Wiener Institut für Internationale Wirtschaftsvergleiche The Vienna Institute for International Economic Studies Good or bad? The influence of FDI on output growth An industry-level analysis Carmen Fillat Castejón University of Zaragoza and Julia Wörz wiiw – Wiener Institut für Internationale Wirtschaftsvergleiche and Tinbergen Institute, EUR EUROFRAME Conference, Vienna 2005

2 Introduction > FDI adds to the capital stock > FDI transfers knowledge and technologies > FDI creates spillovers > FDI exploits the host country and depletes its resources

3 Introduction Further: „FDI needs to fall on fertile ground“ > Absorptive capacity of the host country is important (i.e. Borensztein et al., 1998)

4 Literature > Abundant, but: > Not always conclusive! > Mostly at the macro-level > Or at the micro level: firm data sets, however, international comparisons difficult

5 Literature > 3 unresolved issues: 1.Causality 2.Sign of the effect 3.Heterogeneity

6 This paper > Ambiguity in the sign of the effect is related to Heterogeneity > 2 sources of heterogeneity: Across countries Across industries

7 Data > 26 – 35 countries > > 8 industries: Food, Textiles/Wood, PETCHEM, Metals, electr. Machinery, Transport equ., Other man., NA. > Collected from various sources: –UNIDO: output, investment –wiiw: CEECs –UN COMTRADE: trade –WDI: Prices, GDP pc, etc. –OECD: FDI (OECD) –UNCTAD: FDI (Asia) –ASEAN secretariat: FDI (ASEAN) –wiiw: FDI (CEEC) –Other

8 Allocation of FDI across industries

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10 Heterogeneity across countries and Industries

11 Empirical Model > Following Nair-Reichert and Weinhold (2001): where Y…output FDI…share of FDI in output INV…share of investment in output EX…share of exports in output G…growth of resp. variable i…industry c…country t…year

12 Empirical Model > Basic model is extended to include interactions between: 1. FDI and investment 2. FDI and openness 3. FDI and p.c. income

13 Impact of FDI on output growth

14 Impact of FDI on output growth

15 Impact of FDI on output growth

16 Impact of FDI on productivity growth

17 Impact of FDI on productivity growth

18 Impact of FDI in CEECs

19 Conclusions > Effect of FDI on growth depends on:  stage of development together with industry that receives FDI,  plus interactions between level of existing capital stock, export orientation of receiving industry > Differences between OECD, non-OECD and CEECs:  OECD: transport industry  Non-OECD: Textiles / Wood  CEECs: electrical Machinery