The effects of FDI on host

country export performance

(Austria)

A presentation by; AJang Elvis Ngwesse

Supervised by; Prof. Joseph Francois

Overview

• Research objective and hypothesis

• Theoretical consideration

• Empirical evidence

• Trends in Austria

• The Austrian economy

• Data description

• Methodology

• Results and Conclusion

Research objectives and Hypothesis

• The main objective of this study is to investigate the impact of FDI on export performance in Austria during the period (1970-2005).

• We hypothesize that the inflow of FDI has impacted export growth positively during the period (1970-2005).

Theoretical considerations The New Growth Theory.• It views technological progress as a product of economic activity. It also

suggests that knowledge and technology are characterised by increasing returns (Cortright, 2001).

• Investment in human capital contributes to increasing returns, the more resources devoted to R&D the faster the rate of innovation and the higher the rate of growth (Teixeira and Fortuna , 2003).

• FDI is expected to generate growth by encouraging the incorporation of new inputs and foreign technologies into host countries economy.

• The transfer of advanced technology strengthens the host country’s

existing stock of knowledge through labour training, skill acquisition, and the introduction of better management practices (Sjoholm , 1999).

• As a consequence, FDI increases productivity in the recipient economy, and FDI can be deemed to be a catalyst for domestic investment and technological progress (Markusen, 1999).

The OLI Theory

It seeks to explain why multinationals move across boarders.

It argues that the combination of ownership, location, and internalization advantages explains the decision to establish production subsidiaries abroad (Cuervo-Cazurra, 2008).

Ownership advantage, e.g. rights to a particular technology. Locational advantage, availability of endowments. At home or abroad? internalization advantage, advantages of not licensing or leasing but

internalizing e.g. risk of copying.

Ownership (O) advantages, location (L) attraction, and internalization (I) benefits interact to determine the extent of foreign production activities of MNEs termed foreign direct investment (FDI).

Author Country Data Findings Results

Zhang & Song 2000

China (1984-1997)

Panel data on manufacturing

Export growth & FDI

FDI promotes export

Jacorcik 2004 Lithuania Firm level panel data

MNC & spillovers effect

Existence of positive spillovers

Kutan and Vukšic 2007

12 transition economies

Panel data analyses

FDI & export performance

Positive spillovers by MNC

Jordaan 2008 Mexico Manufacturing industries

Externalities of FDI

Positive externalities

Empirical evidence on FDI and economic growth

Trends in Austria

• Austria´s exports have grown much faster over the period 1995-2005.

• Percapita GDP has also been on a rise since the early 1970´s.

• Unit labour productivity which represents Austria´s competitiveness in manufacturing has been oon a decline.

• Trading partners have increased since Austria joined the EU.

• There have been a continues inflow of FDI with the inflow into service industries surpasing the inflow into manufacturing.

• There appear to be a number of contributing factors including FDI inflows which have been rising consistently since the early 1990´s.

• If FDI leads to export growth, then policicies in attracting FDI are justified! We attempt to adress these issues in this study.

The Austrian economy

Exports % GDP (1970-2006)30

3540

4550

55

1970 1980 1990 2000 2010Years

Source: WDI, 2009

The Austrian economy

Merchandise/Service exports Mill $ (1980-2007)0

50

00

01

00

00

01

50

00

0

1980 1990 2000 2010YEAR

service exports Merchandise export

Source: UNCTAD

The Austrian economy

Productivity in manufacturing (trading partners)

Luxembourg

Norway

France

Austria

Netherlands

Italy

Germany

UK

Switzerland

Japan

Czech Rep

Hungary

Poland

0 20 40 60 80

1

Poland

Hungary

Czech Rep

Japan

Switzerland

UK

Germany

Italy

Netherlands

Austria

France

Norway

Luxembourg

Source: World competitive year book 2008 (GDP per person employed per hour, in US$).

