🗊Презентация International Trade: Theory and Policy Lecture 14

International Trade: Theory and Policy Lecture 14 December, 2016 Instructor: Natalia Davidson Lecture is prepared by Prof. Sergey Kadochnikov, Natalia Davidson

Topics 9-11. International economic integration. International production factor migration. Lecture 13 International economic integration. International production factor migration (labor, foreign direct investment [FDI], portfolio investment): theories and facts. 2.1. Theorem on gains from international production factor migration. 2.2. International production factor movement and international trade as substitutes and complements: Ricardo model and H-O-S model. Lecture 14 3. Foreign direct investment (FDI). 3.1. FDI: empirical evidence. 3.2. OLI-paradigm and MNC strategies (John Dunning). 3.3. The model of multi-plant firm: the choice between export and FDI (James Markusen). 3.4. Transfer of knowledge capital through FDI (James Markusen). 3.5. Example: FDI location choice in Russia.

(3.1.) FDI: empirical evidence

FDI in transition countries of Central and Eastern Europe (CEEs) – comparison with the other countries Carstensen, K. and F. Toubal, (2004) Foreign direct investment in Central and Eastern European countries: a dynamic panel analysis, Journal of Comparative Economics, 32 (1), 3-22. – a paper on FDI determinants.

Enterprise performance: the role of foreign firms Enterprise performance: the role of foreign firms Literature: theory and empirics FDI: direct effects and productivity spillovers – horizontal, vertical and supply-backward ones (Smarzynska-Javorcik, 2004; Merlevede, Schoors, 2008). FDI affects firm productivity, (financial) infrastructure, quality of labour force, variety of resources. Size and sign of FDI effects vary with distance between foreign subsidiary and national firm, time period of technology transfer, host country institutional and political characteristics, industry characteristics, MNC strategies, size, national firms’ productivity and absorptive capacity, technological gap (Borenzstein et al. 1998; Hall, Jones, 1999; Bekes et al. 2009; Damijan et al., 2013). Example. National firms’ characteristics: ability and motivation of national firms to absorb foreign technologies (Blomstrom and Kokko, 2003; Castelani, Pieri, 2010)

Enterprise performance: the role of foreign firms Enterprise performance: the role of foreign firms Literature: empirics FDI may enhance productivity in the industry; change in comparative advantage for a country / region (Crozet et al., 2004) Firms with FDI - a source of positive localization externalities, while domestic firms - of negative ones (Bode et al. (2009) based on the USA states data for 1977-2003) Firms in the developed countries have larger FDI spillovers, probably due to higher absorptive capacity (Smarzynska-Javorcik, 2004; Bode et al., 2009) Transition countries Beginning of transition: more evidence on positive vertical than horizontal spillovers (Merlevede and Schoors, 2008; Smarzynska-Javorcik, 2004; Stancik, 2007) Later: positive horizontal spillovers, with growing importance during the recent ten years; negative horizontal spillovers – for smaller firms, low to medium productivity firms (Damijan et al., 2013) Russia Positive horizontal FDI effects in the Russian regions with diversified economic structure, and negative effects in specialized regions for the years 1999-2008 (Drapkin et al., 2011) The role of FDI in Russia’s accession to the World Trade Organization: crucial factors for the national welfare gains are FDI in business services and endogenous productivity effects generated by additional varieties of business services and goods (Rutherford and Tarr, 2008)

(3.2.) OLI-paradigm and MNC strategies (John Dunning) OLI paradigm (John Dunning) O – ownership advantages L – location advantages I – internalization advantages The choice between exporting, licensing and FDI

MNC strategies MNC strategies Market seeking (поиск рынка) Efficiency seeking (поиск эффективности ) Asset seeking (поиск активов ) Natural resources seeking (поиск ресурсов ) Modern MNCs: Mixed strategies (a combination of the ones listed above) Dunning J.H. Multinational enterprises and the global economy. Wokingham: Addison-Wesley, 1993. / Михайлова А.А. Роль ПЗИ в экономике стран-реципиентов// Экономическая наука современной России. – № 3 (46) 2009. – 84-93. Wladimir Andreff. Lectures at the Faculty of Economics, Ural State University. 2009.

(3.3.) The model of multi-plant firm: the choice between export an FDI (James Markusen) The ‘O’ and ‘L’ advantages are modeled. Assumptions: Technologies with increasing returns to scale (IRS) Two types of economies from scale: At the firm level. At the plant level. 3. Constant marginal costs. 4. Export is associated with transport costs. 5. Two countries: h, f (the firm considers a possibility of work in two countries). The choice between export and FDI. Derivations and conclusions of the model: during the lecture

(3.4.) The model of multi-plant firm: transfer of knowledge capital through FDI (James Markusen)

(3.4.) The model of multi-plant firm: transfer of knowledge capital through FDI (James Markusen)

Conclusions on the FDI effects Conclusions based on the model considered above FDI improves welfare in the host country if MNC sells at a price lower than average costs in autarky: , or lower than price of imported good: pm < p*. MNC can repatriate or reinvest its profits; within the model considered above a country benefits from FDI if the MNC reinvests its profits. Other ideas about FDI FDI lead to GDP growth, but some production factor may loose because of production reallocation. Among the important aspects are the impact of FDI on technological development and changes in such indicators as wage or income, employment, poverty level.

Source: Davidson (2013) Source: Davidson (2013) List of agglomeration centers – 17 cities (Gonchar (2008), Vorobyev et al. (2010)) Lists of monotowns: Monotowns in Russia: how to survive crisis? Institute for regional policy (2008) , Zubarevich (2010)

Source: Davidson (2013) Source: Davidson (2013) List of agglomeration centers – 17 cities (Gonchar (2008), Vorobyev et al. (2010)) Lists of monotowns: Monotowns in Russia: how to survive crisis? Institute for regional policy (2008) , Zubarevich (2010)

Source: Gonchar, Marek (2013) Natural resource or market seeking FDI in Russia?... (data: 2000-2009) Source: Gonchar, Marek (2013) Natural resource or market seeking FDI in Russia?... (data: 2000-2009)

Example 1: automobile industry Example 1: automobile industry Intermediate goods producers for automobile industry Foreign producers of glass and of tires: from import to location in Russia Source: Expert, September – December 2013 Avtovaz (Public joint stock company): automobile brands Lada and Nissan. Partner of Renault-Nissan Alliance (31.12.12: Renault s.a.s.: 25% of authorized capita; 26.03.13: Alliance Rostec Auto B.V. 74.51%). Production in Tolyatti and Izhevsk. About 20% of passenger cars market in Russia. Total number of employees is about 66,000. Avtovaz works in 46 countries. Avtovaz group works in more than 17 countries and contains 270 affiliates. It is involved in telecommunications, power engineering, construction, financial services and insurances. Source: http://group.avtovaz.ru/; 2012 report. Example 2: Sverdlovsk region Over 400 joint ventures with foreign investment from 64 countries, over 300 representative offices of foreign firms: Cyprus, Germany, USA, Great Britain etc Companies: Philips, ABB, National Oilwell, Duferco, Lufthansa, Coca-cola, Pepsi, Henkei, Wrengley's, Ford, Audi, Volvo and others Companies with100% of foreign capital: ‘Pepsi International Bottlers ltd.’, ‘VIZ-Steel ltd’, and others Source: Information agency http://polpred.com/?cnt=195&fo=5&obl=58&dsc=1

Start revising for the exam. Office hours: Upon agreement (i.e. if you need additional consultation, tell me, please) E-mail: natalya.davidson@gmail.com (Наталья Борисовна Давидсон)