Horizontal or Backward? FDI Spillovers, Input-Output Tables and Industry Aggregation Karolien Lenaerts and Bruno Merlevede
Outline Overview of the Literature Research Topic in the Paper Empirical Approach & Data Estimation Results Conclusions 2
Overview of the Literature
Foreign Direct Investment Governments all over the world develop policies to attract multinationals (MNEs) Benefit from both direct and indirect effects of multinational activity: - direct effects : employment, infrastructure - indirect effects : FDI spillovers 4
FDI Spillovers Markusen (1995): when investing abroad, MNEs bring proprietary technology with them to compete with local firms The technology Technology leaks is adopted by MNE invests & or is transferred domestic firms, brings technology intentionally raising their productivity level FDI Spillovers 5
FDI Spillovers horizontal and vertical FDI spillovers Supply Chain raw materials final goods Upstream Foreign Downstream Supplier Subsidiary Customer backward forward spillover spillover horizontal spillover Local goods Competitor spillovers 6
Research Topic in the Paper
Research topic in the paper Link with the literature: - mixed empirical evidence on FDI spillovers - many different explanations Our contribution: importance of the level of industry aggregation in input-output tables 8
Research topic in the paper Focus : level of industry aggregation in the input-output (IO) tables Why? - spillovers are constructed from IO-tables → technical coefficients of vertical spillovers - level of aggregation in the IO-tables determines classification in horizontal or vertical spillovers 9
FDI Spillovers FDI spillovers: computation Proxy for the share of industry j’s output produced by foreign firms Proxy for the foreign presence in industries supplied by industry j (linkages between MNEs and suppliers) Proxy for the foreign presence in industries that supply industry j (linkages between MNEs and clients ) 10
Horizontal or vertical? IO-tables at aggregated and detailed level of industry aggregation Intermediate Consumption 1 2 3 Industry a b a b a b a 1 b a 2 b a 3 b Intermediate Consumption 1 2 3 Industry a b a b a b a 1 b a 2 b a 3 b 11
Importance of the diagonal Consider specific sectors: X / within NACE 2-digit X / total intermediate intermediate supply supply FOOD 26 % 12.1% CHEMICALS 47% 6.5% MINERAL PRODUCTS 37% 4.3% X = off-diagonal elements within the same 2-digit industry 12
Research topic in the paper Additional research question: Inclusion of within-industry intermediate supply and use of goods (include the diagonal of the IO-table) → BK as supplier -customer relationship → potential solution when tables are aggregated? 13
Empirical Strategy & Data
Empirical Strategy Havranek & Irsova (JIE, 2011): best practice → Javorcik (AER, 2004) FDI spillover analysis: two-step estimation procedure in a production function framework Two-step estimation procedure - first step: estimate total factory productivity (TFP) - second step: relate the estimated TFP to FDI spillover variables, control variables, time, industry and region dummies 15
Empirical Strategy First step : estimate total factor productivity Issue: (potential) endogeneity between input choices and productivity OLS estimates will be biased Alternative methods: OP, LP, ACF, DPD Alternative specification: translog 16
Empirical Strategy Second step : relate the estimated TFP to FDI spillover variables, control variables and time, region and industry dummies Equation to estimate : TFP ijrt = α i + ψ 1 f(FDI jt-1 ) + ψ 2 Z i(j)t-1 + ξ ijrt ∆TFP ijrt = ψ’ 1 ∆f(FDI jt-1 ) + ψ’ 2 ∆Z i(j)t-1 + α t + α j + α r + ε ijrt 17
Data Romanian manufacturing firms with at least five employees on average (1996-2005) Data sources : - firm-level data: Amadeus database Bureau Van Dijk - input-output tables: Romanian Statistical Office → detailed input -output table (NACE 3) → collapse to more aggregated level (NACE 2) 18
Data Why Romania? Excellent coverage in the Amadeus database Characteristics of FDI in Romania: - entry in the late 1990s - concentrated in manufacturing industries Note: stylized facts confirmed: foreign firms are larger (labour, capital, output) and more productive 19
Estimation Results
