FDI asymmetries in emerging economies: the case of Colombia (original) (raw)

MACROECONOMIC AND WELFARE EFFECTS OF AN FDI SURGE: A DYNAMIC GENERAL EQUILIBRIUM ANALYSIS

This paper uses a dynamic general equilibrium model to explore the macroeconomic as well as welfare effects of a large increase in FDI, such as that experienced recently by a number of emerging economies. The basic quantitative analysis of the model shows that for an economy with free access to the international financial market, a large FDI capital inflow leads to a surplus in the current account, but does not have large effects on other macroeconomic variables. The macroeconomic effects are more pronounced, however, for an economy not well integrated with the global financial market. The analysis also measures the net welfare effect of FDI to examine whether benefits of technology transfer outweigh the loss due to repatriation of monopoly profits. FDI is, in fact, found to lead to a net welfare loss in the absence of technology spillovers. The choice of the exchange rate regime or the degree of nominal rigidities has little effect on this result. The net welfare loss is higher, moreover, if foreign firms are more productive.

An analysis of devaluations and output dynamics in Latin America using an estimated DSGE model

This paper analyses the effects of currency devaluations on output in Chile, Colombia and Mexico using an estimated DSGE model. The model assesses the relative importance of two main transmis-sion channels: the expenditure-switching and the balance sheet effects. Maximum likelihood estimates of the model for these economies indicate that on average during the last two decades explicit devalu-ationary policy shocks have been expansionary in terms of output. In other words, the expenditure-switching effect has dominated the contractionary balance sheet channel. Results also show that the balance sheet effect has been weaker during the last two decades in Mexico than in Colombia or Chile. Finally, the paper shows that the popular view that devaluations are contractionary fails to take into account the specific source of the shock that triggers an equilibrium response of the exchange rate. Specifically, it is shown that adverse external shocks, such as sudden-stops, rather than the exog...

FDI and Income Inequality—Evidence from Latin American Economies

We analyze whether foreign direct investment (FDI) has contributed to the typically wide income gaps in five Latin American host countries. We perform country-specific and panel cointegration techniques to assess the long-run impact of inward FDI stocks on income inequality among households in Bolivia, Chile, Colombia, Mexico and Uruguay. The panel cointegration analysis reveals a significant and positive effect on income inequality. Furthermore, FDI contributed to widening income gaps in all individual sample countries, except for Uruguay. Our findings are robust to the choice of different estimation methods. There is no evidence for reverse causality.

Distributional Effects of FDI: How the Interaction of FDI and Economic Policy Affects Poor Households in Bolivia

Development Policy Review, 2007

This paper provides a computable general equilibrium analysis of the medium to long-run impact of FDI inflows on poverty and income distribution in Bolivia. The CGE analysis addresses several important transmission channels which have been neglected in the empirical literature by (i) investigating the impact of FDI inflows on incomes of urban and rural households; (ii) taking into account informal activities; and (iii) differentiating between various segments of the urban workforce, whereas previous studies are typically confined to the dichotomy between white-collar and blue-collar workers in manufacturing industries. The simulation results suggest that FDI inflows add to Bolivia's investment ratio, enhance economic growth, and reduce poverty. However, the income distribution typically becomes more unequal. In particular, FDI widens income disparities between urban and rural areas Our results point to two levers through which the Bolivian government may promote growthenhancing and poverty-alleviating effects of FDI. First, it seems important to overcome labor market segmentation. Second, complementary public investment in infrastructure may help remove bottlenecks in the absorptive capacity of the economy that tend to limit productive employment of the poor. Yet, simulated policy reforms or alternative productivity scenarios are hardly effective in reducing the divide between urban and rural areas.

FDI Inflows, Price and Exchange Rate Volatility: New Empirical Evidence from Latin America

Sciprints, 2016

This paper investigates the impact of price and real exchange rate volatility on Foreign Direct Investment (FDI) inflows in a panel of 10 Latin American and Caribbean countries, observed between 1990 and 2012. Both price and exchange rate volatility series are estimated through the Generalized Autoregressive Conditional Heteroscedasticity model (GARCH). Our results, obtained employing the Fixed Effects estimator, confirm the theory of hysteresis and option value, in so far it is found a statistically significant negative effect of exchange rate volatility on FDI. Price volatility, instead, turns out to be positive but insignificant. Moreover, we show that human capital and trade openness are key for attracting foreign capital. From the policy perspective, our analysis suggests the importance of stabilization policies as well as the one of government credibility in promoting trade openness and human capital formation.

