Þjóðarspegillinn 2006 Sjöunda ráðstefna um rannsóknir í félagsvísindum Fixed Costs, Foreign Direct Investment, and Gravity with Zeros (Fastur kostnaður, bein erlend fjárfesting og þyngdaraflslíkan með núllgildum) Helga Kristjánsdóttir, 27. okt. 2006 Þjóðarspegillinn 2006 Sjöunda ráðstefna um rannsóknir í félagsvísindum Þjóðarspegillinn 2006: Sjöunda ráðstefna um rannsóknir í félagsvísindum
Background In 1980s, general-equilibrium and partial-equilibrium trade theories were combined in New Trade Theory Vertical FDI – Production located to gain access to abundant factors (Helpman, 1984) Horizontal FDI – Production located to overcome trade costs and gain market access (Markusen, 1984) Þjóðarspegillinn 2006: Sjöunda ráðstefna um rannsóknir í félagsvísindum
Background Most FDI among developed countries, i.e., East and West, rather than North and South Small open economies particularly dependent on exports and FDI Export ratio (goods and services) of Iceland is comparatively small, or 35% of GDP in 2003 Scandinavian countries’ export ratios ranged from 37-44% Japan and US had export ratios below 12% Þjóðarspegillinn 2006: Sjöunda ráðstefna um rannsóknir í félagsvísindum
Research Objective Extend existing knowledge in the field Emphasize criteria used for selecting certain theories and procedures for application to Icelandic data Gravity, as in physics, and knowledge Heckman 2 step, 2 steps of investment Interpret implications of empirical results for Iceland in an international perspective Þjóðarspegillinn 2006: Sjöunda ráðstefna um rannsóknir í félagsvísindum
Earlier Research Trade literature: Gravity models increasingly popular for estimating FDI Brainard (1997) Mody, Razin and Sadka (2003) Fixed country and sector effects Jeon and Stone (1999) and di Mauro (2000) used countries and sectors Razin, Rubinstein, and Sadka (2004) Þjóðarspegillinn 2006: Sjöunda ráðstefna um rannsóknir í félagsvísindum
Fixed cost and FDI FDI Market Size Þjóðarspegillinn 2006: Sjöunda ráðstefna um rannsóknir í félagsvísindum
Data used in this research The data used in the research is unique: Data on Foreign Direct Investment in Iceland on the 24 countries having OECD membership throughout the period estimated FDI: Foreign ownership of controlling stock in a particular firm (generally 10% or more) 24 OECD countries, 4 sectors, 1989-2001 Þjóðarspegillinn 2006: Sjöunda ráðstefna um rannsóknir í félagsvísindum
Data used in this research Turning to the data, our goals are twofold. First, we desire to test the above theoretical predictions, in particular what factors determine whether any FDI takes place at all (i.e. whether profits from FDI exceed those of exporting). Second, we wish to see to what extent estimates from a typical FDI regression may be affected by ignoring the two-stage decision process of whether to undertake FDI (the selection stage) and then, conditional on this, how much FDI to do (the treatment stage). Thus, we will compare the results from a Heckman (1979) two-stage estimation process with those from simple OLS. Þjóðarspegillinn 2006: Sjöunda ráðstefna um rannsóknir í félagsvísindum
