Work in Progress

Foreign direct investment (FDI) in developing countries is associated with productivity growth of host country firms due to knowledge and technology spillovers. Little is known, however, how the presence of multinational enterprises affects the product mix and the manufacturing of more advanced products by firms. This paper wants to fill this gap by examining the effects of foreign ownership and foreign ownership structures on within firm reallocation processes. With the help of a firm-product-level dataset of Indian manufacturing firms, I reveal that foreign owned firms are associated with a higher product scope and a more flexible manufacturing process allowing to produce more similar products together. Using a doubly robust propensity score reweighted covariate adjusted regression to control for the selection bias associated with the entry of foreign investors, I show that foreign acquired firms expand their product range. FDI increases the probability to introduce new products, upgrade products and drop unrelated products from their product portfolio. The effect is most pronounced for majority and wholly-acquired foreign firms.

Abstract: Global Value Chains (GVCs) provide an important opportunity to become member of the global economy. Gaining access to GVCs and the possibility of developing linkages with major suppliers and customers enables the prospect to upgrade products and production processes via knowledge and technological spillovers, learning by doing and the allocation of new task. Adopting new production technologies and realizing synergy effects might allow cost reduction, product innovation and product upgrading. Even if GVCs represent a rich environment for innovation activities, the extent to which knowledge is created and transferred among firms may vary considerably across their mode of participation in the global chain, thus resulting in heterogeneous innovation capacities for the firms involved. Differences in the forms of governance underlying buyer-supplier relationships – for instance linked to dissimilar power asymmetries and firm capability – can strongly affect the knowledge transmission along the chains and are potentially able to explain heterogeneities in firms’ innovation propensity.

Using a firm-product-level dataset of Indian manufacturing firms including information on business groups, this paper contributes to recent studies on international production and GVCs by testing the effect of different modes of internationalization on firms’ upgrading activities, including the extensive and intensive margins of innovation and R&D expenditures. Controlling for the selection bias associated with the chosen mode of internationalization and accounting for potential reverse causality, this paper shows that the deeper firms are integrated internationally, the higher the likelihood that they engage in innovation activities. Firms which have a high mode of internationalization are not only more productive, but also more likely to introduce new products, upgrade existing products and produce more sophisticated products than firms that are less engaged in international markets and, thus, less prone to international competition.

Abstract: Foreign direct investment (FDI) is considered as important component of economic development. Besides bringing capital to developing countries, FDI is associated with a transfer of technology, organizational and managerial practices and skills as well as access to international markets. However, poor governance might impair the business environment, opening the doors for a misaligned foreign investment policy and investments harming the economic development of the country, leading to conflicts and protests. Limited attention in the literature has been devoted so far on the link between the impact of multinational enterprises and conflicts, a key determinant of underdevelopment.

We contribute to the scarce debate by analysing whether the presence of foreign investors increase or decrease the likelihood of social or armed conflicts in the period from 2006-2016 for around 70 developing countries, mainly in Africa and Latin America. Combining geo-spatial time-series data on protests from the Social Conflict Analysis Database (SCAD) with geo-locations of multinational enterprises, we aim to shed lights on the type of FDI that are boon and bane for a developing country. Using detailed firm-level information from the World Bank’s Enterprise Survey, we can test if the presence of foreign investors harms or improves the conflict potential within a region. Further, we can test for specific channels which might amplify conflict potential or peaceful intention by looking at the rent seeking behaviour, international linkages and the composition of the management board of firms.

Abstract: Allocated where it is needed most, aid has the potential to lower trade costs, stimulate learning-by-doing processes in trading and business procedures, and foster the market environment. We assess whether foreign aid may help improve access to FDI for potential host countries and, thereby, diffuse FDI-related benefits to countries that have remained on the side lines so far.

We use a micro-founded structural gravity framework for FDI introduced by Anderson, Larch and Yotov (2017), analogous to the trade gravity model, to explicitly look at the dyadic effects of aid on FDI.

We analyse whether the allocation of sector-specific bilateral aid is targeted at “investment frictions” in a particular recipient/ host country. These frictions, e.g. in infrastructure, education, health, or institutional development, can be identified by drawing, for example, on international investor surveys and country risk assessments. There are various channels through which aid might reduce these investment frictions. Aid targeted at removing infrastructure bottlenecks in transportation, information and communication technologies, energy and finance makes a recipient country more attractive to foreign investors. Lower transportation costs lower the investor’s costs of selling his products to other markets. Improved information technologies facilitate the communication along the value chain. Improved human capital might allay the investors’ fear of an inadequately educated workforce. Further, aid might improve the business environment of firms and help to establish a reliable legislation system. Following the reasoning in Asiedu et al. (2009), we evaluate whether aid helps to mitigate country risks for investors resulting from these investment frictions. Besides overall country risks for investors, we further construct an indicator of the perceived risk and need of an investor in a specific country.

Using the structural gravity framework for FDI further allows us to perform a counterfactual analysis and evaluate a potential increase in aid and the potential impact of new donor countries on bilateral, total outward and inward FDI.