Does this assumption hold in the sample of emerging markets and does it differ when each of the three sectoral FDI inflows is examined in turn. The second section of the chapter aims to define each of the variables to be used in the model, both dependent variables (very briefly) and independent variables (at length). Explanations and accounts of the empirical findings will be carried out using the models chosen in the previous chapter.
A certain percentage of the parts required for the vehicle must be manufactured in the home country. This is an attempt to retain some added value in the production process. He believes that it is market inefficiencies that determine the initiative to seek markets outside the company's common boundaries.
In the long run, they found that trade openness contributes positively to FDI inflows to these developing economies. They suggest that a 10% increase in trade openness in the primary sector will reduce total FDI by 0.7%. Globerman (2002) argues that foreign direct investment is likely to respond positively to preferential trade liberalization regardless of whether the MNE has invested in the host country vertically (taking advantage of economies of scale in the production process) or horizontally (taking advantage of economies of scale scope of the product).
In empirical analysis, for convenience, we record one or more variables to aid interpretation. This is to determine the most appropriate trade openness variable to use in the proposed empirical analysis. Regarding secondary FDI, if investment in the manufacturing and construction sector is efficiency-seeking (vertical type), a positive sign can be expected between trade openness and secondary FDI.
To test for any heteroskedasticity in the FE model, a Modified Wald test is performed on total FDI inflows. This result was overcome later in the paper by performing another test for serial correlation (xtserial). They found that trade liberalization leads to an increase in the inward FDI stocks of the manufacturing sector in the APEC region.
An xtserial test was then performed, with each of the seven institutional variables in the model. In the primary regression of FDI without control variables (Table 4.2.1), the trade openness variable was 0.0750. Testing for any heteroscedasticity in the tertiary FDI model, it was again found to be a factor in each of the seven control variables.
Adding the Infrastructure Index variable to the model, the trade openness variable now has a statistically significant positive effect on tertiary FDI.
APTA
In the primary sector regression, a negative but insignificant effect of trade openness on primary FDI was found in the APTA sample. A 10% decrease in EMC trade openness (ie, higher trade barriers) leads to a 10.8% increase in FDI in the manufacturing sector, ceteris paribus. In the tertiary sector regression, a negative but insignificant effect of trade openness on tertiary FDI was found in the APTA sample.
In evaluating the table, we will focus simply on the effect of the trade openness variable on FDI. The trade openness variable for EMC (column 1) is positive and significant at the 99% confidence level, while APTA (2) is negative and insignificant. The Trade Openness variable for secondary FDI EMC (5) and secondary FDI APTA (6) are both significant.
EMC trade openness has a positive effect, while APTA trade openness has a strong negative effect on secondary FDI. In their paper, they were surprised to find a strong positive coefficient of trade openness on tertiary FDI. The purpose of this study was to address a central research question that would enable us to understand the impact that trade openness has on FDI.
Previous research has focused on the effect that trade openness has on total FDI to GDP, at an aggregate level.41 Only a small amount of research has been done at a disaggregated level.42. Regarding which of the many hypothesized trade openness variables to use, it was found that the simple trade intensity ratio was the most appropriate to examine the relationship between trade openness and FDI. Using a comprehensive sample of emerging market countries, together with panel data techniques, the paper disaggregates total FDI inflows to investigate empirically – at the sectoral level – the effect that trade openness has on inflows of primary, secondary and tertiary FDI.
The trade openness variable has a positive and significant effect on total FDI and secondary FDI inflows. A 10% increase in the trade openness of an EMC member (i.e. lower trade barriers), resulted in an 8.43% increase in total sector FDI and a 4.01% increase in FDI- of the secondary sector, ceteris paribus. When applied to the primary and tertiary sectors, the results of the trade openness variable – although positive – were not statistically significant to draw any conclusions.
APTA
Foreign Direct Investment in Africa: The Role of Natural Resources, Market Size, Government Policy, Institutions and Political Instability. Foreign Direct Investment and Exchange Rates: A Case Study of US FDI in Developing Countries. Exchange Rate Volatility and Foreign Direct Investment in Sub-Saharan Africa: Evidence from Nigeria and South Africa.
In International trade, foreign direct investment and the economic environment: Essays in honor of Professor Sylvain Plasschaert. Also known as the Simple Trade Intensity (Squalli & Wilson, 2006), it is one of the most used ratios in the literature as a proxy for measuring trade openness.
