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FDI Liberalization, 1973-2000

FDI Liberalization, 1973-2000. Sonal S. Pandya University of Virginia. Why do countries liberalize FDI inflows?. Overview. Theory Data Measurement Results Robustness Test Broader Implications. Motives for Liberalization: Usual Suspects. Change in political representation

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FDI Liberalization, 1973-2000

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  1. FDI Liberalization, 1973-2000 Sonal S. Pandya University of Virginia

  2. Why do countries liberalize FDI inflows?

  3. Overview • Theory • Data Measurement • Results • Robustness Test • Broader Implications

  4. Motives for Liberalization: Usual Suspects • Change in political representation democratization • Ideology • Diffusion competition; learning • External Constraints IMF conditionality

  5. FDI: Key Stylized Facts • FDI = cross-border movement of firm-specific assets • FDI creates multinational firms that span across borders • Multinational firms maintain internal capital markets

  6. Credit Constraints as Motive for FDI Liberalization • Firms face a similar (though certainly not identical) credit market • Credit constrained firm owners relatively more inclined to FDI liberalization as alternate source of capital Consistent with observed “fire-sale FDI” (Krugman 2000, Aguiar and Gopinath 2005)

  7. Measurement: National FDI Restrictions National FDI Restriction = % of unique ISIC Rev. 3 categories subject to FDI entry restrictions Based on original dataset of industry-level FDI entry barriers Mean value for full sample = .3

  8. Economic Crises As Source of Credit Constraints • 4 types of crises, binary Measures if occurred with past two years: Banking crises, Currency crises, Hyperinflation Recession • Data from Abiad and Mody (2005)/Bordo et al (2001) • Crises unlikely to be endogenous to FDI liberalization

  9. Additional Features of Model • Democracy (Polity) • Partisanship (DPI) • IMF conditionality (WDI) • Per capita GDP (WDI) Time-series cross-sectional data: 63 countries, 1973-2000 OLS with panel-corrected standard errors and country fixed effects

  10. Robust to Additional Tests • Lags of democracy, IMF assistance (up to 5 years) • Laeven and Valencia (2008) measures of banking, currency, and sovereign debt crises • Interaction between crisis types and all political and regional variables • Legal Origins (La Porta et al 1998)

  11. Summary &Broader Implications • Credit-constrained firms are more likely to welcome FDI inflows as an alternate source of capital • Economic liberalization obtains through change in underlying distributional effects • Suggests a focus on micro-political economy is necessary

  12. Sample: 63 countries

  13. Restrictions Measure Compares Favorably to Alternatives • Political Risk Measures (PRS, Heritage Fdn) • IMF measure of FDI-related capital capital controls • Coverage ratios • Gravity models Measures based on observed restrictions most theoretical sound and consistent with other measures of industry-level phenomena

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