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Relationship between globalization multinational corporations and direct foreign investments

While real world GDP grew at a 2.

Additionally, MNCs mediate most world trade flows. For example, Bernard, Jensen, and Schott find that 90 percent of U. MNC, with roughly 50 percent of U.

The most important general questions are: As I discuss in a recent survey of the empirical literature addressing the first question -- the determinants of FDI decisions -- the answers are not straightforward. Instead, meaningful insights come from developing hypotheses about, say, when a factor should matter for FDI, or even just a particular form of Relationship between globalization multinational corporations and direct foreign investments, and then finding creative ways to test these hypotheses in the data.

For years, the conventional theory was to compare FDI to bonds, for which exchange rate movements do not affect the investment decision. A depreciation of the currency in the host country reduces the amount of foreign currency needed to purchase the asset, but it also reduces the nominal return one receives in the foreign currency.

Thus, the rate of return for the foreign investor does not change. Empirical studies of FDI seemed to confirm this, often finding insignificant effects of exchange rates. In contradiction to this, the popular press often points to host-country exchange rate depreciations as a contributing factor to inward foreign investment booms, and worries about the selling of key national technological assets. I find a resolution to this puzzle by considering FDI that involves firm-specific assets such as patents or managerial skills - the type of assets previous literature established as crucial to formation of MNCs and FDI.

Thus, the purchase prices of such assets through FDI are in the host-country's currency, but returns can be generated anywhere the firm operates and are not necessarily tied to the home country's currency.

This means that host-country currency depreciations theoretically can lead to increased acquisition of FDI, particularly of firms that have firm-specific assets. This hypothesis is strongly confirmed for a panel of acquisitions of U.

MNCs are potentially subject to taxation in both the host and parent country. However, most parent countries have policies to reduce or eliminate double taxation of their MNCs. Others contend that BITs are mainly intended to share tax information across countries in order to deter tax evasion and to reduce administrative costs and, thus, should have little, or even negative, effects on FDI flows. Davies and I examine whether the empirical evidence suggests that such treaties increase FDI flows across nations, as the OECD and many economists presume.

Across these various samples and numerous specifications, we find little evidence that these BITs increase FDI activity, a surprising result in light of OECD promotion of these treaties.

Trade Protection and FDI The notion that trade protection encourages FDI is folk wisdom for economists, so much so that it is rarely examined empirically. But my research into this relationship has also yielded surprises.

Working Papers & Publications

In a study examining all U. Instead, these firms must face either significant antidumping duties or go through the costly process of raising U. Work with Tomlin and Wilson finds that relationship between globalization multinational corporations and direct foreign investments firms experience a 3 percent increase in expected discounted profitability from antidumping dutie s unless the foreign firms subject to the duties decide to tariff-jump, in which case the domestic firms do not experience any increase.

FDI requires substantial fixed costs of identifying an efficient location, acquiring knowledge of the local regulatory environment, and coordination of suppliers.

Thus, access to better information about some host countries may make FDI to that location more likely. Ellis, Fausten, and I find an interesting avenue for investigating this hypothesis using information on Japanese industrial groups called keiretsu.

A number of studies have focused on the potentially favorable financing received by keiretsu firms from their main bank as one impetus for greater investment by these firms, including FDI -- but the evidence is mixed on this.

However, the major firms in a keiretsu also get togeth er on a regular basis in what are termed Presidential Meetings and presumably share information more than other firms would. My work with Ellis and Fausten examines whether this information affects FDI choices, by estimating how much prior-year FDI by members of a firm's keiretsu in a particular host country increases the likelihood that the firm will also choose that country for its FDI.

We find that prior-year investment by a firm in the same keiretsu will raise a firm's probability of locating an investment in that same host country by about 20 percent.

A related paper with Wooster examines whether U. It is difficult to disentangle whether such an effect is attributable to better information of foreign markets by the foreign CEO or to different personal preferences influenced by a less U.

Regardless, the results suggest that there are likely other important factors behind FDI patterns than the standard economic ones so often mentioned in the literature.

