R O G E R M I L L E R

Special Project Presentation

A Review of Literature

Panel of 11 manufacturing sectors in Hungary, Poland and Czech Republic

Find evidence to show labor productivity increased from FDI learn techniques of management, technology, processes

Some evidence to suggest that FDI has helped speed the process of enterprise restructuring

Deeper restructuring has almost exclusively been in firms with foreign participation

Argue that FDI acts as important channel for

diffusion of ideas and new innovations even

between developed economies

Suggest that technology is not exogenous as in the

H-O model

Hope their evidence prompts more research

FDI has positive effect on growth but the

magnitude depends on human capital stock

Including interaction between FDI and HK (sse)

improved performance of their model

Strong complementary effects between FDI

and HK on growth rate of income

Theoretical lit identifies benefits, empirical lit

has not been able to show significant positive

link between FDI and growth of host countries

25 Central European and FSU nations (‘90-’98) –

purer tech transfer in transition economies – FDI

shows positive and significant impact in line with

theory predictions

Min threshold of HK is necessary (Gregorio and

Lee)

Positive effect of FDI is independent of presence

of domestic investment (implied, 18)

From Table 5:

Slow progress – from weakness in implementing effective corporate governance or weaknesses in broader economic environment?

Problems of transitions in FSU concern delays introducing corporate governance mechanisms and appropriate competitive market environment

Most FSU countries have privatized successfully, some unwilling to reform (Ukraine, Belarus)

Foreign Owners introduce new capital and Western experience, worker owned slows improvements like labor reduction and restructuring

Entrepreneurs are good, they choose best locations

Relatively short time since restructuring started, more time…

Other factors may be important like more effective legal infrastructures and enhanced market competition, without which even governance issues are not able to be resolved well

Best reforms are most consistent and committed reforms

25 transitional economies (1989-1998): Albania, Armenia, Azerbaijan, Belarus, Bulgaria, Croatia, Czech Rep., Estonia, Georgia, Hungary, Kazakhstan, Kyrgyz Rep., Latvia, Lithuania, Macedonia, Moldova, Poland, Romania, Russia, Slovak Rep., Slovenia, Tajikistan, Turkmenistan, Ukraine, Uzbekistan

Least time under communism

Initial decline in transition for all countries

Both Macro stabilization and structural reforms are necessary

Russia assumed all FSU foreign debt though modest

By Roger Miller

Soviet Union: Centrally planned, quota

driven

Heavy industrial sector, overpaid agriculture

Great citizen benefits, tied to job

Many great market economies around them

Theory says FDI should increase growth with

productivity, technology, exposure to new

processes, managerial skills, employee

training, international production networks,

access to markets (Alfaro et al. 2007)

Firm level studies have not shown positive effects on growth including technology (Carkovic and Levine 2002)

Such benefits may be hidden in the numbers and difficult to measure directly

Macroeconomic studies show FDI good for growth when financial markets can manage flows

Market economies allow for people to find their niche, everybody wins

’94-’98 study found FDI in Europe’s transitioned economies is determined by risk, labor cost, market size, gravity factors, if joining EU – increases faith in that economy, FDI increases, which increases growth (Bevan and Estrin 2000)

MNC’s are more technologically advanced, smart

business, lower cost to replicate technology, likely

to improve also

Work force must be capable of learning production

and processes

Aim: Show positive effects of FDI for FSU nations

FSU isolated in analysis because of their history as a

combined socially planned economy

Corruption and governance may be problems, but

are difficult to accurately measure

Hope: showing benefits from FDI would stimulate

policy to invite more of it

Form is OLS: coefficient = effect, all else

constant

Start in 1995 allowing for more transition to

have taken place, and stabilized

Developing, growing, stabilizing, attracts FDI

Causality, endogeneity, corrections

Dependant: GDPgpc = Growth per capita 5 year

average 2001 – 2005

Independents:

Initial Income per Capita = Ln (GDP base year

1999)

Human Capital = Secondary School

Enrollment and Crude Birth Rate

FDI = net inflows as a % of GDP, 5 year

average

FSU = 0,1 indicator

2001 2005

1 1996 2000

2 1996 2000

3 1999

* *

*

*

GDPgrow th

FDI FSU

FDI

FSU controls

Created Variable FDI (% of GDP)*FSU (indicator)

Gross Domestic Savings (% of GDP)

Gross Fixed Capital Formation (% of GDP),

industrialization

Secondary School Enrollment (% of gross) – HK

Crude Birth Rate – HK

Log of GDP in 1999 for initial capital

Openness to trade X + I (% of GDP)

Inflation, prices effect trade and investment?

