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The effects of FDI on host country export performance (Austria)

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

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The effects of FDI on host country export performance (Austria)

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  1. The effects of FDI on host country export performance (Austria) A presentation by; AJang Elvis Ngwesse Supervised by; Prof. Joseph Francois

  2. Overview • Research objectiveandhypothesis • Theoreticalconsideration • Empiricalevidence • Trends in Austria • The Austrian economy • Data description • Methodology • Resultsand Conclusion

  3. 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).

  4. 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).

  5. 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).

  6. Empirical evidence on FDI and economic growth

  7. 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.

  8. Exports % GDP (1970-2006) 55 50 45 40 35 30 1970 1980 1990 2000 2010 Years The Austrian economy Source: WDI, 2009

  9. Merchandise/Service exports Mill $ (1980-2007) 150000 100000 50000 0 1980 1990 2000 2010 YEAR service exports Merchandise export The Austrian economy Source: UNCTAD

  10. Productivity in manufacturing (trading partners) Poland Poland Hungary Hungary Czech Rep Czech Rep Japan Japan Switzerland Switzerland UK UK 1 Germany Germany Italy Netherlands Italy Austria Netherlands France Austria Norway Luxembourg France Norway 0 20 40 60 80 Luxembourg The Austrian economy Source: World competitive year book 2008 (GDP per person employed per hour, in US$).

  11. The Austrian economy Source:OeNB 2007

  12. Inward FDI share by industry (1999-2006) Source.OeNB

  13. Inward FDI by share of Goods & Services. Source: OECD

  14. Inward FDI (Mill. Euros) Belgium Japan Belgium Germany U.S.A France Russia Italy Switzerland, Netherlands Liechtenstein Hungary Sweden Germany Slovenia Spain United Kingdom United Kingdom Slovenia Spain Hungary Sweden Switzerland, Liechtenstein Netherlands Russia U.S.A France Italy Japan The Austrian economy Source:OeNB

  15. 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.

  16. Summary Statistics

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

  18. Results of Unit Root test for Variables in levels *, **, *** are Significance levels at 1%, 5%, and 10% respectively

  19. Results of unit root test for transformed variables in first difference *, **, *** are Significance levels at 1%, 5%, and 10% respectively

  20. Co-integration Tests Result for Unit root tests for the residuals (ECT) *, **, *** are Significance levels at 1%, 5%, and 10% respectively

  21. Regression results for Supply-Capacity equation ***,**,*, represent statistical significant levels at 1%, 5% and 10% respectively

  22. Regression results for FDI-Specific effects ***,**,*, represent statistical significant levels at 1%, 5% and 10% respectively

  23. 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.

  24. Thanks foryour attension

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