But we also want to have empirical specifications of FDI that are grounded in theory and that do a good job of explaining FDI patterns across the world. These models seemingly do well to describe FDI patterns statistically, but while Anderson and van Wincoop have solidified an appropriate gravity specification as theoretically valid for trade patterns, it is not clear this is true for FDI patterns.

General equilibrium theoretical models of MNCs and their FDI activities only first began to be developed in the mids with Markusen's development of a horizontal model of FDI where an MNC replicates its process across multiple countries to avoid trade frictions, and Helpman's vertical MNC model where firms locate their production process abroad to take advantage of lower factor costs.

In recent work with co-authors I have explored the central question of how well these specifications actually fit the real-world data we observe. The empirical specification estimated by CMM was a starting point in this research, since its inclusion of endowment differences clearly outperforms a standard gravity equation of FDI. In initial work with the model, Davies, Head, and I found that the CMM model had a specification of endowment differences that was not consistent with the theory.

Once corrected, the model no longer provides evidence that vertical FDI motivations are very important in overall FDI flows between countries. We show t hat even after logging variables, adding country fixed-effects, and splitting samples into developed countries versus less-developed countries, one is still not guaranteed of having normally distributed error terms.

Relationship between globalization multinational corporations and direct foreign investments other words, finding an appropriate specification that effectively models the substantial heterogeneity in FDI activity across countries is still an open issue. Until this is resolved, using these models as control variables in studies of how new factors of interest affect FDI can be misleading. This assumes that FDI decisions to different markets are independent.

There are a number of reasons to think this may not be true. In this case, more FDI in a particular host country would mean less in neighboring ones. Davies, Naughton, Waddell, and I explore this by explicitly modeling spatial interdependence in empirical estimation of U.

Globalization and Multinational Corporations

However, our finding that the coefficients on the standard control variables in FDI studies are hardly affected by including these spatial considerations is relatively good news for previous work using these empirical specifications.

There has been substantial progress in the literature in the past couple of decades, but it is complicated enough that, in many ways, we are still in the process of uncovering what we don't know.

I am excited to work on filling more gaps in our understanding in my future research efforts. Schott, "Importers, Exporters and Multinationals: A Portrait of the Firms in the U.

  • Nevertheless, international investment remains more dependent on national legal systems and self-enforcement than on international regimes;
  • The FTAA would create the world's largest free-trade area, with million people, and is scheduled to come into being latest by
  • Individuals in traded sectors are accepting only if their sector is internationally competitive;
  • Instead, these firms must face either significant antidumping duties or go through the costly process of raising U;
  • My work with Ellis and Fausten examines whether this information affects FDI choices, by estimating how much prior-year FDI by members of a firm's keiretsu in a particular host country increases the likelihood that the firm will also choose that country for its FDI.

For example, see J. For example, see T.

  1. Davies and I examine whether the empirical evidence suggests that such treaties increase FDI flows across nations, as the OECD and many economists presume. Geographic distance is a major factor in those analyses, but so are linguistic and other cultural differences.
  2. However, the major firms in a keiretsu also get togeth er on a regular basis in what are termed Presidential Meetings and presumably share information more than other firms would.
  3. An additional impetus has been to promote regional integration as a way of lessening dependence on extra-regional economies. Enlargement of regional blocks Mergers of regional organizations have taken place mainly in Europe and America.
  4. Information sharing and communication technologies are the principal factors bringing about flexible networks. A related issue is how FDI may affect trade protection policies that is, reverse causality , which I address with co-authors in B.
  5. Davies and I examine whether the empirical evidence suggests that such treaties increase FDI flows across nations, as the OECD and many economists presume. In other words, finding an appropriate specification that effectively models the substantial heterogeneity in FDI activity across countries is still an open issue.

Blonigen, "Evolving Discretionary Practices of U. A related issue is how FDI may affect trade protection policies that is, reverse causalitywhich I address with co-authors in B. Trade Protection and Promotion Policies, R. University of ChicagoPress,pp. Figlio, "Voting for Protection: