI is more sensitive to changes in market size, local R&D spending, patent protection and the presence of home-country immigrants than general FDI. For distance and local profit taxes, the picture is reversed,
2.3 FDI of the BRICs in the EU in comparison to the United States and Japan
Outwardforeigndirectinvestment undertaken by MNCs of emerging markets including the BRICs is a rather new phenomenon. FDI outflows fromthe BRICs picked up in the early 1990s and its growth accelerated markedly only with the beginning of the new millennium (Figure 5, left). This gives all of the BRICs, excluding Hong Kong, a latecomer status with regards to outward FDI. Rapid growth of outward FDI flows since the beginning of the decade has made Russia the most important FDI investor among the BRIC countries in 2007. Brazilian global outward FDI is rather volatile but shows a clear positive trend and a strong pick-up is observable for China and India. Much less of an upward trend is discernible in the FDI flows of the BRICs directed towards the EU, with the important exception of Russia (Figure 5, right). Rather than a steady upward trend, the EU inflows originating from Brazil, India and China show single peaks in different years such as Brazil with EUR 4 billion in 2004. Russian FDI flows to the EU, amounting to EUR 9 billion in 2007, constituted the largest inflow recorded from any of the BRICs during the period 2001-2007. Hong Kong used to be an active FDI investor in the markets of the EU but has lost this position due to disinvestments over the last three years.
What can we say of the Irish case? Activities in which US corporations use Ireland as a production base from which to export into the EU should best be regarded as horizontal. In the information technology sector for example, most of the computers produced by Dell and the packaged software products produced by Microsoft at their Irish plants are bound for markets in Europe, the Middle East and Africa. In the case of electronic components however, produced in Ireland by Intel and a number of other firms, the United States is as important an export destination as the EU. Further evidence suggestive of vertical FDI comes from Görg (2000) who focuses on inward processing trade between the United States and Europe. This is a procedure whereby goods can be imported into the EU for processing and subsequent re-export beyond the EU without payment of EU duties. He shows that by the latest date in his analysis, 1994, a full 44 percent of Irish imports fromthe United States were in this category, by far the largest proportion of any EU country. Thus both types of FDI would appear to be important in the Irish case.
Their propositions were; firstly, notwithstanding each multinational institution’s unique directinvestment location decision, collectively such flows target economically and culturally integrated regions rather than specific countries. Secondly, they proposed that the transnational investments initially flow to the region that provides the best mix of the traditional FDI determinants. Thirdly, build-up of intense competitive pressures in the original host region would cause such institutions to make efficiency-seeking investments into countries with cheap labor in order to run a cost effective business. Fourth multinational institution’s’ efficiency and market- seeking investments into a region will depend on the countries in that region adopting investor- friendly liberalization policies. And fifth proposition, which states that the optimal mix of theforeigndirectinvestment determinants for low-wage countries, would be different fromthe mix for the developed countries which they considered them to be the original FDI destinations. As per their analysis, there are statistically significant changes in the regional distribution of theforeigndirect investments proven fromthe investigation on the United States multinational enterprises directinvestment. They also found a change in some of its conventional determinants of the FDI. The paper pointed out that in the period under consideration, the economic liberalization measures and the infrastructural developments across countries to some extent accounts for the shift in efficiency-seeking US’s directinvestment to these countries, which further have also affected the FDI trends over time. In summing up, they strongly argue that both macroeconomic and firm strategy factors must be taken in to account in explaining the changing trends of foreigndirectinvestment (FDI) flows across countries.
outward FDI. We also include a firm’s market share and its markup in the control variables. A firm’s market share in its industry and its markup pick up the degree of competition faced by that firm. The higher its market share and markup, the less competitive pressure a firm faces and, as a result, it has less incentive to improve its production technology. Therefore, the sign on the estimated coefficient on firm market share and markup on productivity are both expected to be negative. Finally, in the standard OLS regression the standard errors of the estimates will be downward biased if the error terms are correlated within groups in some way, which leads to spurious statistical significance of the estimated coefficients. To deal with potential correlations of the errors, we allow errors belonging to the same 3-digit NAICS industries to be correlated.
Source: Calculated fromthe UNCTAD and IMF data.
There are a couple of interesting things in Figure 2.6. One is the effect of the financial crisis in 2008. Both Russia and Poland had a huge drop in the FDI stock (in relation to GDP). FDI bounced back in the next year but data from year 2008 show how a decline in the global economy can affect FDI. The fact that data from Germany does not have the same effect shows how the biggest losers on economic activity are often the ones that have the lowest level of GDP. FDI levels are highest in those countries where economic growth is high. In these kinds of economies the possible economic gains are large, but so are the risks. This means that when investors get scared, these are the investments that they will cut first.
between different European countries. As Table 2 shows, some European countries such as Germany, Denmark and the Netherlands offer strong levels of IP enforcement, whereas others such as Greece, Poland, and Slovakia offer weak levels of IP enforcement, similar to the level of IP enforcement strength offered in China. This is because even though the IP regulatory structure of most European countries is generally strong, partly due to the influence of international treaties such as the TRIPs agreement and European agencies such as the European Patent Office (EPO) (EPO’s members include countries outside the European Union), there is currently no similar co-ordination or obligation for the enforcement related aspects of IP institutions. IP enforcement is organised and delivered at the national level and the strength of effectiveness is affected by the national normative and cognitive IP structures that underpin the actions of local institutional agents. Although there are plans to centralise certain enforcement related aspects of the IP institutions at the European level, such as the proposals for the Unified Patent Court, these have not yet materialized (Unified Patent Court, 2017). Therefore, the strength of IP institutions in European countries (but also most developed and developing WTO member countries) is predominantly determined by the way that the normative and cognitive structures affect IP institutional agents and the effectiveness with which they enforce IP law in practice. Overall, studying the effect of the strength of the IP institutions of European countries on OFDI levels from China showcases how different levels of IP institutional strength in one IP diverse geographic region can affect Chinese OFDI.
ongoing concerns of Vernon (966), who also felt uneasy about the use of ‘foreigndirectinvestment’ when analysing the activities of transnational corporations.
Moreover, if theoutward investing activities of firms from economies in transition is really so unimportant, then why bother to analyse it? Beside the expectation that soon more and more countries in transition should enter the third phase of theinvestment development path, under which outward FDI gradually outgrows inward FDI, the observer may be misled by the relative smallness of theoutward-investing firms. But as Mathews (200) has presented it under the new “zoology” of transnational corporations (TNCs), there is space under the sun for small TNCs, too. In fact, taking the data of UNCTAD (2000), there are 63 32 TNCs around the globe. Dividing the world stock of outward FDI by this number, the average international position of TNCs should stand at USD 94 million only.