HOME COUNTRY EFFECTS OF FDI

1
HOME COUNTRY EFFECTS OF FDI

• Winners and losers
• Effects on home investments and exports
• Balance-of-payments effects
• RD and technology effects
• Structural changes
• Literature Dunning, chapter 12, 14, Blomström
  and Kokko (1994)

2
Winners and losers

• How does FDI affect different actors in the home
  country?
• Differential rates of return models Big changes
  in relative factor prices. Immobile factor
  (labor) at home loses, mobile factor (capital)
  abroad loses.
• Mundell (1957) No winners and losers - no long
  run changes in factor prices.
• More realistic case Some of adaptation to factor
  movements comes through trade. Smaller changes in
  relative factor prices.

3
Winners and losers

• Is there too much FDI because of divergence
  between private and social returns?
• Investors dont care that their new FDI lowers
  return on existing FDI stock.
• Investors are indifferent between paying Home or
  Foreign taxes. Countries are not.
• Changes in bargaining strength of labor and
  capital?

4
Impact on home investment and exports

• The international debate has been dominated by
  two issues
• Investment substitution Does FDI reduce the
  level of home investment?
• Export substitution Does FDI replace exports
  from the home country?

5
Investment substitution does FDI replace home
investment?

• Three theoretical possibilities
• Classical case one-to-one substitution.
• Reverse-classical case fixed amount of
  investment opportunities, no substitution.
• Anticlassical caseDifferentiated products and
  separate markets, no change at home, net gain
  abroad.
• Most studies suggest some investment
  substitution, for financial reasons or because of
  other supply restrictions in MNCs.

6
Export substitution does FDI replace home
exports?

• Key question Why FDI instead of exports or
  license sales? Offensive or defensive strategies?
  Vertical or horizontal?
• Offensive FDI probably some substitution in the
  short run.
• Defensive FDI may be necessary for survival.
• Trade in intermediate goods important determinant
  of total impact. Export structure changes
  whatever the impact on volume.

7
Balance-of-payments effects

• Sum of capital transfers and impact on trade.
• Simple case initial capital outflow balanced by
  subsequent stream of repatriated profits.
• Caveats Capital often borrowed in foreign
  country. Profit is often reinvested.
• More complicate case capital flows influence
  consumption and terms-of-trade (exchange rates).
  May neutralize initial effects.
• Few good empirical studies. MNCs seem to
  speculate on disequilibria in currency markets.

8
Effects on RD and technology

• Main effect FDI allows more RD and more
  innovations (creation of more intangible assets)
• Another effect FDI may be a source of new
  technology.
• Small problem Is RD moving to affiliates?
• Big problem Where are RD results used? Who
  captures the spillovers from RD?

9
Structural effects of FDI

• FDI causes changes in the production structure.
  More exports of intermediates.
• Positive view Sharpens comparative advantages.
  We concentrate on a few good things.
• Sceptical view What types of industries will
  expand? What is their strategic value? We may be
  focusing on the wrong activities.

10
Policy dilemmas

• Should we (the people) try to influence the
  production decisions of our MNCs? How?
• What would happen if FDI was prohibited or
  discouraged?
• If the effect of FDI is not positive, what can we
  do to make it hurt less?

11
SUMMARY

• Effects on firms fairly simple firms can grow
  stronger and invest in more intangible assets
• What would have happened without FDI?
• Effects on countries more complicated MNCs
  decide where to locate production, and that must
  not be the home country
• What can governments do?
• What would have happened without FDI?