Literature review WP6

1. Literature review WP6 Natalya Tourdyeva (CEFIR)

2. WP6 in the DOW • The aim of WP6 is to develop the international module of the SUST-RUS assessment model which includes the representation of the flows of goods, capital and labour between Russia and several major foreign geographic areas.

3. Literature review in DOW • Literature review • applied model + relevant theoretical approaches • Developing the methodological approach • Armington approach to international trade • Major trade links between Russia, EU and ROW • The depletion of Russia’s natural resources • The FDI flows between Russia, EU and ROW • Decision making mechanisms about the delocalization of the economic activities • Channels via which the FDI flows influence the economic development of Russia

4. FDI in DOW • FDI is explicitly described, with a developed methodological approach both theoretically consistent • agents' behaviour, • domestic investment setting • consistent with the results of the empirical econometric studies about the FDI’s determinants • Two types of FDI are looked at: • Purchase of foreign firms by investors (Brownfield investment), • Building of new firms (Greenfield investment).

5. Set of decisions: dynamics • Nature of model dynamics: • Recursive dynamic Vs. perfect foresight model • Depletion of natural resources? • Nature of Investment decision?

6. Set of decisions: capital • Physical (producing) capital or financial flows? • Nature of capital mobility: • Sector-specific fixed capital • Interpretation: short-run constrains on capital mobility • Sector and region-specific return on capital • Capital is mobile across industries but fixed regionally • Interpretation: capital/investment controls prevent cross-regional capital flows inside the country • Regional return on capital • Capital is mobile across industries and regions in the country but is immobile internationally • Country-level return on capital • Perfect capital mobility – global capital market

7. Set of decisions: investment • Nature of cross-boarder capital flows: • Capital flows due to the investment demand • Nickell 1978, Lemelin and Decaluwe 2007 • Firm maximizes the present value of its cash flows subject to the capital accumulation constrains • Perfect foresight on the firm’s side • “The main disadvantage of the investment demand specification lies in the high volatility of results and in the fact that it allows for negative investment (disinvestment) - a feature that could generate strange welfare results.” (Lakatos and Walmsley, 2009)

8. Set of decisions: investment • Nature of cross-boarder capital flows: • Capital flows due to the investment supply • Petri 1997 • Portfolio diversification problem: household’s wealth is allocated at the beginning of each period subject to a diversification constraint (CES-type supply function) • Investment decisions are differentiated by the country of origin and characterized by an imperfect substitution • Investments are driven by the relative rates of return • There is a possibility of recursive dynamics

9. Set of decisions: investment • Nature of cross-boarder capital flows: • Capital flows due to the investment supply • “The model is calibrated on bilateral/sectoral investment stocks data and it could be considered as less volatile than the investment demand specification calibrated on investment flows. As a critique to this method, we can argue that rates of return, especially in real asset CGE models, cannot be interpreted as a “price”, but more like the ratio of two prices that are driven by other mechanisms in the model.” (Lakatos and Walmsley, 2009)

10. Set of decisions: investment • Nature of cross-boarder capital flows: • Capital flows due to the investment supply • Data for calibration of bilateral FDI flows and stocks • CEPII, (Boumellassa, Gouel, and Laborde 2007) • “…this database is fully consistent, balanced and suitable for use in a CGE work.” (Lakatos and Walmsley, 2009)

11. Set of decisions: investment • Nature of cross-boarder capital flows: • Capital flows due to the multi-national enterprises’ operations • Markusen, Rutherford and Tarr (2000), Markusen and Maskus (2001) • Scale effects of industry-specific factor trade within the multinationals • Product variety assumption in MNE sectors • No constraints on the nature of dynamics • Data: ownership share

12. Beyond the DOW • Literature on • Trade and environment • FDI and environment

13. References • Lakatos, Csilla, and Terrie Walmsley (2009) Modeling cross-border investment in CGE: some alternatives and mechanism, GTAP • Boumellassa, H. and Gouel, C. and Laborde, D. (2007). A Multisector, Multi- country FDI database for GTAP. 10th Annual GTAP Conference, Purdue University, USA • Lemelin, A. and Decaluwe, B. (2007). Issues in Recursive Dynamic CGE Modeling: Investment by Destination, Savings and Public Debt A Survey . CIRPEE working paper. • Nickell, SJ. (1978). The Investment Decisions of Firms. James Nisbet & Co Ltd. • Petri, P.A. (1997). Foreign Direct Investment in a Computable General Equilibrium Framework. Conference, Making APEC Work: Economic Challenges and Policy Alternatives. • Markusen, James R, Thomas Rutherford and David Tarr (2000), Foreign Direct Investment in Services and the Domestic Market for Expertise,” Policy and Research Working Paper 2413, Washington D.C.: The World Bank. • Markusen, James R. and Keith E. Maskus (2001) General-Equilibrium Approaches to the Multinational Firm: A review of theory and Evidence, NBER Working paper 8334