Unskilled host country skill(i)-skill(j)>0 Os = Origin for Source Country Unskilled Labor Origin for Host Country = Oh Unskilled host country skill(i)-skill(j)>0 Skilled host country skill(i)-skill(j)<0 Small host country Y(i)-Y(j)>0 Location of Iceland RELATIVE ENDOWMENTS SIZE Sdiff=0 Large host country Y(i)-Y(j)<0 Ydiff=0 Skilled Labor Þjóðarspegillinn 2006: Sjöunda ráðstefna um rannsóknir í félagsvísindum Os = Origin for Source Country Unskilled Labor Origin for Host Country = Oh Unskilled host country skill(i)-skill(j)>0 Skilled host country skill(i)-skill(j)<0 Small host country Y(i)-Y(j)>0 Location of Iceland RELATIVE ENDOWMENTS SIZE Sdiff=0 Large host country Y(i)-Y(j)<0 Ydiff=0 Skilled Labor Os = Origin for Source Country Unskilled Labor Origin for Host Country = Oh Unskilled host country skill(i)-skill(j)>0 Skilled host country skill(i)-skill(j)<0 Small host country Y(i)-Y(j)>0 Location of Iceland RELATIVE ENDOWMENTS SIZE Sdiff=0 Large host country Y(i)-Y(j)<0 Ydiff=0 Skilled Labor Os = Origin for Source Country Unskilled Labor Origin for Host Country = Oh Unskilled host country skill(i)-skill(j)>0 Skilled host country skill(i)-skill(j)<0 Small host country Y(i)-Y(j)>0 Location of Iceland RELATIVE ENDOWMENTS SIZE Sdiff=0 Large host country Y(i)-Y(j)<0 Ydiff=0 Skilled Labor Os = Origin for Source Country Unskilled Labor Origin for Host Country = Oh Unskilled host country skill(i)-skill(j)>0 Skilled host country skill(i)-skill(j)<0 Small host country Y(i)-Y(j)>0 Location of Iceland RELATIVE ENDOWMENTS SIZE Sdiff=0 Large host country Y(i)-Y(j)<0 Ydiff=0 Skilled Labor Os = Origin for Source Country Unskilled Labor Origin for Host Country = Oh Unskilled host country skill(i)-skill(j)>0 Skilled host country skill(i)-skill(j)<0 Small host country Y(i)-Y(j)>0 Location of Iceland RELATIVE ENDOWMENTS SIZE Sdiff=0 Large host country Y(i)-Y(j)<0 Ydiff=0 Skilled Labor Os = Origin for Source Country Unskilled Labor Origin for Host Country = Oh Unskilled host country skill(i)-skill(j)>0 Skilled host country skill(i)-skill(j)<0 Small host country Y(i)-Y(j)>0 Location of Iceland RELATIVE ENDOWMENTS SIZE Sdiff=0 Large host country Y(i)-Y(j)<0 Ydiff=0 Skilled Labor Os = Origin for Source Country Unskilled Labor Origin for Host Country = Oh Unskilled host country skill(i)-skill(j)>0 Skilled host country skill(i)-skill(j)<0 Small host country Y(i)-Y(j)>0 Location of Iceland RELATIVE ENDOWMENTS SIZE Sdiff=0 Large host country Y(i)-Y(j)<0 Ydiff=0 Skilled Labor
Model Setup Bergstrand (1985), basic specification of Gravity Model Yi is GDP of exporting country Yj is GDP of recipient country Dij is distance between economic centers of source and host countries Aij reflects factors that aid or restrict trade between country i and j log-normally distributed error term,E(lnij) = 0 Þjóðarspegillinn 2006: Sjöunda ráðstefna um rannsóknir í félagsvísindum
Model Setup Combination of Gravity Model and Knowledge-Captial (KK) Model Knowledge-Capital model by Carr, Markusen and Maskus (CMM, 2001) Endowment inclusion in gravity model obtained from the KK literature Generally the KK model with incorporation of endowments – skilled / unskilled labor Þjóðarspegillinn 2006: Sjöunda ráðstefna um rannsóknir í félagsvísindum
Model Setup Typical KK model with skilled and unskilled labor may not be the right endowment approach for Iceland Additions here include important factors of endowments - hydro energy supply, oil prices Þjóðarspegillinn 2006: Sjöunda ráðstefna um rannsóknir í félagsvísindum
Model Setup Threshold costs generally not dealt with in FDI empirical models Markusen (2002): fixed cost that MNEs need to consider when undertaking FDI Heckman's (1979) two-step model to control for whether sample selection is driving results Þjóðarspegillinn 2006: Sjöunda ráðstefna um rannsóknir í félagsvísindum
