Regional Integration and Foreign Direct Investment in Developing - - PowerPoint PPT Presentation

Regional Integration and Foreign Direct Investment in Developing Countries

Dirk Willem te Velde and Dirk Bezemer Dirk Willem te Velde and Dirk Bezemer dw.tevelde@odi.org.uk dw.tevelde@odi.org.uk Overseas Development Institute Overseas Development Institute Seminar 3 September 2004 Seminar 3 September 2004 EC EC-

• PREP project on

PREP project on “ “Regional Integration Regional Integration And Poverty And Poverty” ” funded by DFID funded by DFID

Introduction

Regional Integration and Poverty: Attraction

• f FDI through formation of region is one

possible route to development when appropriate policies and economic conditions are in place.

Examine relationship between Regional

Integration and Foreign Direct Investment relevant for negotiators of RTAs, moving beyond most econometric studies that measure regions as a black box

Regional Integration and FDI: theory

Regional trade rules (tariffs, rules of origin,

non-tariff barriers, services provisions)

Regional investment rules (national treatment

and market access pre/post establishment, dispute settlement procedures)

Other regional links (regional public goods,

investment funds, joint promotion)

Econometric studies on Regional Integration and FDI

• FDI determinants differ over sectors
• IMP introduction boosted FDI
• IMP redirected UKFDI from US to EC

Sector output, factor costs, currency volatility, corporate finance conditions, non-tariff barriers (1-3 scale), SEM dummy, sector dummies How has intra- and extra EC FDI by UK and German forms in different sectors changed with the introduction of the Internal Market Programme (SEM)? UK and German outward FDI for seven sectors, 1980/81-1992 Pain and Lansbury (1996)

• Single European Act (1992) and Iberian enlargement : more

FDI but no observed FDI diversion Population, distance, trade/FDI agreement dummies, host country economic freedom dummies, CEE dummies, host country Eu membership dummy, FDI residual (in trade regression) Does European integration increase FDI? Does it divert FDI? Are trade and FDI substitutes or complements? FDI in and outflows, imports, exports for Eu and CEEC countries, Brenton et al (1998)

• When split by periods (77-81; 82-86; 87-92), no evidence

that SEM increased US & Jap. FDI (But we should bear in mind that SEM was complete only in 1993) Market size, labour costs capital costs. previous FDI infrastructure (telephone, electricity), country risk

• penness

Which factors determine US and Japanese FDI? 35 OECD and non-OECD countries, 1997-1992, split out in groups of low-middle, high income countries; and EEC, Latin America, East Asia Srinivasan and Mody (1997) FDI flows increases with

• less exchange rate volatility

This may affect way in which a currency union would affect FDI. Level and change in income, domestic .invest, exchange rate(t), exch rate volatility How does the EC Single Program (SEM) affect the location of FDI? OECD countries, 1972-1988 UNCTAD (1993)

• FTA membership doubles FDI stocks on average

FDI increases upon joining a FTA with:

• more trade/GDP (openness)
• more similar capital/worker
• better investment environment
• larger market

FTA membership, Extended market host, Extended. market source, capital/worker distance, market size, bilateral trade, inflation trade/GDP, privatization capital/worker, investment. environment, common border, common language How do RTAs affect the location of FDI? FDI from 20 OECD countries to 60 OECD/non-OECD countries, 1982-1998: Levy, Stein and Daude (2002) Findings Explanatory variables Research question; Region, countries and years; Methodology Study

Econometric studies on Regional Integration and FDI

Positive correlation between intra/ extra FDI and

Regional Integration

BUT, Regions often seen as black box and static,

and often identified by 0/1 dummies (Dee & Gali, 2003, offer recent exception, but include few developing countries)

Even recent studies that account for regional

“market size” do not fully account for factors that can be influenced by negotiators: e.g. tariffs

Market size and initial MFN tariffs

4

11.6 33 CARICOM

27

15.6 171 SADC

31

16.9 181 COMESA

143

23.6 605 SAARC

43

7.9 548 ASEAN

32

11.2 287 ANDEAN

108

13.6 797 MERCOSUR

935

8.2 11400 NAFTA Approximate market size “gained” by regional tariff preferences Unweighted average applied MFN tariffs (latest year available) Market size (bn$, 2001) Source: WTO, WDI

• The higher the initial MFN tariffs, the larger the regional market size that

can be gained through intra-regional tariff reductions

Thinking outside the black box

Regional investment provisions differ in two

fundamental respects:

Over time when regions change or add investment

related provisions

Across regions when investment related provisions

differ at one single point in time

Differences can be categorised as

Extent of regional tariff preferences Restrictiveness of Rules of Origin Investment rules, including national treatment for

pre and post establishment and presence of effective dispute settlement mechanisms

Regional co-ordination on investment.

