The effects of FDI on host country export performance (Austria)

The effects of FDI on host

country export performance

(Austria)

A presentation by; AJang Elvis Ngwesse

Supervised by; Prof. Joseph Francois

Table of Contents

• General Overview

• The Austrian Economy

Openness FDI PerformanceExport Performance

• MNC´s & FDI (Theory)

• Model depicting FDI impacts Growth

• Regression Results

Overview

• FDI inflows and export performance (1970-2005).

• MNC and their investment decision determines the inflow of FDI (UNCTAD 2006).

• These MNC are credited for increasing competition and creating spill-over effects to domestic firms (Javorcik, 2004).

• We focus on endogenous growth theory ( main determinant of long-run growth are technology and Human capital (Markusen et. al 2001).

• The model of quality/expanding variety of product is used to show the impact of increasing innovation on growth.

• Regression

The Austrian economy

• Sustained economic growth since WW2 (BMF, 2005).

• Growth in % GDP;

-(1950´s-70´s). Growth due to nationalization/labour laws.-(1973/74). Slow down due to oil crisis and stock market crash.-(1978-81). Average growth of 2.6% real GDP.-(1984-91). Average growth of 2.8% real GDP.-(1995-1997). Growth increased due to EU membership (Breuss &

Schebeck 1998). -(1999-01). Average growth was 2.4% (OECD 2005).-(2005). Growth was 2.5% (increased exports).-(2006-07). Growth 3%-(2008-09). Slow down in growth due to financial crisis (IMF 2008).

Openness of the Austrian Economy

Source:BMF 2005. Openness is calculated as the sum of exports and imports as a share of GDP %.

**This was due to increase in privitization, increase in M &A and increase in the number of trading partners (OECD 2008).

FDI inflows in Million Euros

Source: WIFO, 2008.

**Increases have been due to the rise in aqcuisition deals. The Decrease in the late 90´s was due to stock market bubbles (UNCTAD,2006).

Export in Million Euros

Source: WIFO, 2008.

**Expandsion in world trade, EU accession, increase competitiveness,appreciation of the euro (OECD, 2007).

Multinationals and FDI

• A MNC is a firm that manages production establishments in two or more countries (Appleyard and Field, 1998) .

• MNC are the major elements engaged in cross-boarder trade and can impact a host country +vely or –vely (UNCTAD, 2006).

• Kindle Berger (1969) points out that MNC´s provide a vehicle for the transfer of technology and Human capital.

• The empirically determined channel of technological transfer from home to host country is FDI.

• There are also other channels such as foreign licensing but have short comings on productivity (Yasar and Morrison, 2005).

• There exist Horizontal (non-fragmented) and Vertical (fragmented) MNC with different impacts on growth (Beugelsdijk et, al. 2008).

• knowledge can be used simultaneously in many plants without encountering diminishing returns (Markusen et al, 2001).

• Our main finding is; if these international linkages (technology) have been behind the growth of Austrian export.

Author Country Data Findings Results

Zhang & Song 2000

China (1984-1997)

Panel data on manufacturing

Export growth & FDI

FDI promotes export

Jacorcik 2004

Lithuania Firm level panel data

MNC & spillovers effect

Existence of positive spillovers

Markusen and Venables 1999

Theoretical model

MNC and spillovers

Positive spillovers by MNC

Borensztein et, al. 1998

Theoretical model

Effects of FDI on growth

FDI/tech. impacts growth

Empirical evidence on FDI and economic growth

Model depicting relationship between FDI and growth.

• We shall use the model of Barro and Sala-i-Martin (1994) to show that FDI impacts growth positively.

Properties of the model; Factors can be substituted and are constant. Model exhibits constant returns. Main factors are Labour and Capital. Existence of monopolistic competition. Three agents, producers of final goods, R&D firms and household. There is no diminishing returns in the long run due to increase in

innovation by R&D firms. No creative destruction.