Table 1: FDI Flows into Iceland OLS Heckman 1st step Heckman 2nd step GDPj,t 2.410*** (3.54) -.304 (-0.81) 2.457* (1.74) GDPcapj,t -5.625 (-0.80) 16.365*** (3.85) -36.327 (-0.92) Skillj,t -1.858 (-0.88) 2.396* (1.95) -5.658 (-0.87) Opennessj,t -2.882 (-0.54) -9.226*** (-3.32) 14.027 (0.62) Distancej -9.302** (-2.05) -8.775*** (-3.52) 7.917 (0.36) Hydroj,t -3.920*** (-3.72) -3.774* (-1.83) Oilt -.939 (-0.68) -.796 (-0.28) CO2j,t+1 .788 (0.36) 3.470*** (2.79) -3.829 (-0.54) Hydroj,t-1 .094 (1.03) Oilt-1 .999 (0.96) Constant 28.404 (0.34) -206.797*** (-3.98) 412.251 (0.84) Observations 28 263 Adjusted R2 0.5127 Þjóðarspegillinn 2006: Sjöunda ráðstefna um rannsóknir í félagsvísindum
Table 2: FDI Stock into Iceland OLS Heckman 1st step Heckman 2nd step GDPj,t 2.462*** (12.15) -.304 (-0.81) 2.360*** (3.60) GDPcapj,t -4.788** (-2.47) 16.365*** (3.85) 9.976 (0.54) Skillj,t -1.750*** (-2.62) 2.396* (1.95) .352 (0.12) Opennessj,t 5.068*** (4.11) -9.226*** (-3.32) -2.328 (-0.22) Distancej -1.917* (-1.87) -8.775*** (-3.52) -9.206 (-0.89) Hydroj,t -1.342*** (-4.69) -1.230 (-1.29) Oilt -.392 (-1.00) -.425 (-0.33) CO2j,t+1 .358 (0.68) 3.470*** (2.79) 1.949 (0.59) Hydroj,t-1 .094 (1.03) Oilt-1 .999 (0.96) Constant 25.101 (1.12) -206.797*** (-3.98) -152.871 (-0.67) Observations 44 263 Adjusted R2 0.8969 Þjóðarspegillinn 2006: Sjöunda ráðstefna um rannsóknir í félagsvísindum
Table 3: The Effect of Other FDI on FDI Flows Other FDI Dummy 1st step Other FDI Dummy 2nd step Other FDI 2nd step GDPj,t -.191 (-0.49) 2.509** (2.30) -.335 (-0.87) 2.369*** (3.88) GDPcapj,t 16.547*** (4.05) -29.763 (-1.03) 15.041*** (3.26) -15.871 (-0.85) Skillj,t 2.441*** (2.12) -5.121 (-1.03) 2.249* (1.77) -3.083 (-1.07) Opennessj,t -9.082*** (-3.39) 10.209 (0.62) -9.090*** (-3.20) 2.687 (0.25) Distancej -8.963*** (-3.62) 3.826 (0.24) -8.438*** (-3.31) -3.472 (-0.32) Hydroj,t -3.810** (-2.40) -3.875*** (-4.31) Oilt -.659 (-0.30) -.852 (-0.70) CO2j,t+1 3.611*** (2.84) -2.564 (-0.50) 3.765*** (2.80) -.645 (-0.21) Hydroj,t-1 .080 (0.85) .066 (0.65) Oilt-1 .854 (0.80) 1.090 (1.02) Other FDI Dummyj,t-1 -.354 (-0.74) Other FDIj,t .072 (0.75) Constant -210.823*** (-4.13) 326.338 (0.92) -193.869*** (-3.52) 156.657 (0.67) Observations 263 Þjóðarspegillinn 2006: Sjöunda ráðstefna um rannsóknir í félagsvísindum
Table 4: The Effect of Other FDI on FDI Stock Other FDI Dummy 1st step Other FDI Dummy 2nd step Other FDI 1st step 2nd step GDPj,t -.191 (-0.49) 2.322*** (3.47) -.335 (-0.87) 2.447*** (3.10) GDPcapj,t 16.547*** (4.05) 10.561 (0.60) 15.041*** (3.26) 11.862 (0.49) Skillj,t 2.441*** (2.12) .593 (0.19) 2.249* (1.77) .518 (0.14) Opennessj,t -9.082*** (-3.39) -2.527 (-0.25) -9.090*** (-3.20) -3.250836 (-0.24) Distancej -8.963*** (-3.62) -9.283 (-0.95) -8.438*** (-3.31) -10.394 (-0.76) Hydroj,t -1.229 (-1.26) -1.235 (-1.09) Oilt -.530 (-0.39) -.496 (-0.32) CO2j,t+1 3.611*** (2.84) 1.867 (0.60) 3.765*** (2.80) 2.064 (0.51) Hydroj,t-1 .080 (0.85) .066 (0.65) Oilt-1 .854 (0.80) 1.090 (1.02) Other FDI Dummyj,t-1 -.354 (-0.74) Other FDIj,t .072 (0.75) Constant -210.823*** (-4.13) -157.836 (-0.72) -193.869*** (-3.52) -176.687 (-0.59) Observations 263 Þjóðarspegillinn 2006: Sjöunda ráðstefna um rannsóknir í félagsvísindum
Conclusions High skilled, small economy,mainly greenfield FDI ind GM and KK model combination useful for explaining fixed FDI costs OLS versus Heckman 2 step estimates indicate the importance of fixed costs Þjóðarspegillinn 2006: Sjöunda ráðstefna um rannsóknir í félagsvísindum
Þjóðarspegillinn 2006: Sjöunda ráðstefna um rannsóknir í félagsvísindum