Governance: Rule of Law, independent and

*FDI*FSU

Table 1: Base Year 1999 Descriptive Statistics

MeanStandard

Error

Standard

Deviation

Sample

VarianceMin. Max. Count

GDPgpc (2001-2005) 2.846 0.252 3.439 11.830 -6.000 24.057 187

FDIFSU (1996-2000) 0.257 0.083 1.078 1.163 0.000 6.597 168

FDI net inflows (1996-2000) 4.533 0.469 6.073 36.886 -3.073 51.476 168

FSU - - - - 0 1 187

Gross Domestic Savings (% of GDP) 16.079 1.088 14.306 204.649 -41.225 53.231 173

Gross Fixed Capital Formation 21.464 0.554 7.290 53.146 3.087 47.993 173

Secondary School Enrollment 67.337 2.735 33.833 1144.670 5.178 159.499 153

Crude Birth Rate 14.310 0.744 6.093 37.128 7.800 41.800 67

Log of Initial Income per Capital 7.581 0.117 1.587 2.520 4.537 10.675 185

Inflation 0.138 0.032 0.408 0.166 -0.085 2.937 162

Openness to Trade 82.943 3.248 43.459 1888.670 18.969 251.372 179

Rule of Law -0.040 0.078 1.022 1.045 -2.267 1.925 170

Rule of Law *FSU -0.035 0.017 0.215 0.046 -1.404 0.590 170

Rule of Law *FSU*FDI -0.084 0.059 0.766 0.586 -5.925 3.713 170

Data from World Bank, World Development Indicators 2008 CD-Rom version. Base year of 1999 unless otherwise specified.

Table 3: Correlation Matrix

GDP Growth RateFDI*FSU (1996-

2000)

FDI, net inflows (%

of GDP) (1996-

2000)

Gross domestic

savings (% of

GDP)

Gross fixed capital

formation (% of

GDP)

School enrollment,

secondary (%

gross)

Crude Birth RateLog of Initial GDP

per capitaInflation

FDI*FSU (1996-

2000) 0.375 1

FDI, net inflows (%

of GDP) (1996-

2000)0.324 0.009 1

Gross domestic

savings (% of

GDP)0.104 -0.021 0.035 1

Gross fixed capital

formation (% of

GDP)0.026 -0.016 0.359 0.197 1

School enrollment,

secondary (%

gross)0.005 0.156 0.076 0.421 0.175 1

Crude Birth Rate -0.240 -0.143 -0.177 -0.097 0.027 -0.413 1

Log of Initial GDP

per capita -0.048 -0.072 0.162 0.549 0.219 0.796 -0.351 1

Inflation 0.122 0.090 -0.009 0.001 -0.118 -0.159 -0.067 -0.220 1

Openness to Trade 0.080 0.106 0.477 0.290 0.391 0.173 -0.228 0.250 0.048

Data from World Bank, World Development Indicators 2008 CD-Rom version.

0

1000

2000

3000

4000

5000

6000

7000

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Belarus Estonia Georgia Kazakhstan

Kyrgyz Republic Latvia Lithuania Moldova

Russian Federation Tajikistan Ukraine Uzbekistan

Table 4: Regression Results with 1999 Base Year

Variable and Abbreviation 1 2 3 4 5 6 7

FDI*FSU (1996-2000)1.177253696*** 1.020616*** 0.5989597*** 1.02424*** 0.498204 0.3875706

(0.000) (0.000) (0.000) (0.000) (0.180) (0.361)

FDI, net inflows (% of GDP) (1996-2000)0.099230* 0.066652 0.089695* 0.1688492*** 0.110500** 0.0586109 0.0897582*

(0.071) (0.216) (0.082) (0.005) (0.043) (0.239) (0.068)

FSU indicator3.329632** 3.280747 4.851288***

(0.035) (0.111) (0.000)

Gross domestic savings (% of GDP)0.0292815 0.0650209** 0.0316734 0.024789 0.0526232***

(0.019) (0.049) (0.270) (0.198) (0.009)

Crude Birth Rate-0.2380626***

(0.000)

