Contribution of FDI inflows to the Efficiency of Investment Assaf Razin

Corporate Governance What is the essential difference between FDI and FPI from the point of view of corporate governance?

FDI has been growing faster than world income

FDI FLOWS: FAMILIAR FEATURES FDI has been growing faster than world GDP. Commercial motives for offshore production: access to domestic markets, access to lower price inputs, tariff jumping. Government influence on offshore production: foreign tax, domestic tax, foreign labor market policies, domestic labor market policies, foreign tariffs, foreign merger law, and domestic merger law.

Main Points of the Talk FDI promotes growth through a higher amount and more efficient allocation of investment. Gains to the host country depend on foreign industry specific cost advantage in cream- skimming efficient projects, host-country corporate transparency, and degree of competition among FDI investors

Empirical Strategy:Comparing gravity equations Imports of goods Inflows of FDI Inflows of FPI

Table 2: Determinants of Growth OLS TSLS Foreign Direct Investment, FDI 0.09 (3.0) 0.20 (5.0) Long run effect[1] of FDI on DY[1] Loan Inflows, L 0.01 (0.2) 0.02 (0.4) Long run effect of L on DY Portfolio Inflows, P 0.05 (0.6) 0.10 (1.0) Long run effect of P on DY

Determinants of FDI Inflows OLS TSLS Output Growth, DY 0.02 (1.3) 0.05 (2.2) Lagged Foreign Direct Investment, FDI(-1) 0.45 (13.4) 0.49 (13.4) Domestic Investment, I 0.07 (3.8) 0.08 (3.7)

A Theory

Fraction of industry with efficient investment is larger when FDI inflows finance domestic investment rather than FPI inflows.