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GEP Conference, Malaysia, February 12-13, 2011

For better or worse, in crisis and in boom… Does foreign direct investment promote economic stability in developing and emerging economies?. by Camilla Jensen Nottingham School of Economics Faculty of Arts and Social Sciences University of Nottingham Malaysia Campus.

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GEP Conference, Malaysia, February 12-13, 2011

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  1. For better or worse, in crisis and in boom…Does foreign direct investment promote economic stability in developing and emerging economies? by Camilla JensenNottingham School of EconomicsFaculty of Arts and Social SciencesUniversity of NottinghamMalaysia Campus GEP Conference, Malaysia, February 12-13, 2011

  2. Paper presentation • Research questions • Expected results • Investment, growth and volatility • Foreign direct investment and volatility • Investment equation • Preliminary estimation results • Discussion GEP Conference, Malaysia, February 12-13, 2011

  3. Research Question(s) • Do foreign firms respond differently to uncertainty or volatility? • If they respond differently what is the likely reason for this behaviour? • What role does institutions play in mitigating the impact of or transmission of volatility onto the investment function? GEP Conference, Malaysia, February 12-13, 2011

  4. Expectations • The common opinion about FDI in Europe/Latin America/Africa has been that foreign investors are the first to bail out during crisis or at least the first to stop investing (perhaps because the recent crisis was emanating from the home countries and global in character) • FDI was seen to play a somewhat different role during the Asian Financial Crisis in the late 1990s (perhaps because the crisis was in the host countries and more local in characters) GEP Conference, Malaysia, February 12-13, 2011

  5. Investment, growth and volatility Ramey and Ramey (1995) AER Aizenman and Marion (2003) Economica Nucci and Pozzolo (2006) EER GEP Conference, Malaysia, February 12-13, 2011

  6. Foreign direct investment and volatility Campa (1993) RES - Option value of waiting from perspective of the outside investor Goldberg and Kolstad (1995) IER – Export diversification Aizenman (2003) JDE – Production shifting GEP Conference, Malaysia, February 12-13, 2011

  7. About the data Business Enterprise and Economic Performance Surveys + Global Economic Monitor • both published by the World Bank Figure 1: Volatility and the share of foreign ownership in the sampled countries • About the BEEPS datasets • Cover firms across all regions • Often comparable and collected using same Q • Mostly cross sectional • World regions covered in particular years • Only one fifth of respondents willing to report • financial data • -Half of the countries drop out because of missing • data • -But to date there is no better data to investigate the • role of institutions in a cross country perspective • with outset in firm level data outside the OECD GEP Conference, Malaysia, February 12-13, 2011

  8. GEP Conference, Malaysia, February 12-13, 2011

  9. The Investment Equation GEP Conference, Malaysia, February 12-13, 2011

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  12. Discussion • Initial results confirm that FDI can be a factor of stability during episodes of exchange rate volatility (which is seen as a proxy for uncertainty and nothing else in this paper) • The potential implications of this result is that it may explain why we cannot expect to observe any positive correlation between FDI and growth at the macroeconomic level • Future version should perhaps control for outswings that are value enhancing (deprecations) or destroying (appreciations) in a foreign currency holder perspective • Growth equations are not formulated yet • Include more data for the period 2002-2005 (present results only include the fresh surveys from the period 2006-2010) GEP Conference, Malaysia, February 12-13, 2011

  13. Questions?

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