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Trade and investment patterns Lecture for the course STV4284B. Carl Henrik Knutsen Department of Political Science, UiO 8/4-2008. Important questions. Which firms import and export , and why ? Which firms invest , and why ? What characterizes FDI flows and stocks ?

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trade and investment patterns lecture for the course stv4284b

Trade and investmentpatternsLecturefor thecourse STV4284B

Carl Henrik Knutsen

Department ofPolitical Science, UiO


important questions
  • Whichfirms import and export, and why?
  • Whichfirmsinvest, and why?
  • Whatcharacterizes FDI flows and stocks?
  • Whatarethefactorsinfluencingallocationof FDI?
  • Howdoes trade relate to FDI?
  • Firmsinvest
  • However, weareofteninterested in aggregatepatterns at thenationallevel, evenifindividualinvestmentdecisionsaretaken by firms (and evenindividualswithinthefirm).
    • Structuralfactors, politicaleconomic systems
    • Generalization
the profit maximizing firm in neo classical economics
The profit-maximizingfirm in neo-classicaleconomics
  • Invest or not?
    • Investif: p*f(x) –w*x – c > δ
    • A wideinterpretationof c: plant investment, administrative costs, corruption, reputationeffectsetc..
  • Uncertainty and risk-aversefirms
  • Are investors rational? Otherimportantfactors more or less compatiblewithrationalchoicetheory:
    • knowledge and learning; boundedrationality
    • externaleffectsonotheractivities
    • market power (mergers and acquisitions)
    • maximizingprofits or size?
  • Parsimony: Benefits and drawbacks.
empirical studies
  • Aggregatevsfirmlevel data
  • Firmlevel data areonlyavailable for a certainnumberofcountries, and this limits thenumberof studies
  • Secrecy
  • Short time series
  • Comparabilityacrossnations; data at thenationallevel
  • Definitions and comparability. OECD.
norwegian fdi
Norwegian FDI
  • Data from theStatisticsNorway (SSB)
  • Data oninvestmentprojects
  • 1998-2005
  • Basedon survey
  • Reporting, bias and lackof data
  • Availability and secrecy
project on norwegian fdi
Project onNorwegian FDI
  • Hveem et al (2008a and 2008b) are first outputs from thisprojects.
  • Aggregate studies onFDI-patterns. Descriptions and causalanalysis.
  • Forthcoming: State-ownedenterprises and FDI
  • Need for nuance: Sector studies and firm studies. Studies onparticular host countries?
  • A verygoodopportunity for writingMA-thesis!
the latecomer investor
”The Latecomer Investor”
  • Large-scaleoutward FDI from Norway is a relativelynovelphenomenon, withsomeexceptions (e.g. shipping)
  • Historically, Norway has been a net importer of FDI
  • Butthis has changed! In 2005: Outward = 2x Inward FDI
    • Economicgrowth and growthoffirms (large firmsaremuch more likely to engage in FDI)
    • Capital accumulation
    • Business culturechanges, even in state-ownedenterprises?
  • According to UNCTAD statistics, NorwegianoutwardFDI-stock in 1980 wasonly0,4% ofthat in 2006, and in 1990 it was9,0% ofthat in 2006.
some numbers
  • Total outward FDI stock:
    • 1998: 238 864 million NOK
    • 2005: 665 349 million NOK
    • Annualgrowth rate of 15,8% from 1998 to 2005. The growth rate from 1980 to 1998 was 25,1%, starting from a verylowlevel!
    • The growth rate in globalFDI-stocks over theperiod from 1998 to 2005 was 10,9%. The growth rate from 1980 to 1998 was 11,6%.
  • Norwegianoutward FDI as a shareof global FDI went up from 0,09% in 1980 to 1,04% in 2005. The Norwegianpopulationaccounts for about 0,08% oftheworld’spopulation.
  • Total outward FDI stock in oil and gas production:
    • 1998: 87 408 million NOK
    • 2005: 216 755 million NOK
    • Annualgrowth rate of 13,9%
some claims from the paper
Someclaims from thepaper
  • Norwegian FDI has had a dramaticincrease in later years, outgrowingeventhe global trend
  • Norwegian FDI has been and still is veryconcentratedgeographically, butthetrend is deconcentration, as Norwegian investors have increasinglyturned to for exampleAfrica and Asia
  • The largest ”receivers” of FDI in 2005: Sweden, USA, Belgium, Canada, Netherlands, Singapore, Denmark, Great Britain, Germany, Angola, Azerbaijan
  • Norwegianoil and gas investmentsare a substantial part ofthe story, but not thewhole story. Othersectors: Telecom, aluminium, mechanicalindustries, shipping
  • Norwegian FDI has grownbecauseof 1) New investments in existingprojects, 2a) Mergers and acquistions, 2b) Greenfieldinvestments
  • In addition to FDI, Norway’sstateownedpetroleum/pension fund is a very large global investor in stocks and bonds.
  • Not in paper: State ownedcompaniesareimportant: 30,3% of 2005 FDI, whenapplying a 50% ownershipcriterion.
blue eyed investors
”Blue-eyed investors”
  • Underlyingpremise: A verywide range ofhost-countrycharacteristicscanaffecttheallocationofNorwegian FDI.
  • Economic, geographic, political and socialfactors.
  • Earlier studies have tended to focusoneconomicfactors
  • No existingcoherentmodel is able to capturethese diverse factors A need for theoreticaleclecticism and an explorativestrategy, empirically.
some methodology
  • A regression-basedframework, butappliedon a panel data set OLS does not suffice
  • Pooled Cross Section Time Series analysis: OLS with panel corrected standard errors. Takesintoaccountheterogenous standard errorsacross panels, autocorrelation and contemporaneouscorrelation
  • Time series from 1998-2005. Country-yearsareunits.
  • Data from severalsources: SSB, WDI, FHI, WGI, ILO, CEPII….
  • Regressionequation:

