《旅游心理学 Tourism Psychology》课程教学资源（参考文献）The Impact of Economic Integration on Fdi and Exports

THE IMPACT OF ECONOMIC INTEGRATION ON FDI AND EXPORTS: A GRAVITY APPROACH FRANCESCA DI MAURO Introduction Economic integration between countries has continued to deepen over the past decade This is especially visible at the regional level,with the escalation of Regional Integration Agreements(RIAs)ranging from Free Trade Areas(FTAs)to Customs Unions(CUs),such as NAFTA,Mercosur or ASEAN.These developments have renewed interest in the economics of regional integration,first raised by Viner (1950).Since trade and Foreign Direct Investment(FDI)are generally recognised as the two main channels of economic integration,the most topical issues in the debate about RIAs relate to trade creation,trade diversion,the redirection'of FDI from non-members to members of the RIA and the phenomenon of 'tariff-jumping FDI'(the latter suggesting FDI is only substitute for trade). A typical example of the perceived threat'deriving from RIAs is the European Single Market,initially labelled Fortress Europe'.The European Union,however,provides also one of the most interesting laboratories to assess the impact of such deep integration. Indeed,several studies have been carried out in order to assess its economic impact,either ex-ante-see e.g.Baldwin (1989),Neven and Roller(1991)and Brenton and Winters (1992), or ex-post in the years following the implementation of the Single Market Programme (SMP) -Baldwin et al.(1995),Sapir (1996)and Brenton (1996).Amongst others,the European Commission study (1996)attempted to include all aspects of potential effects:on trade,on efficiency and competition,on FDI,on income and employment and on the growth and convergence of EU Member States. In this paper the main concern is not to assess the impact of the Single Market Programme specifically,but the emphasis is rather on the effect of economic integration upon FDI, relatire to that on exports.Is economic integration more beneficial to FDI or to exports? Which variables reflecting economic integration are more prone to FDI and to exports? Given that FDI is often associated with greater dynamic effects,such as the technology transfer,which in turn may lead to beneficial effects for the recipient country,the impact of economic integration on FDI is potentially more important and deserves close attention. Economic integration is proxied here through three main variables:exchange rate variability (ERV),tariff barriers and non-tariff barriers (NIBs),and included in gravity-type equations for FDI and for exports in turn.These variables are the most immediate policy instruments available to countries to reveal their will to integrate.The surge of currency boards in emerging countries is an example of what can be called 'monetary integration'. These economies commit to a stable exchange rate in order to gain the trust of investors and to boost their trade.The set-up of the European monetary system (EMS)in the EU pursued the primary objective of stabilising the EU currencies,with an expected benefit for the economies.Similar arguments hold for a reduction in tariffs and even more in NTBs, both measures of 'commercial integration'.I should stress here that this paper does not 1

1 THE IMPACT OF ECONOMIC INTEGRATION ON FDI AND EXPORTS: A GRAVITY APPROACH FRANCESCA DI MAURO Introduction Economic integration between countries has continued to deepen over the past decade. This is especially visible at the regional level, with the escalation of Regional Integration Agreements (RIAs) ranging from Free Trade Areas (FTAs) to Customs Unions (CUs), such as NAFTA, Mercosur or ASEAN. These developments have renewed interest in the economics of regional integration, first raised by Viner (1950). Since trade and Foreign Direct Investment (FDI) are generally recognised as the two main channels of economic integration, the most topical issues in the debate about RIAs relate to trade creation, trade diversion, the ‘redirection’ of FDI from non-members to members of the RIA and the phenomenon of ‘tariff-jumping FDI’ (the latter suggesting FDI is only substitute for trade). A typical example of the perceived ‘threat’ deriving from RIAs is the European Single Market, initially labelled ‘Fortress Europe’. The European Union, however, provides also one of the most interesting laboratories to assess the impact of such deep integration. Indeed, several studies have been carried out in order to assess its economic impact, either ex-ante - see e.g. Baldwin (1989), Neven and Röller (1991) and Brenton and Winters (1992), or ex-post in the years following the implementation of the Single Market Programme (SMP) – Baldwin et al. (1995), Sapir (1996) and Brenton (1996). Amongst others, the European Commission study (1996) attempted to include all aspects of potential effects: on trade, on efficiency and competition, on FDI, on income and employment and on the growth and convergence of EU Member States. In this paper the main concern is not to assess the impact of the Single Market Programme specifically, but the emphasis is rather on the effect of economic integration upon FDI, relative to that on exports. Is economic integration more beneficial to FDI or to exports? Which variables reflecting economic integration are more prone to FDI and to exports? Given that FDI is often associated with greater dynamic effects, such as the technology transfer, which in turn may lead to beneficial effects for the recipient country, the impact of economic integration on FDI is potentially more important and deserves close attention. Economic integration is proxied here through three main variables: exchange rate variability (ERV), tariff barriers and non-tariff barriers (NTBs), and included in gravity-type equations for FDI and for exports in turn. These variables are the most immediate policy instruments available to countries to reveal their will to integrate. The surge of currency boards in emerging countries is an example of what can be called ‘monetary integration’. These economies commit to a stable exchange rate in order to gain the trust of investors and to boost their trade. The set-up of the European monetary system (EMS) in the EU pursued the primary objective of stabilising the EU currencies, with an expected benefit for the economies. Similar arguments hold for a reduction in tariffs and even more in NTBs, both measures of ‘commercial integration’. I should stress here that this paper does not

