Contribution of FDI inflows to the Efficiency of Investment

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Contribution of FDI inflows to the Efficiency of
Investment

• Assaf Razin

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Corporate Governance

• What is the essential difference between FDI and
  FPI from the point of view of corporate
  governance?

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FDI has been growing faster than world income
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FDI FLOWS FAMILIAR FEATURES

• FDI has been growing faster than world GDP.
• Commercial motives for offshore production
  access to domestic markets, access to lower
  price inputs, tariff jumping.
• Government influence on offshore production
  foreign tax, domestic tax, foreign labor market
  policies, domestic labor market policies, foreign
  tariffs, foreign merger law, and domestic merger
  law.

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Main Points of the Talk

• FDI promotes growth through a higher amount and
  more efficient allocation of investment.
• Gains to the host country depend on foreign
  industry specific cost advantage in
  cream-skimming efficient projects, host-country
  corporate transparency, and degree of competition
  among FDI investors

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Empirical StrategyComparing gravity equations

• Imports of goods
• Inflows of FDI
• Inflows of FPI

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Table 2 Determinants of Growth   OLS TSLS Foreign
Direct Investment, FDI  Foreign Direct
Investment, FDI   0.09 (3.0) 0.20 (5.0) Long run
effect1 of FDI on DY 0.1 0.23 Loan Inflows,
L   0.01 (0.2) 0.02 (0.4) Long run effect of L on
DY 0.01 0.02 Portfolio Inflows,
P   0.05 (0.6) 0.10 (1.0) Long run effect of P on
DY 0.06 0.11      
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Determinants of FDI Inflows   OLS TSLS Output
Growth, DY   0.02 (1.3) 0.05 (2.2) Lagged Foreign
Direct Investment, FDI(-1)   0.45 (13.4) 0.49 (13.
4) Domestic Investment, I   0.07 (3.8) 0.08 (3.7)
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A Theory
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Fraction of industry with efficient investment
is larger when FDI inflows finance
domestic investment rather than FPI inflows.