RTAs: classifying regions

1.

Without investment related provisions except trade rules (most RTAs);

2.

Towards a more restrictive common policy toward investment (ANDEAN in the early 70s);

3.

Developing a common approach gradually over time introducing provisions that stimulate regional investment co-operation and regional investment promotion and national and MFN treatment to foreign firms (e.g. ASEAN);

4.

With comprehensive investment provisions from the beginning, including pre-establishment national treatment and effective investor-state dispute mechanisms (e.g. NAFTA).

USFDI (% of GDP) in ANDEAN

0.00 0.05 0.10 0.15

1966 1971 1976 1981 1986 1991 1996 2001 Andean free trade area Decisions 291and 292 Categena Agreement Decision 24

USFDI (% of GDP) in MERCOSUR

0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 1966 1971 1976 1981 1986 1991 1996 2001 Treaty

• f

Asuncion Investment Protocols

USFDI (% of GDP) in ASEAN-5

0.02 0.04 0.06 0.08 0.1 0.12 1966 1971 1976 1981 1986 1991 1996 2001

Signing AFTA Inv protection agreement Improved protection AIA

FDI and ASEAN FTA: Effect?

(Inward FDI stock as per cent of GDP)

20 40 60 80

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Myanmar (1 997)

ASEAN-5

ASEAN- 5 (excl. S'pore) Cambodia (1 998) Vietnam (1 995) Signing AFTA Improved invcestor rules Signing AIA

Formal statistical evidence

Need to account for other factors affecting FDI

Policy (e.g. bilateral investment treaties) Economic (human capital, infrastructure, market size)

Need to derive a regression equation with policy

induced regional provisions as one of the measurable explanatory variables: FDI = f (GDP,OTHER, RTA) Similar equation has been used before

Measuring provisions in RTAs

1 (1994) 1 (1994) COMESA 1 (1992) 1 (1992) SADC 1 1 1 2 (1996), 3 (1998) 1 (1987) ASEAN 2 (1993) 1 1 2 (1991) 1

• 1(1970)

ANDEAN 3 2 1 (1973) 2 (1997) 1 (1982) CARICOM 3 (1991) 2 (1994) MERCOSUR 2 3 (1994) NAFTA 1990s 1980s 1970s 1990s 1980s 1970s

Trade Investment

Index = 0 if not member of group = 1 if some investment provisions, = 2 if advanced inv prov = 3 if complete inv prov + dispute settl = -1 if more restrictive provisions Index = 0 if not member of group = 1 some trade provisions, = 2 low MFN, zero intra-reg tariffs =3 high MFN, zero intra-reg tariffs

Set up of empirical model

Extra regional FDI: UK and US real stock of FDI in

developing countries (extra-regional FDI accounts for majority of FDI in developing country regions such as ASEAN, SADC, SAARC)

As many developing countries as possible; in practice

many gaps; 75 countries for UKFDI and 99 for USFDI (of total 142)

Max period: 1980-2002, in practice many gaps,

availability differ by host/home country

Also gaps in explanatory variables In principle interested in LR model, but present static

model only

FDI = f (GDP,OTHER, RTA)

US and UK FDI in developing countries

• 0.0001**

INVPROV*D ISTANCE 0.08 INVPROV*G DPpcRATIO 0.80** INVPROV*G DPRATIO 0.43** Regional Trade Provisions 0.63** 0.39* 0.17** 0.41**

Regional Investment Provisions

MERCOSUR 1.48** NAFTA 1.07** ANDEAN 1.42** ASEAN 1.31** CARICOM 0.35 COMESA

• 0.37*

SADC 0.68* Region7 0.12 Region VII VII VI V IV III II I

Implications of regressions

Moving away from region measured by a 0/1

dummy and a “black box”, to an RTA indicator that includes measurable and negotiable regional provisions

Approach successful:

Only advanced regions attract more extra regional

FDI as a result of forming a region

But effect depends on introduction of trade and

investment provisions

And: the closer to the main market in region (in

economic size or in distance) the more FDI

Conclusions

The attraction of FDI is potentially one way how

regions can affect poverty; important, because number and scope of RTAs is growing.

Two camps: a) statistical evidence using 0/1 region

dummies; and b) descriptions of provisions in RTAs.

We argued that research should focus on what type

• f regions (and what provisions) are likely to affect

FDI and suggested a few tools how this might be

• done. The results indicate that the type of (provisions

in) RTA matters and the location of a country within it: smaller countries far away from the main market tend to benefit less.

Thank you