The Austrian economy

Export Destination by country in %

EU

Germany

Italy

France

Switerland

US

Hungary

0 10 20 30 40 50 60 70

1

Hungary

US

Switerland

France

Italy

Germany

EU

Source:OeNB 2007

Inward FDI share by industry (1999-2006)Year 1999 2000 2001 2002 2003 2004 2005 2006

Agriculture, Forestry, Fishing 35 35 37 39 19 19 23 19

Mining and quarrying 257 286 336 332 345 373 386 336

Food, beverages and tobacco 378 631 647 878 297 244 2,643 300

Textiles, clothing and leather 232 252 262 243 245 215 246 246

Wood and wood products 22 50 53 47 43 53 51 62

Paper and paper products; printing 803 783 777 1,099 1,130 1,191 1,323 1,629

Chemicals, rubber and plastic products 2,641 2,529 2,527 3,732 3,074 4,223 3,302 3,017

Non-metallic mineral products 409 468 539 540 572 508 634 690

Metal and metal products 504 584 622 668 673 684 807 801

Machinery and equipment 730 1,149 1,189 1,358 1,110 1,107 1,137 1,254

Electrical, electronic and optical equipment 1,240 2,286 2,941 2,425 2,226 2,143 1,614 1,115

Motor vehicles and other transport equipment 387 412 497 487 434 426 376 539

Other manufacturing; recycling 74 86 78 60 61 25 41 21

Electricity, gas and water supply 32 30 31 34 187 220 854 1,323

Construction 81 80 48 70 106 72 77 56

Trade and repair 5,430 6,449 6,401 8,848 10,468 9,020 10,748 12,074

Hotels and restaurants 202 262 274 243 164 195 175 182

Transport, storage and communication 1,191 1,439 1,649 1,457 813 744 2,187 3,702

Banking Insurance 2,895 6,556 7,046 6,446 8,089 10,874 14,465 20,804

Real estate, renting, IT, R&D 6,647 9,066 13,632 13,699 15,512 19,495 28,793 36,040

Public and other services 72 60 127 106 69 85 95 127

Total 24,261 33,493 39,713 42,811 45,635 51,915 69,977 84,337

Production of goods 7,824 9,661 10,585 12,012 10,520 11,503 13,514 11,408

Services 16,437 23,832 29,129 30,798 35,114 40,412 56,463 72,930

Source.OeNB

Inward FDI by share of Goods & Services. 0

20

40

60

80

An

nu

al %

1998 2000 2002 2004 2006Years

goods Services

Inward FDI in Goods & Services

Source: OECD

The Austrian economy

Inward FDI (Mill. Euros)

Germany

FranceItaly

Netherlands

Sweden

United Kingdom

Switzerland,

Liechtenstein

Russia

U.S.AJapan

Spain

Slovenia

Belgium

Hungary

Belgium

Germany

France

Italy

Netherlands

Sweden

Spain

United Kingdom

Slovenia

Hungary

Switzerland, Liechtenstein

Russia

U.S.A

Japan

Source:OeNB

Data

• All of the data used in this study are from secondary sources.

• Some data sources include UNCTAD,IMF,WDI,WIFO,OeNB,OECD,UNESCO.

• The period covered is from 1970-2005

• Some data have missing values e.g Terms of trade

• Most data are aggregate data (FDI) making further findings not possible.

• Poxy for HC Primary/Secondary enrolmenet was not available.

Summary Statistics

stats | FDI EXP TOT REEX GDP

mean | .9063889 36.53833 98.9929 .3666667 2.581143

max | 4.4 53.2 104.52 13.6 6.21

min | .15 28.89 90.46 -13.8 -.36

variance | 1.016527 44.08881 9.098932 33.79657 2.88094

skewness | 1.867783 1.059393 -.7489629 -.0682148 .1361214

kurtosis | 5.896101 3.122904 3.516625 3.42861 2.365281

range | 4.25 24.31 14.06 27.4 6.57

cv | 1.112359 .1817253 .0304713 15.85495 .6575898

Methodology

Model specification. We try to capture the effect of FDI on export by using the following specification.