FRANCESCA DI MAURO seek to reconsider the relationship between exchange rate variability and trade,a topic extensively treated in the literature (see e.g.De Grauwe and Bellefroid (1986),Peree and Steinherr(1989),Gagnon (1993)and Sapir and Sekkat(1995)).In contrast,this relationship has been largely neglected in the FDI literature,even though trade and FDI share very similar characteristics.My purpose is therefore to analyse the relative impact of exchange rate variability on exports as compared to the one on FDI. Economic integration among countries can also be a concern in terms of employment.An important example was the creation of NAFTA,with American workers perceiving a jobs threat from Mexican 'maquiladoras'.A similar concern arises in the EU,where European firms investing in Central and Eastern Europe are seen as replacing European labour with cheaper labour available in these countries.With either horizontal or vertical FDI,domestic firms investing abroad rather than exporting may leave the export sector at home worse- off.This constitutes the second concern of this paper,and the issue of whether exports and FDI are complements or substitutes will be addressed following Graham's (1996) approach. It should be stressed at the outset that the focus of the paper is the study of FDI,while the analysis on exports is used as a comparative tool.Thus the review in Section 1 only focuses on the theory of FDI and it is finalised to the derivation of the gravity model used in the empirical part.In Section 2 I discuss the expected impact of economic integration on exports and FDI and their potential inter-linkages.The empirical analysis will be presented in Section 3,followed by some concluding remarks in Section 4. 1. The theory of FDI In recent years FDI has received more and more interest from economists and policy- makers.On the one hand,this is probably due to its growing economic importance for both developed and developing countries.According to the 1999 World Inrestment Report,in the past decade both global output and global sales have grown faster than world GDP and world exports.Thus,sales of foreign affiliates are now greater than world total exports of goods,implying that firms use FDI more than they use exports to service foreign markets. Moreover,FDI inward flows represented in 1998 11%of Gross Fixed Capital Formation (UNCIAD (2000))revealing the importance that these flows can have for economic growth.On the other hand,given the many aspects of FDI,a wide range of economists has become involved in the research:from trade economists,for the close relationship between trade and FDI and development and growth economists,for its effects on the host economy,to regional economists,for its implications for RIAs and industrial economists, for the impact on industrial restructuring.In this section though,I am mainly concerned with the theories that explain the determinants of FDI. 1.1 The OLI framework The traditional theory of FDI tries to explain why firms produce abroad instead of simply servicing the markets via exports.After all,multinational companies (MNCs)experience additional costs in producing abroad:higher costs in placing personnel abroad, communication costs (international phone calls,travel expenses for executives or even time costs due to mail delays),language and cultural differences,informational costs on local tax laws and regulations,costs of being outside domestic networks;they also incur higher risks, 2