Gross fixed capital formation (% of GDP)0.035555 0.0846482** 0.1477094*** 0.035264 0.0747151** 0.0555807

(0.290) (0.019) (0.001) (0.289) (0.030) (0.102)

School enrollment, secondary (% gross)0.0224695* 0.0130283 0.0153975 0.0125467

(0.056) (0.284) (0.203) (0.284)

Openness to Trade-0.006216 -0.0062585 -0.0135856** -0.0146073** -0.007106

(0.322) (0.308) (0.046) (0.028) (0.254)

Inflation0.3644437

(0.480)

Log of Initial GDP per capita-0.373711** -0.6998317*** -1.600056*** -0.7754999*** -0.317298* -0.543592**

-

0.7132263***

(0.021) (0.006) (0.000) (0.006) (0.050) (0.040) (0.009)

R-squared 0.2468 0.3341 0.7162 0.4097 0.2688 0.3419 0.3729

f-statisticF(6,152) F(6,125) F(6,54) F(8,112) F(7,151) F(6,126) F(6,125)

8.30 10.45 22.71 9.72 7.93 10.91 12.39

Data from World Bank, World Development Indicators 2008 CD-Rom version. Base year of 1999 unless otherwise specified. (***), (**), and (*) indicate significance to the 1%, 5%, and 10% levels, respectively. Constant

terms vary by regression and are omitted.

Table 5: Governance Indicators

Variable and Abbreviation 1 2 3 4

FDI*FSU0.2808042 0.2890947 0.2808042 0.2921956

(0.604) (0.506) (0.604) (0.503)

FDI, net inflows (% of GDP) (1996-2000)0.0655467 0.0658427 0.0655467 0.0655314

(0.209) (0.208) (0.209) (0.209)

FSU indicator4.200222 4.151858* 4.200222 4.125981*

(0.165) (0.057) (0.165) (0.063)

Gross fixed capital formation (% of GDP)0.0617689* 0.0613066* 0.0617689* 0.061822*

(0.085) (0.094) (0.085) (0.085)

School enrollment, secondary (% gross)0.0173286 0.0171263 0.0173286 0.0172705

(0.177) (0.184) (0.177) (0.178)

Rule of Law0.0320419

(0.944)

Rule of Law *FSU0.0535104

(0.972)

Rule of Law *FDI*FSU0.0003421

(0.999)

Log of Initial GDP per capita-0.6212972** -0.6329134* -0.6212972** -0.6197108**

(0.028) (0.060) (0.028) (0.028)

R-squared 0.3715 0.3715 0.3715 0.3715

f-statisticF(7,115) F(7,115) F(7,115) F(7,115)

9.71 9.71 9.71 9.71

Data from World Bank, World Development Indicators 2008 CD-Rom version. Base year of 1999 unless otherwise specified. (***), (**),

and (*) indicate significance to the 1%, 5%, and 10% levels, respectively. Constant terms vary by regression and are omitted. Regulatory

Quality provided by the World Bank website from "Governance Matters VIII: Governance Indicators for 1996-2008" by Kaufmann et al.

Regression analysis to test significance of FDI

in transitional economies testing the FSU

Not significant when including FDI, FSU,

FDI*FSU

Significant and large coefficient on FSU

Reliability of data, does data capture to

isolate effects of FDI

Short time since break up, time will tell…

Barrell, Ray and Dawn Holland (2000), ‘Foreign Direct Investment and Enterprise Restructuring in Central Europe.’ Economics of Transition, Volume 8, Issue 2, pp. 477-504.

Barrell, Ray and Nigel Pain (1997), ‘Foreign Direct Investment, Technological Change, and Economic Growth Within Europe.’ The Economic Journal, Volume 107, Number 455 pp. 1770-1786

Borenstein, E., J De Gregorio, and J-W. Lee (1998), ‘How Does Foreign Direct Investment Affect Economic Growth?’ Journal of International Economics, Volume 45, pp. 115-135.

Campos, Nauro F., and Yuko Kinoshita (2002), ‘Foreign Direct Investment as Technology Transferred: Some Panel Evidence from the Transition Economies.’ William Davidson Working Paper Number 438.

Estrin, Saul and Mike Wright (1999), ‘Corporate Governance in the Former Soviet Union: An Overview.’ Journal of Comparative Economics, Volume 27, pp. 398-421.

Fischer, Stanley and Ratna Sahay (2000), ‘The Transition Economies After Ten Years.’