21143210 DDXLGDPLTOTLREEXLX ttttt

215143210 DDLFDIXLGDPLTOTLREEXLX tttttt

Equation 1. Suppy capacity equation (captured by GDP)

Equation 2. FDI-Specific effect equation (captured by FDI)

X represents Exports, REEX represents the real effective exchange rate, GDP

represents gross domestic product, FDIG represents Foreign Direct

Investment, TOT represents Terms of Trade, D1 represents Dummy for EU

membership, D2 represents Dummy for adoption of Euro, Ε represents Error

term.

Results of Unit Root test for Variables in levels

Variable DF PP ADF Order of

Intergration

X -0.728 1.473 1.348 I(I)

GDP -5.185* -3.704* -5.198* I(0)

TOT -3.044** -3.043** -3.030** I(0)

FDIG -3.059*** -2.836*** -2.831*** I(0)

REXC -4.061 * -5.181* -5.218* I(0)

*, **, *** are Significance levels at 1%, 5%, and 10% respectively

Results of unit root test for transformed variables in first difference

Variable DF PP ADF Order of integration

dxg -4.476* -4.365* -4.457* I(0)

dGDI -11.306* -6.060* -9.015* I(0)

dFdig -10.190 * -12.996 -5.044* I(0)

drexg -8.219 * -10.248 * -6.139* I(0)

dtot -6.025 * -6.155* -3.089* I(0)

*, **, *** are Significance levels at 1%, 5%, and 10% respectively

Co-integration Tests

Variable DF PP ADF Order of integration

residuals -3.502** -3.079** -3.200** I(0)

Result for Unit root tests for the residuals (ECT)

*, **, *** are Significance levels at 1%, 5%, and 10% respectively

Variables Coefficient Standard error

dGDP 0.0534952 0.1100093

X_1 -0.272413** 0.1035256

dTOT -0.0683159 0.086801

dREEX -0.05448415*** 0.0314684

D1995 2.419701* 0.7283057

ECT .3222161** .1261245

Constant 9.234293 3.443196

F-Statistics 3.61

P-Value 0.0114

R-Square 0.4850

Breusch-Pagan / Cook-Weisberg test(Hettest)

0.6852

Breusch-Godfrey LM test for autocorrelation

0.3428

Durbin-Watson d-statistic 2.058662

Autoregressive conditional (Hettest) 0.0563

Observation 30

***,**,*, represent statistical significant levels at 1%, 5% and 10% respectively

Regression results for Supply-Capacity equation

Regression results for FDI-Specific effectsVariables Coefficient Standard error

dGDP 0.0004822 0.0904994

X_1 -0.4770149* 0.1014271

dTOT -0.1399077*** 0.0731762

dFDI 1.485494* 0.4128616

dREEX -0.052764*** 0.0255359

D1995 2.098149* 0.5975733

ECT .5793396 * .1248056

Constant 16.03983 3.373497

F-Statistics 6.55

P-Value 0.0003

R-Square 0.6758

Breusch-Pagan / Cook-Weisberg test(Hettest) 0.9686

Breusch-Godfrey LM test for autocorrelation 0.2941

Durbin-Watson d-statistic 1.642557

Autoregressive conditional (Hettest) 0.2625

Observation 30

***,**,*, represent statistical significant levels at 1%, 5% and 10% respectively

Conclusion

• We find evidence that FDI inflows in the period (1970-2005) contributed to export growth of the Austrian economy.

• GDP was insignificant. This variable was expected to capture increases in the supply capacity of the economy due to FDI inflows.

• Thus FDI did not contribute in increasing the supply capacity. Reasons being most FDI was directed to the service sector while most Austrian exports was from the manufacturing sector.

• Never the less, results show that FDI was significant in increasing exports through spill-over effects i.e. Positive externalities of FDI.

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