Model of Technological progress with an expanding variety

of products.

Producers of final output.

N

jijii XALY

1

1 )(. Production function (1.1)

0>α<1 , Yi = output, Li = labour, A = measure of productivity, Xij = employment of the jth intermediate good, N = variety of intermediate goods.

111 .)(. NNXAL

NN

NXALY iiii

Yi only increases with increases in N1-α (endogenous growth)

(1.2)

Profits of producing firm

Since market is competitive and firms take prices as given, Pj = Marginal product of Xj . The marginal product of thr jth intermediate good is given from equation 1.1,

11

ijiij

ij XLAX

YP (1.3)

)1(1).( jiij PALX (1.4)

R&D firm.

•Increase in N, the variety of intermediate goods requires positve efforts in R&D

•In order for R&D to occure, the net present value of future expected profits should be larger than R&Dexpenditure.

• Firms determine their prices.

•Each investor retains monopoly right over her intermediate good as a result of patents and secrecy.

Monopoly profits;

veXPvevtV tvrj

t

j

t

tvr

)()( .)1().()( (1.5)

)(1)()( vXvPv jjj (1.6)

Profit flow is given by;

Substituting equation 1.4 into 1.6 gives us an equation for theMaximisation of monopoly profits.

)1(1

)()(1)()(max vPALvPv jjjvp j

(1.7)

First order condition wil be;

11

1)1(

0/)()1(1)1()(

PP

PP

PPXPPX

j

jj

jjjjji(1.8)

LAX j)1(2)1(1

If we substitude monopoly price into 1.4, we get an expression On the quantity of each intermediate good produced.

(1.9)

If we substitute Xj and Pj from equations (1.9) and (1.8) into

equation (1.7), we get a formula for the profit flow.

)1(2)1(1 1)(

LAtV (1.10)

substitute Xj and Pj into equation 1.5 to get the net present value of monopoly profits over time

veLAtVt

tvr

)()1(2)1(1 1)(

(1.11)

Shows profit margins of investors and also determines the number of units sold. If rate of interest is constant then value

of integral simplifies to 1/r

rLAtV 11

)( )1(2)1(1

)1(2)1(1 1

LA

r

The decision to become an R&D firm

R&D cost = ,a constant

)(tVA firm thus decides to devote resources to R&D if

(1.12)

Free entry condition

Free entry implies any firm can pay the R&D cost to become an

innovator.

)(tV (1.13)

House Hold

dtec

U t

0

1

1

1

House hold maximise utility as shown below;

(1.14)

craa

House hold budget constraint is given by;

(1.15)

rCC 1

Households satisfy the familiar Euler equation

(1.16)

)1(211 11 LA

C

CC

Then;

(1.17)

C = Y – NX - N

)1(2)1(1 11 AL

C

CCN

NXALY .1Identical firms, production function is

Assume all variables are constant, N grows same as Y

ΔY= ΔN

Regression results

------------------------------------------------------------------------------ dlx | Coef. Std. Err. t P>|t| [95% Conf. Interval]-------------+---------------------------------------------------------------- lx_1 | -.1545449 .0837873 -1.84** 0.079 -.3283092 .0192195 pcapita | .0123137 .0048809 2.52* 0.019 .0021912 .0224361 gdig | .0036946 .0019238 1.92** 0.068 -.0002951 .0076844 dlfdig | .0185081 .0098472 1.88** 0.073 -.0019137 .0389299 lrexc_1 | .0789022 .0670176 1.18 0.252 -.0600838 .2178883 lfdig_1 | .0254005 .0119134 2.13* 0.044 .0006937 .0501073 EC_1 | .0070612 .0032164 2.20* 0.039 .0003908 .0137316 _cons | -.0827453 .4840336 -0.17 0.866 -1.08657 .9210788------------------------------------------------------------------------------Significant levels are defined as ***Significance at 10%, (**) stationarity at 5% and

(*) stationarity at 1%

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