1. Literature review WP6 Natalya Tourdyeva (CEFIR)

2. WP6 in the DOW  The aim of WP6 is to develop the international module of the SUST-RUS assessment model which includes the representation of the flows of goods, capital and labour between Russia and several major foreign geographic areas.

3. Literature review in DOW  Literature review  applied model + relevant theoretical approaches  Developing the methodological approach  Armington approach to international trade  Major trade links between Russia, EU and ROW  The depletion of Russia’s natural resources  The FDI flows between Russia, EU and ROW  Decision making mechanisms about the delocalization of the economic activities  Channels via which the FDI flows influence the economic development of Russia

4. FDI in DOW  FDI is explicitly described, with a developed methodological approach both theoretically consistent  agents' behaviour,  domestic investment setting  consistent with the results of the empirical econometric studies about the FDI’s determinants  Two types of FDI are looked at:  Purchase of foreign firms by investors (Brownfield investment),  Building of new firms (Greenfield investment).

5. Set of decisions: dynamics  Nature of model dynamics:  Recursive dynamic Vs. perfect foresight model  Depletion of natural resources?  Nature of Investment decision?

6. Set of decisions: capital  Physical (producing) capital or financial flows?  Nature of capital mobility:  Sector-specific fixed capital  Interpretation: short-run constrains on capital mobility  Sector and region-specific return on capital  Capital is mobile across industries but fixed regionally  Interpretation: capital/investment controls prevent cross- regional capital flows inside the country  Regional return on capital  Capital is mobile across industries and regions in the country but is immobile internationally  Country-level return on capital  Perfect capital mobility – global capital market

7. Set of decisions: investment  Nature of cross-boarder capital flows:  Capital flows due to the investment demand  Nickell 1978, Lemelin and Decaluwe 2007  Firm maximizes the present value of its cash flows subject to the capital accumulation constrains  Perfect foresight on the firm’s side  “The main disadvantage of the investment demand specification lies in the high volatility of results and in the fact that it allows for negative investment (disinvestment) - a feature that could generate strange welfare results.” (Lakatos and Walmsley, 2009)

8. Set of decisions: investment  Nature of cross-boarder capital flows:  Capital flows due to the investment supply  Petri 1997  Portfolio diversification problem: household’s wealth is allocated at the beginning of each period subject to a diversification constraint (CES-type supply function)  Investment decisions are differentiated by the country of origin and characterized by an imperfect substitution  Investments are driven by the relative rates of return  There is a possibility of recursive dynamics

9. Set of decisions: investment  Nature of cross-boarder capital flows:  Capital flows due to the investment supply  “The model is calibrated on bilateral/sectoral investment stocks data and it could be considered as less volatile than the investment demand specification calibrated on investment flows. As a critique to this method, we can argue that rates of return, especially in real asset CGE models, cannot be interpreted as a “price”, but more like the ratio of two prices that are driven by other mechanisms in the model.” (Lakatos and Walmsley, 2009)

10. Set of decisions: investment  Nature of cross-boarder capital flows:  Capital flows due to the investment supply  Data for calibration of bilateral FDI flows and stocks  CEPII, (Boumellassa, Gouel, and Laborde 2007)  “…this database is fully consistent, balanced and suitable for use in a CGE work.” (Lakatos and Walmsley, 2009)

11. Set of decisions: investment  Nature of cross-boarder capital flows:  Capital flows due to the multi-national enterprises’ operations  Markusen, Rutherford and Tarr (2000), Markusen and Maskus (2001)  Scale effects of industry-specific factor trade within the multinationals  Product variety assumption in MNE sectors  No constraints on the nature of dynamics  Data: ownership share

12. Beyond the DOW  Literature on  Trade and environment  FDI and environment

13. References  Lakatos, Csilla, and Terrie Walmsley (2009) Modeling cross-border investment in CGE: some alternatives and mechanism, GTAP  Boumellassa, H. and Gouel, C. and Laborde, D. (2007). A Multisector, Multi- country FDI database for GTAP. 10th Annual GTAP Conference, Purdue University, USA  Lemelin, A. and Decaluwe, B. (2007). Issues in Recursive Dynamic CGE Modeling: Investment by Destination, Savings and Public Debt A Survey. CIRPEE working paper.  Nickell, SJ. (1978). The Investment Decisions of Firms. James Nisbet & Co Ltd.  Petri, P.A. (1997). Foreign Direct Investment in a Computable General Equilibrium Framework. Conference, Making APEC Work: Economic Challenges and Policy Alternatives.  Markusen, James R, Thomas Rutherford and David Tarr (2000), Foreign Direct Investment in Services and the Domestic Market for Expertise,” Policy and Research Working Paper 2413, Washington D.C.: The World Bank.  Markusen, James R. and Keith E. Maskus (2001) General-Equilibrium Approaches to the Multinational Firm: A review of theory and Evidence, NBER Working paper 8334