Fixed Costs and FDI: The Conflicting Effects of Productivity Shocks

The paper develops a model with lumpy setup costs of new investment, which govern the flows of FDI. Foreign investment decisions are two-fold: whether to export FDI and, if so, how much. The first decision is governed by total profitability considerations, whereas the second is governed by marginal profitability considerations. A positive productivity shock in the host country may, on the one hand, increases the volume of the desired FDI flows to the host country but, on the other hand, somewhat counter-intuitively, lowers the likelihood of the making new FDI flows by the source country, at all. Every country is potentially both a source for FDI flows to several host countries, and a host for FDI flows from several source countries. Thus, the model could generate two-way FDI flows, but not all source-host FDI flows get realized. We employ a sample of 24 OECD countries, over the period 1981-1998. We observe many pairs of countries with no FDI flows between them. Zero reported flows c...

Doi: dx.doi.org/10.12804/rev.econ.rosario.17.01.2014.01

2016

We use a large firm level data set to investigate the determinants of foreign direct investment (FDI) in Colombia. We estimate econometric models for the determinants of the probability that a firm receives FDI, as well as for the factors that help to explain the foreign share in a firm's capital. The results show that firms listed on the stock market, involved in foreign trade activities, and operating in sectors with greater capital intensity are more likely to be recipients of FDI. Also, the probability of a firm receiving FDI is directly related to its size.

The role of US based FDI flows for global output dynamics

This paper uses a global vector autoregressive (GVAR) model to analyze the relationship between FDI inflows and output dynamics in a multi-country context. The GVAR model enables us to make two important contributions: First, to model international linkages among a large number of countries, which is a key asset given the diversity of countries involved, and second, to model foreign direct investment and output dynamics jointly. The country-specific small-dimensional vector autoregressive submodels are estimated utilizing a Bayesian version of the model coupled with stochastic search variable selection priors to account for model uncertainty. Using a sample of 15 emerging and advanced economies over the period 1998:Q1 to 2012:Q4, we find that US outbound FDI exerts a positive long-term effect on output. Asian and Latin American economies tend to react faster and also stronger than Western European countries. Forecast error variance decompositions indicate that FDI plays a prominent role in explaining GDP fluctuations, especially in emerging market economies. Our findings provide evidence for policy makers to design macroeconomic policies to attract FDI inflows in the respective countries.. We are indebted to Benedikt Sargant for excellent research support.

Sectoral productivity and spillover effects of FDI in Latin America

2008

Empirical studies analysing productivity effects of FDI in Latin America (LA) are inconclusive. We argue that investigating aggregate FDI masks interesting effects of FDI that take place within and across sectors. Moreover, the potential of FDI to generate productivity effects differs across sectors. For these reasons and because sectoral FDI intensities vary significantly between LA countries and over time we

A Regional Computable General Equilibrium Model for Honduras: Modeling Exogenous Shocks and Policy Alternatives

SSRN Electronic Journal, 2000

In this paper we develop a dynamic regional computable general equilibrium (CGE) model for Guatemala that incorporates regional disaggregated sectors for agriculture. The model is designed to be useful as a development tool for determining the effects of regional investments intended to reduce regional poverty and also to explore policy options to deal with a number of macro and balance-of-payments issues. Our model extends previous modeling work on Guatemala in several ways. First, it develops an updated regional social accounting matrix (SAM) for 2008, coupled with an updated CGE. Second, the CGE is a recursive dynamic model that incorporates unemployment in the short run. Most CGE models are not useful for short-run analysis because they are comparative static models that assume full employment. We specify a fixed minimum wage and an informal sector and use a recursive dynamic framework to solve for the short-run adjustment process that occurs as the economy responds to shocks. Second, the model is regional, permitting us to examine the impact of sectoral development policies, particularly those focused on agriculture. Guatemala has one of the lowest investment rates in Latin America. We show that if the investment share is raised by 4percent over five years, the rate of growth of the economy rises by about .6 percentage points. Guatemala is also quite sensitive to external macro disturbances. Our dynamic model gives a first approximation of the timing and nature of the adjustment over the ten years following various macro disturbances. We show that after ten years most of these shocks are absorbed by changes in the real exchange rate and the composition of output rather than the rate of growth of output. Negative shocks cause a real devaluation and a shift from consumption and non-tradables and towards exports and tradable goods. An important empirical question is whether the adjustment toward the traded goods sector is as flexible as the underlying elasticities in the model imply.