FRANCESCA DI MAURO 2 seek to reconsider the relationship between exchange rate variability and trade, a topic extensively treated in the literature (see e.g. De Grauwe and Bellefroid (1986), Perée and Steinherr (1989), Gagnon (1993) and Sapir and Sekkat (1995)). In contrast, this relationship has been largely neglected in the FDI literature, even though trade and FDI share very similar characteristics. My purpose is therefore to analyse the relative impact of exchange rate variability on exports as compared to the one on FDI. Economic integration among countries can also be a concern in terms of employment. An important example was the creation of NAFTA, with American workers perceiving a jobs threat from Mexican ‘maquiladoras’. A similar concern arises in the EU, where European firms investing in Central and Eastern Europe are seen as replacing European labour with cheaper labour available in these countries. With either horizontal or vertical FDI, domestic firms investing abroad rather than exporting may leave the export sector at home worseoff. This constitutes the second concern of this paper, and the issue of whether exports and FDI are complements or substitutes will be addressed following Graham's (1996) approach. It should be stressed at the outset that the focus of the paper is the study of FDI, while the analysis on exports is used as a comparative tool. Thus the review in Section 1 only focuses on the theory of FDI and it is finalised to the derivation of the gravity model used in the empirical part. In Section 2 I discuss the expected impact of economic integration on exports and FDI and their potential inter-linkages. The empirical analysis will be presented in Section 3, followed by some concluding remarks in Section 4. 1. The theory of FDI In recent years FDI has received more and more interest from economists and policymakers. On the one hand, this is probably due to its growing economic importance for both developed and developing countries. According to the 1999 World Investment Report, in the past decade both global output and global sales have grown faster than world GDP and world exports. Thus, sales of foreign affiliates are now greater than world total exports of goods, implying that firms use FDI more than they use exports to service foreign markets. Moreover, FDI inward flows represented in 1998 11% of Gross Fixed Capital Formation (UNCTAD (2000)) revealing the importance that these flows can have for economic growth. On the other hand, given the many aspects of FDI, a wide range of economists has become involved in the research: from trade economists, for the close relationship between trade and FDI and development and growth economists, for its effects on the host economy, to regional economists, for its implications for RIAs and industrial economists, for the impact on industrial restructuring. In this section though, I am mainly concerned with the theories that explain the determinants of FDI. 1.1 The OLI framework The traditional theory of FDI tries to explain why firms produce abroad instead of simply servicing the markets via exports. After all, multinational companies (MNCs) experience additional costs in producing abroad: higher costs in placing personnel abroad, communication costs (international phone calls, travel expenses for executives or even time costs due to mail delays), language and cultural differences, informational costs on local tax laws and regulations, costs of being outside domestic networks; they also incur higher risks

THE IMPACT OF ECONOMIC INTEGRATION ON FDI AND EXPORTS such as the risks of exchange rate changes or even of expropriation by the host country. One theoretical approach,introduced by Dunning (1977,1981),the "OLI framework", considers FDI as determined by Ownership,Location and Internalisation advantages which the MNC holds over the foreign producer;when these advantages outweigh the above costs,FDI arises.The ownership adrantage includes a product or a production process to which other firms do not have access,such as a patent,blueprint or trade secret,to more intangible advantages such as reputation for quality.The location adrantage stems directly from the foreign market,such as low factor prices or customer access,together with trade barriers or transport costs that make FDI more profitable than exporting.Finally,the internalisation adrantage is a more abstract concept to explain why licensing may not be practised;it derives from the firm's interest in maintaining its knowledge assets (such as highly skilled workers who know the firm's technology)internally.This avoids "defection" once the licensee has come to understand the technology and sets up his own firm,in competition with the MNC.1 Informational asymmetries may also push MNCs to prefer foreign production over licensing,such as better knowledge of the domestic market by the licensee.The fear of being substituted with direct production in the presence of highly selling markets would provide incentive for the licensee to under-declare the potential absorption capacity of a market.Finally,advantages derive from the reduction of transaction costs (for contracting,quality assurance,etc.)that arise in case of licensing. The main problem of this framework is that although it does explain the existence of MNCs,it has had difficulty explaining the recent trends in FDI,namely their surge among similar countries (horizontal FDD);further,no sound empirical models have been generated in order to compare real data with the theory. 1.2The“New Theory of FDI” The so-called "New Theory of FDI"refers mainly to the ownership and location advantage and introduces MNCs in general equilibrium models,where they arise endogenously. Helpman(1984)and Helpman and Krugman(1985)-exponents of the early literature- derive the activity of MNCs when they try to explain intra-firm trade,that is,an additional component of international trade.The models are based on two main assumptions:(1) there is product differentiation and economies of scale,and(2)there are some firm inputs that behave like public goods2.Moreover,it is assumed that transport costs are zero and the MNCs will split their production process between a headquarter'activity,often skill or capital-intensive,and the plant production abroad.In other terms,the factor proportions in the two activities of the MNE differ,which is the rationale for multinational activity to arise at all.This is recognisable as vertical FDI,since firms separate their production process in order to take advantage of factor price differentials across countries.The implications of these models for a potential derivation of the gravity model are that only differences in relative factor endowments across countries (often proxied by GDP per capita)matter for the location of MNCs abroad.This also implies that the 'type'of FDI Of course,the problem of"moral hazard"can also appear within a subsidiary,but its activity is more subject to the MNC's control. 2 These are inputs such as management,marketing,R&D,that are specific to the firm and that can be easily transferred from one plant to another,at virtually no cost,hence the denomination of public good'. 3

