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DIRECT

INVESTMENTAND

INTERNATIONAL

TRADEDireta Wonahausi (1306417515)

Harry Patria (1306417660)

Nurhadi Pancawibowo (130635479)

!ictor " P #atindas (1306355006)


2/17

POTENTIAL ECONOMY-WIDE

EFFECTS OF FDI

The dramatic increase in FDI over the last decade has had atleast three sources:

1. Technological improvements in communications,information processing, and transportation, coupled withnew organizational structures, have enabled rms to

become more eective in e!isting rms.

". The changing framewor# of international competition hasled to the liberalization of capital $ows amongintegration in %urope.

&. Developing countries are increasingl' liberalizing their

regimes for inward foreign investment. These countriesaccounted for &() of total FDI $ows in 1**(, an increaseof "+ ) since 1**+. t present, 1-& of the worlds FDIstoc# located in developing countries, although itremains heavil' concentrated in a few of them.


3/17

FDI’S POTENTIAL EFFECT ON NATIONALECONOMIES (1)

ccording to /tevens and 0ipse' 1**"2, There are twoimplication:

1. FINANCIAL IMPLICATION 3 The eect is indirect4

Focuses on possible “substitution efects betweendomestic and oreign investment”.

Limited Budget Constraint, The cost o borrowingincreases with indebtedness make the decision to invest inabroad oreclose the possibilit o investing at home.

!mpirical evidence ound that substitute efect dominated"# $irms% Berbedos &'(()*+ using utch ata, #vensson

&'((-* using #wedish ata. / investment decline, e0pansion o output, variet and

1ualit will be reduce. There can lead to market sharereduce and potentiall non+price competitiveness decline&!rkel 2ousse et al., '(((*.


4/17

FDI’S POTENTIAL EFFECT ONNATIONAL ECONOMIES (2)

2. PRODUCTION IMPLICATION 3 The eect more directnature4

5ased on 6ainstream Theor' about FDI and endogenousgrowth model. There are " two2 distinction benet from

spillovers: 3ori4ontal spillovers, Foreign a7liates tend to hire more

8ualied wor#ers and manage more e7cientl'

5ertical spillovers, foreign a7liates need e7cientsuppliers. The a7liates train local rms upstream od

induce cascading investments.

FDI can be e!pected to contribute to the rate oftechnological progress in the 9ost countr' Findla', 1*(2.


5/17

TO SUM UP …

FDI tends to enhanced economic growth in host countriesprimaril' through spillover eect associated with thetransfer of technolog' and #nowledge.

There are interactions between dierent #inds of eects,including those on competition and technological spillover.

The development level of host countries, and the policiesthe' pursue, in$uence their abilit' to absorb technolog'.


6/17

TRADE & FDI PERSPECTIVES The ;bottom3up< = ;9ome39ost3&rd >art'< perspective

Home

/ubstituting : hurting homes production and emplo'ment

?omplementar' : e!pand mar#et through a7liatecompetitiveness

Hos

/ubstituting : Improve the current account, domesticproduction and emplo'ment

Importation of inputs might impl' a wea#ening of the hostcountr's account

!"#

P$"%7liates: increasing e!port of intermediate products to hostcountr'

@on3a7liates: get benet from FDI in the host countr' orthe host countr' increases e!port to &rd countries

9owever &rd part' competitors ma' lose mar#et share in the


7/17

Ie"$'o e*ee FDI & T"$#e FDI E+e' e*ee se'o"s

s.t. large complementarit' eect on trade.

%!. n investment in the retail sector ma' lead toincreased manufactured e!ports, whereasproduction abroad, at the level of the individual rm,ma' substitute for previous or potential e!ports

FDI m,$'s depend on the organization ofinternational business activities ?aves, 1*"2.

Aertical integration

specialization, trade liberalization, various technoand prices and economies of scale at the plant level

9orizontal Integration

operations resemble those of the parent compan'


8/17

H-POTHESES FDI sse "$#e/ Theoreticall e0plained6

A0e"$e S"$ees 5arlet, 1**"2

Firms can either produce at home and e!port, or produceabroad and substitute local sales of foreign a7liates fore!ports considering economies of scale and transportationcost

P"o3m%4'o'e"$o "$#e o+ 5rainard, 1**&2IB/ limit the number of e7cient plant vs. transportationcost and more generall' trade barriers. 6@? would locatesubsidiaries near their dierent mar#ets and localproduction would be e!pected to displace trade 6ar#usen

and Aenables, 1**C2 FDI 'om,0eme$"% 5o" "$#e/ !mpiricall e0plained 6.

Aarious factors should be observed such as the organizationof rm activit', or the size and income of host countries, or

pro!imit', transport cost and taris, in$uence outcomes. The relationshi has never been addressed in the literature


9/17

MICRO LEVEL EVIDENCEutward FDI results positive impacts on E/ e!ports as wellas a positive correlation between total e!ports of the parent

and the local production of the a7liate 0ipse' and eiss,1*14 1*G2, '78 increase in the share o intra+9rmbilateral trade leads to a :78 increase in trade with thecountr considered /achs and /hatz, 1**G2

9elleiner and 0avergne 1*+2 observed that intra3rmtrade is much more important in E/ trade with othercountries than in other bilateral trade relations. 6icroevidence suggest that the relationship varies over time as

e!plain b' 5ergstern et.al 1*(2. Trade between a7liatesin dierent host countries will graduall' replace tradebetween the home countr' and a7liates >earce, 1*"2.

