Bridging the Gap: the Role of Trade and FDI in the Mediterranean

Bridging the Gap: the Role of Trade and FDI in the Mediterranean

Effect of FDI on the Productivity of the Egyptian Industrial Sector

Nada Massoud

Naples, June 2006


1. Can Egypt Benefit from FDI Productivity Spillovers?

2. Are there any Productivity Spillovers?

3. What Factors affect the Direction of Spillovers?


1. Can Egypt Benefit from FDI Productivity Spillovers?

A- Comparative Productivity of Foreign and Domestic firms

B- Egypt’s Absorptive Capacity

• Productivity Comparison between Foreign and

Domestic Firms

– Average Productivity per Worker: Real output per worker

– Total Factor Productivity: A residual from regressing the real value

added of the each industry on the capital stock and the number of

employees of the industry

Can Egypt Benefit from FDI Productivity Spillovers?

Productivity Comparison between Foreign and Domestic Firms

Average Productivity

TFP

Manufacturing IndustriesHigherHigher

Textiles, Garments and Leather HigherHigher

Paper & Products and Printing & Publications

HigherHigher

Chemical Products HigherHigher

Building Material HigherLower

Basic Metal ProductsHigherHigher

Machinery and Equipment HigherHigher

Other Manufacturing HigherHigher

Source: CAPMAS, GOFI, and GAFI unpublished data

Productivity Comparison between Foreign and Domestic Firms

• In general, based on the Average Productivity per Worker and TFP

Foreign firms are more productive

Can Egypt Benefit from FDI Productivity Spillovers

• Egypt’s Absorptive Capacity

– Technology Gap (Controversial)

– Human Capital

– Financial Development

– Institutional Quality

Egypt’s Absorptive Capacity

Source: Calculated from the WDI, World Bank website, www.worldbank.org

• Technology Gap: Threshold by Li and Liu 2005: 12.6%

-

5.00

10.00

15.00

20.00

25.00

30.00

1984 1987 1990 1993 1995 196 1997 1998 1999 2000 2001 2003 2004 2005

Years

Gap

Egypt's Technology Gap Technology Threshold

(US GDP per Capita - Egypt GDP per Capita/)Egypt GDP Per Capita( 1984-2005)


0.00

2.00

4.00

6.00

1980 1985 1990 1995 2000

Yrs

of

sch

ooli

ng

years

Average Years of Schooling Borensztein Educational Threshold

Average Years of Secondary Schooling of the Male Population above 25 years(1980-2000)

Source: Barro and Lee 2000

• Human Capital Quality: Threshold by Borensztein 0.52


Banking Credit to the Private Sector in Egypt as % of GDP )1984-2005(

-

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

50.00

1984 1987 1990 1993 1995 196 1997 1998 1999 2000 2001 2003 2004 2005

Years

%

Domestic credit to private sector (% of GDP) Financial Development Threshold (SB)

Financial Development Threshold (HL)

Source: World Bank website, www.worldbank.org

• Financial Development: Threshold by SB: 13%, by HL: 12%


-1.2

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

1996 1998 2000 2002 2004

-0.9

-0.8

-0.7

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0

Voice and Accountability Political Stability Governmnet Effectivness

Regulatory Quality Rule of Law Control of Corruption

Threshold

Source: World Bank Governance and Anti-Corruption, http://info.worldbank.org/governance/kkz2004/country_report.asp?countryid=67

Egypt’s Institutional Quality Assessment, (1996-2004)

• Institutional Quality: Threshold by Kaufmann: -0.84


Below ThresholdAbove Threshold

Technology Gapyes

Human Capitalyes

Financial Developmentyes

Institutional Qualityyes

• Higher productivity for foreign firms

• Sufficient absorptive capacity

There is room for Egypt to benefit from FDI productivity spillovers

Can Egypt Benefit from FDI Productivity Spillovers?

Are there Any Productivity Spillovers?

• Horizontal Spillovers: Intra-Industry

• Vertical Spillovers: Inter-Industry

Through regressing a linear function for the period 1984-2005 based

on an unbalanced panel data set of industrial production that

includes 12 industries at the 12-digit ISIC classification

Are there Any Productivity Spillovers?

VariableVariable Specification

Dependant Variable

ProductivityTotal value added / Total # of employees

Independent Variables

Foreign PresenceEmployees in foreign firms / Total employees

Capital IntensityTotal Fixed assets / Total # of employees

Human CapitalWhile-collars / Blue-collars

ScaleAverage gross production by domestic plants / gross production of the largest domestic plant

Concentration∑ squared individual plants production shares

Horizontal Spillovers

• All sectors had no significant spillovers, except three sectors:

– Two had positive productivity spillovers to domestic firms: Oil and Natural Gas – Machinery and Equipment

– One had negative effect on the productivity of domestic firms: Textiles, Garments and Leather

Vertical Spillovers

• Backward Linkages

• Forward Linkages

Used a cut-off point that the industry i must demand/supply at least 5% of gross output in industry j, based on Egypt’s Input-

Output tables.

Vertical Spillovers

• Backward Linkages

• No backward spillovers in all sectors which implies:

– TNCs depend on importing their inputs (consistent with FDI effect on imports from other studies and surveys)

Vertical Spillovers

• Forward Linkages:

• Negative Spillovers from three sectors: Oil and Gas,

Manufacturing Industries, and Building Material

• Positive Spillovers from one sector: Machinery and

Equipment

Are There Any Productivity Spillovers?

• Intra-industry spillovers in less than 20% of the examined sectors

• No Backward inter-industry spillovers

• Forward inter-industry spillovers in 20% of the studied sectors, and negative in the rest

Spillovers are not on a large scale despite Egypt’s sufficient absorptive capacity and the higher productivity of foreign firms

What are the Factors Affecting the Direction of Spillovers?

• Size of Technology Gap

• Industry Characteristics

• Foreign Market Share in the Industry

Size of Technology Gap within a specific industry

No Pattern Observed

Gross Value Added per Worker in Foreign Firms to that of Egyptian Firms(1984-2005)

Source: GOFI 2005, unpublished data

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

31 32 33 34 35 36 37 38 39

Industries

Tech

no

log

y G

ap

Industry Characteristics

• Average Capital Intensity

• Average Productivity


No pattern observed

0

50

100

150

200

250

300

22 23 29 31 32 33 34 35 36 37 38 39

Source: CAPMAS 2005, unpublished data

Average Capital Intensity in Manufacturing and Extraction Industries)1984-2005(


No pattern observed

0

5

10

15

20

25

30

22 29 31 32 33 34 35 36 37 38 39

Industries

Pro

duct

ivit

y

Average Productivity of Manufacturing and Extraction Industries)1984-2005(

Source: CAMPAS 2005, unpublished data

Foreign Market Share in the Industry

Industries with foreign participation of 5% or more witnessed horizontal productivity spillovers

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

38 23 29 31 32 33 34 35 36 36 39 22

Industries

%Average Foreign Participation in the Manufacturing and Extraction Industries

)1984-2005(

Conclusion

1. Are Foreign Companies more productive than Domestic Companies? Yes

2. What is the absorptive capacity of Egypt? Above thresholds

3. Are there horizontal productivity spillovers from foreign to domestic companies? Mixed Effects

4. Are there vertical productivity spillovers from foreign to domestic companies? Mixed Effects

5. What are the factors affecting the direction of spillovers? Foreign market share more than 5%

Conclusion

• Further investigation is needed to test the effect of:

– FDI mode of entry

– Nationality of the existing affiliates

– Institutional/individual nature of FDI

Documents

Bridging the Gap: the Role of Trade and FDI in the Mediterranean