Estimation results Aggregated versus detailed input-output tables: zero-diagonal definition ACF OP DPD TL Agg. Det. Agg. Det. Agg. Det. Agg. Det. 1.908** 1.205*** 0.578** 0.344* 0.543** 0.327* 0.579** 0.346** HOR [0.734] [0.463] [0.240] [0.175] [0.239] [0.177] [0.242] [0.176] BK 2.553 2.146** 1.426* 1.059*** 1.367* 1.071*** 1.287* 1.027*** [1.746] [0.958] [0.752] [0.330] [0.731] [0.325] [0.745] [0.328] # obs. 73,255 73,255 96,681 96,681 96,728 96,728 96,728 96,728 0.079 0.074 0.063 0.062 0.059 0.059 0.068 0.067 R² ***/**/* denotes significance at 1/5/10 percent 21
Estimation results The level of industry aggregation matters! ACF OP DPD TL Agg. Det. Agg. Det. Agg. Det. Agg. Det. 1.908** 1.205*** 0.578** 0.344* 0.543** 0.327* 0.579** 0.346** HOR [0.734] [0.463] [0.240] [0.175] [0.239] [0.177] [0.242] [0.176] BK 2.553 2.146** 1.426* 1.059*** 1.367* 1.071*** 1.287* 1.027*** [1.746] [0.958] [0.752] [0.330] [0.731] [0.325] [0.745] [0.328] # obs. 73,255 73,255 96,681 96,681 96,728 96,728 96,728 96,728 0.079 0.074 0.063 0.062 0.059 0.059 0.068 0.067 R² ***/**/* denotes significance at 1/5/10 percent 22
Estimation results The level of industry aggregation matters! ACF OP DPD TL Agg. Det. Agg. Det. Agg. Det. Agg. Det. 1.908** 1.205*** 0.578** 0.344* 0.543** 0.327* 0.579** 0.346** HOR [0.734] [0.463] [0.240] [0.175] [0.239] [0.177] [0.242] [0.176] BK 2.553 2.146** 1.426* 1.059*** 1.367* 1.071*** 1.287* 1.027*** [1.746] [0.958] [0.752] [0.330] [0.731] [0.325] [0.745] [0.328] # obs. 73,255 73,255 96,681 96,681 96,728 96,728 96,728 96,728 0.079 0.074 0.063 0.062 0.059 0.059 0.068 0.067 R² ***/**/* denotes significance at 1/5/10 percent 23
Estimation results The level of industry aggregation matters! ACF OP DPD TL Agg. Det. Agg. Det. Agg. Det. Agg. Det. 1.908** 1.205*** 0.578** 0.344* 0.543** 0.327* 0.579** 0.346** HOR [0.734] [0.463] [0.240] [0.175] [0.239] [0.177] [0.242] [0.176] BK 2.553 2.146** 1.426* 1.059*** 1.367* 1.071*** 1.287* 1.027*** [1.746] [0.958] [0.752] [0.330] [0.731] [0.325] [0.745] [0.328] # obs. 73,255 73,255 96,681 96,681 96,728 96,728 96,728 96,728 0.079 0.074 0.063 0.062 0.059 0.059 0.068 0.067 R² ***/**/* denotes significance at 1/5/10 percent 24
Estimation results The level of industry aggregation matters! Aggregated table: horizontal ↔ Detailed table: horizontal and backward Upward bias of horizontal spillover coefficient Bias against finding significant backward spillovers Results hold for FE and LP 25
Estimation results Zero-diagonal or non-zero-diagonal? ACF OP Agg. Det. Agg. Det. zero non-zero zero non-zero zero non-zero zero non-zero HOR 1.908** 2.020** 1.205*** 0.712 0.578** 0.700* 0.344* 0.216 [0.734] [1.002] [0.463] [0.497] [0.240] [0.382] [0.175] [0.190] BK 2.553 2.251 2.146** 2.344** 1.426* 0.918 1.059*** 0.923*** [1.746] [1.964] [0.958] [1.004] [0.752] [0.710] [0.330] [0.323] # obs. 73,255 73,255 73,255 73,255 96,681 96,681 96,681 96,681 R² 0.079 0.076 0.074 0.074 0.063 0.060 0.062 0.061 ***/**/* denotes significance at 1/5/10 percent 26
Estimation results Zero-diagonal or non-zero-diagonal? ACF OP Agg. Det. Agg. Det. zero non-zero zero non-zero zero non-zero zero non-zero HOR 1.908** 2.020** 1.205*** 0.712 0.578** 0.700* 0.344* 0.216 [0.734] [1.002] [0.463] [0.497] [0.240] [0.382] [0.175] [0.190] BK 2.553 2.251 2.146** 2.344** 1.426* 0.918 1.059*** 0.923*** [1.746] [1.964] [0.958] [1.004] [0.752] [0.710] [0.330] [0.323] # obs. 73,255 73,255 73,255 73,255 96,681 96,681 96,681 96,681 R² 0.079 0.076 0.074 0.074 0.063 0.060 0.062 0.061 ***/**/* denotes significance at 1/5/10 percent 27
Estimation results Zero-diagonal or non-zero-diagonal? Aggregated table: no impact ↔ Detailed table: horizontal effect disappears No solution for the biases 28
Estimation results Contribution to TFP level – sector 15 29
Estimation results Contribution to TFP level – sector 24 30
Conclusions
Conclusions Literature: mixed evidence of FDI spillovers → channels, determinants, measurement In this paper: - level of industry aggregation in IO-tables matters - zero-diagonal versus non-zero-diagonal definition In the analysis of FDI spillover effects, use IO-tables with a sufficiently detailed industry classification! 32
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