/wedenborg 1*(", 1*"2 fount that FDI induced e!ports of

intermediate goods, or complementar' suppl' of nished


10/17

MICRO LEVEL EVIDENCE (2)

/vensson 1**H2 found that the complementar' relationship

was overturned in the 1*+s. This impact ma' stem from theadvanced stage of internalization of /wedish 6@?s, but is alsostrongl' in$uenced b' the economic policies pursued in/weden during the 1*+s and the countr's position outsidethe integrating %uropean 6ar#et at that time. /uch conditionshave impacted on the structure of /wedish production5lomstrom and o##o, 1**G2

%?%D 1**G2 found that foreign a7liates in the E/ t'picall'e!port as much and import more than domestic E/ rms. s

well as E/, France with large share of intra3rm tradeconcerns nal products. %ven if local sales partl' substitute forprevious e!ports, but the' need imported inputs.


11/17

MACRO LEVEL EVIDENCE %ven FDI displaces trade at the rm level2, this not appl' at

the industr' or macroeconomic level. Inward and outward

FDI need not have a s'mmetric impact on trade. C0$ss'$0 6eo"% b' 6undell 1*C(2 viewed the mobilit' of

goods and factors as opposing forces. 6igration or FDI leadsfactor rewards, and hence product price.

FDI ma' induce trade or vice versa C$s$0% e*eeFDI $# "$#e

J a large and positive relationship between outward FDI ande!port, as well as imports for both Kapan and E/, but notobtained in the case of inward %aton and Tamura2.

J 9enr' 1**G2 suggest the prevalence of eight possiblecausal eects: %!ports3Imports vs. utward3Inward FDI andutward3Inward FDI vs. %!ports3Imports2.

J M$'"o e#e'e produced var'ing result across countries.For E/ onl' causal relationship is imports causing inwardFDI due to restrictive trade policies in sensitive sectors such


12/17

MACRO LEVEL EVIDENCE (2)

%!port3induced outward investment for Lerman'.

9owever, all these relationships are aected b' a turning point inthe mid31*+s. Beore the mid+'(;7s, there is evidence o man

cases in which trade caused investment &the "nited


13/17

EMPIRICAL EVIDENCEAT THE INDUSTR- LEVEL

T6e Ue# 7#om There is complementarit' with e!ports and imports for both inward

and outward investments $ows

5ut, the net impact on trade is negligible since the increase ine!ports and imports are roughl' similar

F"$'e There is complementarit' with e!ports and imports for both inward and

outward investments $ows

5ut, the net impact on trade is negligible since the increase in e!ports andimports are roughl' similarutward and inward FDI $ows arecomplementar' with e!ports and imports

The potential negative impact of inward investment on the trade balance isassessed b' the high sensitivit' of imports and low sensitivit' of e!ports

%ach dollar of outward investment is associated with a &C cent tradesurplus

%ach dollar of inward investment is associated with a 1" cent trade decit


14/17


15/17

EMPIRICAL EVIDENCEAT THE INDUSTR- LEVEL

Co'0so The short term direct eects of FDI $ows on the trade

balance tend to be detrimental to the host countr'

In the long run, the impact ma' well vanish as aresult of spillovers, technological progress and growth


16/17

CONCLUSION AND POLIC- ISSUES

T6e Ue# 7#om

There is complementarit' with e!ports and imports for both inwardand outward investments $ows

5ut, the net impact on trade is negligible since the increase ine!ports and imports are roughl' similar

F"$'e There is complementarit' with e!ports and imports for both inward and

outward investments $ows

5ut, the net impact on trade is negligible since the increase in e!ports andimports are roughl' similarutward and inward FDI $ows arecomplementar' with e!ports and imports

The potential negative impact of inward investment on the trade balance isassessed b' the high sensitivit' of imports and low sensitivit' of e!ports

%ach dollar of outward investment is associated with a &C cent tradesurplus

%ach dollar of inward investment is associated with a 1" cent trade decit


17/17

CRITICAL REVIE<

FDI impacts depend on the organization ofinternational business activities. There is noe!planation on impact of other parameters despiteeconomies of scale in terms of horizontal = verticalintegrationM

0ess e!planation on impact FDI in developing countrieswhich depend on trade polic' and more generall'

trade barriers and non3trade barriers. This paper anal'zed d'namicall' the relation between

FDI = Trade. Thus, it should be better to consider otherattributes associated with the investment, including

positive spillovers of technolog' and managementpractices which enhance competitiveness. in the longrun, the impact ma' well vanish as a result of thosespillovers, which the short3term impact is associated

with induced imports of intermediate and capitalgoods as a source of much of the spillovers2

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