Y = α + β1Xi1 + β2Xi2 + …. + βnXin + εi

  • Interpretationofcoefficients (Controlled for all otherfactors!)
methodological pitfalls
  • Data: Measurement errors from survey. Lacking data classified as 0 underreporting
    • Systematicbiasesif FDI in someparticularcountriesaresystematicallyunderreported (tax-havens?)
  • Transitcountries and final investment location: Belgium and Singapore!!
  • Bi-directionalcausality: Onlyaffectssome variables in thisstudy
  • Omitted variable bias
  • Controllingawayindirecteffects
  • Multi-colinearity and uncertainty
  • All thesepointsimplythattheresults from thearticle have to be interpretedwithcare. Nevertheless, thesearethe best estimateswecanget!
the main empirical results
The mainempiricalresults
  • Thesefactorsseem to significantlyincreaseNorwegian FDI:
    • Large market
    • Smallgeographicaldistance
    • EU-membership
    • Being Nordic
    • Hightertiaryschoolenrollment rate
    • Lowcapitaldensity
    • Energy-resources
    • Lowcorruption
    • Stricterlabour standards
  • Thesefactors show divergingresults or areinsignificant in most analyses:
    • Wages
    • Democracy
    • Ruleoflaw
    • Trade-taxes
    • Bilateral investmenttreaties
    • Tax-haven status
    • Primaryschoolenrollment rate
economic factors
  • The ”gravitymodel” in studies of trade. Works quitewellhere as well.
    • The roleof a big market and welldevelopedfactor markets
    • Distance and FDI. Verticalvshorizontal FDI and theoreticalpredictions
  • Factorsofproduction
    • Type ofeducation and sectors
    • The roleofwages
    • Investment and twotheoreticalpredictions (SolowvsKrugman)
economic policy and trade
Economic policy and trade
  • Bilateral investmenttreaties and tax-havens: Whysuchweakresults?
  • Trade taxes and alternative explanationsofthe negative relationshipwith FDI
  • EU/Nordic
  • Trade and FDI: The issueofcausaldirection and interpretationofregressionresults
political structures
  • Highcorrelationbetweenpoliticalstructures. Institutionalstructuresthattend to og togetherMulti-colinearity and thedifficultyofdetermining relative effects.
  • But: Politicalstructuresclearly matter!
    • Rational investors and costofdoing business
    • Rational investors and uncertainty
    • Business leaders and norms
    • Reputationeffects
  • The choiceoffunctional form: Logarithmictransformations and interpretationofcoefficients
  • Alternative operationalization and robustnessofresults
  • The largest problem however is choosingthe most suitablemodel-specification
  • Rememberthatweareonlydealingwithmodel-contingentestimates: The most importantthing is not thenumbers, but ”sign” ofcoefficients and statisticalsignificance.
interpretation and nuance
Interpretation and nuance
  • Estimatesareestimates
  • Wearedealingwithaggregate data: wayofgeneralizing, does not strictlysayanythingaboutfactorsmovingdecisions in concrete, singular instances
  • Nuancingtheaggregate data: Sectors and diversity!
bernard et al 2007
Bernard et al. (2007)
  • Firms and trade in the US.
  • Whatarethecharacteristicsoftradingfirms, and how do theyperform?
  • Data from 1993-2000: Noticetheshort time intervalwheninterpreting trends
  • Trends versus levels, shares versus growth
  • Links customs data with data onfirms
  • Paper is mostlydescriptive, and does not conductanyrigorousanalysis. Correlation and causation.
main findings
Main findings
  • Importing and exportingarecorrelatedactivities (omitted variables? Size?)
  • Trade is veryconcentrated: Top 1% tradingfirmsaccount for 81% of trade, and concentrationincreases over time.
  • Only a smallnumberoffirmsengage in trade, butthenumber is growing (entry and exit mechanisms)
  • Butthesefirmsare in general big!
  • Greatesshareoftradingfirmsare ”wholesale and retail trade” firms, butthelargestvolumeof trade takesplace in thegoodssector
  • Most ofthe trade is withother OECD countries, and theaveragenumberoftrading partners is low (approx 3), butgrowing.
  • Tradingfirms have betterperformances (employmentgrowth and exit). Causalinterpretation: Learning and spill-overs as well as profits from trade AND/OR self-selectioninto trade by most successfulfirms: Trade as symptom (Dani Rodrik)
  • ”Most GloballyEngagedFirms” arefirmsthatboth import and exportwithrelatedparties. Theseaccount for 80% of US exports and imports and are more likely to trade with less developedcountries
  • Intra-firm trade is onthe rise in MGEs, and in general, thesefirmsalso have highergrowth rates in exports and imports thanotherfirms.
hummels et al 2001