THE IMPACT OF ECONOMIC INTEGRATION ON FDI AND EXPORTS 3 . such as the risks of exchange rate changes or even of expropriation by the host country. One theoretical approach, introduced by Dunning (1977, 1981), the “OLI framework”, considers FDI as determined by Ownership, Location and Internalisation advantages which the MNC holds over the foreign producer; when these advantages outweigh the above costs, FDI arises. The ownership advantage includes a product or a production process to which other firms do not have access, such as a patent, blueprint or trade secret, to more intangible advantages such as reputation for quality. The location advantage stems directly from the foreign market, such as low factor prices or customer access, together with trade barriers or transport costs that make FDI more profitable than exporting. Finally, the internalisation advantage is a more abstract concept to explain why licensing may not be practised; it derives from the firm’s interest in maintaining its knowledge assets (such as highly skilled workers who know the firm’s technology) internally. This avoids “defection” once the licensee has come to understand the technology and sets up his own firm, in competition with the MNC.1 Informational asymmetries may also push MNCs to prefer foreign production over licensing, such as better knowledge of the domestic market by the licensee. The fear of being substituted with direct production in the presence of highly selling markets would provide incentive for the licensee to under-declare the potential absorption capacity of a market. Finally, advantages derive from the reduction of transaction costs (for contracting, quality assurance, etc.) that arise in case of licensing. The main problem of this framework is that although it does explain the existence of MNCs, it has had difficulty explaining the recent trends in FDI, namely their surge among similar countries (horizontal FDI); further, no sound empirical models have been generated in order to compare real data with the theory. 1.2 The “New Theory of FDI” The so-called “New Theory of FDI” refers mainly to the ownership and location advantage and introduces MNCs in general equilibrium models, where they arise endogenously. Helpman (1984) and Helpman and Krugman (1985) – exponents of the early literature - derive the activity of MNCs when they try to explain intra-firm trade, that is, an additional component of international trade. The models are based on two main assumptions: (1) there is product differentiation and economies of scale, and (2) there are some firm inputs that behave like public goods2. Moreover, it is assumed that transport costs are zero and the MNCs will split their production process between a ‘headquarter’ activity, often skill or capital-intensive, and the plant production abroad. In other terms, the factor proportions in the two activities of the MNE differ, which is the rationale for multinational activity to arise at all. This is recognisable as ‘vertical FDI’, since firms separate their production process in order to take advantage of factor price differentials across countries. The implications of these models for a potential derivation of the gravity model are that only differences in relative factor endowments across countries (often proxied by GDP per capita) matter for the location of MNCs abroad. This also implies that the ‘type’ of FDI 1 Of course, the problem of “moral hazard” can also appear within a subsidiary, but its activity is more subject to the MNC’s control. 2 These are inputs such as management, marketing, R&D, that are specific to the firm and that can be easily transferred from one plant to another, at virtually no cost, hence the denomination of ‘public good’

《旅游心理学 Tourism Psychology》课程教学资源（参考文献）The Impact of Economic Integration on Fdi and Exports - a Gravity Approach