1. Bridging the Gap: the Role of Trade and FDI in the Mediterranean Effect of FDI on the Productivity of the Egyptian Industrial Sector Nada Massoud Naples, June 2006

2. Effect of FDI on the Productivity of the Egyptian Industrial Sector 1. Can Egypt Benefit from FDI Productivity Spillovers? 2. Are there any Productivity Spillovers? 3. What Factors affect the Direction of Spillovers?

3. Effect of FDI on the Productivity of the Egyptian Industrial Sector 1. Can Egypt Benefit from FDI Productivity Spillovers? A- Comparative Productivity of Foreign and Domestic firms B- Egypt’s Absorptive Capacity

4. Productivity Comparison between Foreign and Domestic Firms –Average Productivity per Worker: Real output per worker –Total Factor Productivity: A residual from regressing the real value added of the each industry on the capital stock and the number of employees of the industry Can Egypt Benefit from FDI Productivity Spillovers?

5. Productivity Comparison between Foreign and Domestic Firms TFPAverage Productivity Higher Manufacturing Industries Higher Textiles, Garments and Leather Higher Paper & Products and Printing & Publications Higher Chemical Products LowerHigherBuilding Material Higher Basic Metal Products Higher Machinery and Equipment Higher Other Manufacturing Source: CAPMAS, GOFI, and GAFI unpublished data

6. Productivity Comparison between Foreign and Domestic Firms In general, based on the Average Productivity per Worker and TFP Foreign firms are more productive

7. Can Egypt Benefit from FDI Productivity Spillovers Egypt’s Absorptive Capacity –Technology Gap (Controversial) –Human Capital –Financial Development –Institutional Quality

8. Egypt’s Absorptive Capacity Source: Calculated from the WDI, World Bank website, www.worldbank.org Technology Gap: Threshold by Li and Liu 2005: 12.6% - 5.00 10.00 15.00 20.00 25.00 30.00 1984198719901993199519619971998199920002001200320042005 Years Gap Egypt's Technology GapTechnology Threshold (US GDP per Capita - Egypt GDP per Capita)/Egypt GDP Per Capita (1984-2005)

9. Egypt’s Absorptive Capacity 0.00 2.00 4.00 6.00 19801985199019952000 Yrs of schooling years Average Years of SchoolingBorensztein Educational Threshold Average Years of Secondary Schooling of the Male Population above 25 years (1980-2000) Source: Barro and Lee 2000 Human Capital Quality: Threshold by Borensztein 0.52

10. Egypt’s Absorptive Capacity Source: World Bank website, www.worldbank.org Financial Development: Threshold by SB: 13%, by HL: 12%

11. Egypt’s Absorptive Capacity Source: World Bank Governance and Anti-Corruption, http://info.worldbank.org/governance/kkz2004/country_report.asp?countryid=67 Egypt’s Institutional Quality Assessment, (1996-2004) Institutional Quality: Threshold by Kaufmann: -0.84

12. Egypt’s Absorptive Capacity Above ThresholdBelow Threshold yesTechnology Gap yesHuman Capital yesFinancial Development yesInstitutional Quality

13. Higher productivity for foreign firms Sufficient absorptive capacity There is room for Egypt to benefit from FDI productivity spillovers Can Egypt Benefit from FDI Productivity Spillovers?

14. Are there Any Productivity Spillovers? Horizontal Spillovers: Intra-Industry Vertical Spillovers: Inter-Industry Through regressing a linear function for the period 1984-2005 based on an unbalanced panel data set of industrial production that includes 12 industries at the 12-digit ISIC classification

15. Are there Any Productivity Spillovers? Variable SpecificationVariable Dependant Variable Total value added / Total # of employeesProductivity Independent Variables Employees in foreign firms / Total employeesForeign Presence Total Fixed assets / Total # of employeesCapital Intensity While-collars / Blue-collarsHuman Capital Average gross production by domestic plants / gross production of the largest domestic plant Scale ∑ squared individual plants production sharesConcentration

16. Horizontal Spillovers All sectors had no significant spillovers, except three sectors: –Two had positive productivity spillovers to domestic firms: Oil and Natural Gas – Machinery and Equipment –One had negative effect on the productivity of domestic firms: Textiles, Garments and Leather

17. Vertical Spillovers Backward Linkages Forward Linkages Used a cut-off point that the industry i must demand/supply at least 5% of gross output in industry j, based on Egypt’s Input- Output tables.

18. Vertical Spillovers Backward Linkages No backward spillovers in all sectors which implies: –TNCs depend on importing their inputs (consistent with FDI effect on imports from other studies and surveys)

19. Vertical Spillovers Forward Linkages: Negative Spillovers from three sectors: Oil and Gas, Manufacturing Industries, and Building Material Positive Spillovers from one sector: Machinery and Equipment

20. Are There Any Productivity Spillovers? Intra-industry spillovers in less than 20% of the examined sectors No Backward inter-industry spillovers Forward inter-industry spillovers in 20% of the studied sectors, and negative in the rest Spillovers are not on a large scale despite Egypt’s sufficient absorptive capacity and the higher productivity of foreign firms

21. What are the Factors Affecting the Direction of Spillovers? Size of Technology Gap Industry Characteristics Foreign Market Share in the Industry

22. Size of Technology Gap within a specific industry No Pattern Observed Gross Value Added per Worker in Foreign Firms to that of Egyptian Firms (1984-2005) Source: GOFI 2005, unpublished data Average Capital Intensity in Manufacturing and Extraction Industries (1984-2005)

23. Industry Characteristics Average Capital Intensity Average Productivity

24. Industry Characteristics No pattern observed Source: CAPMAS 2005, unpublished data Average Capital Intensity in Manufacturing and Extraction Industries (1984-2005)

25. Industry Characteristics No pattern observed 0 5 10 15 20 25 30 2229313233343536373839 Industries Productivity Average Productivity of Manufacturing and Extraction Industries (1984-2005) Source: CAMPAS 2005, unpublished data

26. Foreign Market Share in the Industry Industries with foreign participation of 5% or more witnessed horizontal productivity spillovers 0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 382329313233343536 3922 Industries % Average Foreign Participation in the Manufacturing and Extraction Industries (1984-2005)

27. Conclusion What is the absorptive capacity of Egypt? 2. Are Foreign Companies more productive than Domestic Companies? 3. Are there horizontal productivity spillovers from foreign to domestic companies? 4. Are there vertical productivity spillovers from foreign to domestic companies? 5. What are the overall productivity effects of TNCs on the Egyptian manufacturing sector? 6. What are the factors affecting the magnitude and direction of spillovers? 1. Are Foreign Companies more productive than Domestic Companies? Yes 2. What is the absorptive capacity of Egypt? Above thresholds 3. Are there horizontal productivity spillovers from foreign to domestic companies? Mixed Effects 4. Are there vertical productivity spillovers from foreign to domestic companies? Mixed Effects 5. What are the factors affecting the direction of spillovers? Foreign market share more than 5%

28. Conclusion Further investigation is needed to test the effect of: –FDI mode of entry –Nationality of the existing affiliates –Institutional/individual nature of FDI