Hummels et al. (2001)
  • Point ofdeparture: Productionprocessesincreasinglyinvolvesequential, verticaltradingalongthevaluechain. Import ofinputs - production - exportofgood (alternatively used as new input in receivingcountry)
  • (International) Verticalspecialization: Useofimportedgoodsthatare used in producinggoodsthatare later exported
  • More formally:
    • Good is produced in two or more stages
    • Two or more countriesprovidevalueadded to good
    • At leastonecountry must useimported inputs and exportsomeoftheproduction
data and main findings
Data and main findings
  • Usesinput-outputtables from OECD database for 10 OECD countries, plus separate data from Ireland, Korea, Taiwan and Mexico (Thesecountriesaccount for more than 60% of world exports).
  • VerticalSpecialization as shareof trade for thesecountries: From 0,165 in 1970 to 0,21 in 1990. A 30% growth.
  • VerticalSpecializationaccounts for 30% ofthegrowth in total exports over theperiod.
other findings
Other findings
  • Heterogeneity: Smallcountries have a highershareofVS/export, and the US in particular has a lowshare.
  • VS/export has grown in most countries, butsomecountriesexperienced a slow-down in the 1980’s. VS wasparticularlyimportant in increasingexportgrowth rates in Mexico and Taiwan.
  • The VS share has mainlygrownbecausethere has been an increasing VS sharewithinsectors, and not becausecountries have changedtheirsectoralcomposition
  • Countriesareable to reapbenefits from Ricardian ”comparativeadvantages” not only in trading ”home-grown” final goods, butalso by trading inputs: gains from trade.
  • Why has thisbecomeincreasinglypossible?
    • Technologicalchange
    • Transport costs
    • Loweringof tariffs
    • The transnationalcorporation and intra-firm trade (organizationalchange)
  • Increase in trade, and economicintegration (mainlyfocusingonthe US).
  • ”The skeptic”: Pre WWI trade levelswerehigh!
    • Feenstra: Sectoralcomposition has changed as GDP has increased. Less trade in services than in goods: Merchandisetrade/production is muchhighertoday (1998)
  • Economicintegrationgoestogetherwithdisintegrationofproductionprocess(”outsourcing”). Relate to Hummels et al and verticalspecialization
  • US trade in goods and long-rundevelopments: From agriculture and raw materials to manufacturedconsumergoods and particularlycapitalgoods
  • Capital goods, butalsomanufacturingareincreasinglydoneabroad, butoften by affiliatesbelonging to US TNCs or by firmsengaged in different types oflong-runcontractualrelations (licensing etc.)
  • ”Low skill” productionundertakenabroad, and ”high skill” production at home (a simplifiedmodel). Advertising, marketing and productdevelopmentremains in the US. The logicofcomparativeadvantage
the political debate and the academic debate
The politicaldebate and theacademicdebate
  • The politicaldebate, especially in the US, has focusedonthe negative effectsofglobalization and outsourcingon real wagedecline or at leaststagnation for low-skilledworkers and uneployment
  • Economists, with a basis in empirical studies, have arguedthattechnologicalchange, which has reduceddemand for low-skilledworkers, is largely to blame for declining real wages (US) and highunemployment (Europe)
  • Feenstraarguesthatonecannot separate easilybetweeneffects from technologicalchange and theeffects from trade, and thattheseeconomists have basedtheir studies on trade in final goods. According to Feenstra, thepicturechangesifwetakeintoaccountverticalspecialization and trade in inputs.
  • In addition, increasedmobilityofcapital has increasedthe relative bargainingpowerofcapitalowners over laborers. Often, thethreat to movethefactory is enough to reducewages, and we do not need to seeoutsourcing for thethreatofoutsourcing to have an effectonwages.
  • Feenstra’spoint is welltaken, but in my view, thepublicdebate has one-sidedlyfocusedoneconomicintegration as a cause for theseeconomicills, and has not takenintoaccounttheroleoftechnologicalchange. Bothfactors have probablybeen at work.
policy remedies
  • Trade policy: From altering and usingthe ”escapeclauses” in WTO to outright unilateral protectionism: Efficiencyissues!
  • Subsidizethe losers, but let theeconomyrestructure: Norman and Dixit’s subsidies and taxes
  • Rodrik and theneed for a strongwelfarestate in a globalizedeconomy
  • Labour-market policies: Retrain and reeducatetheunempolyedindustrialworkers
  • Technologicaldevelopment and newsectors: Findyournewcomparativeadvantage!
  • Provide a well-functioning and broadeducational system.