Bilateral FDI Flows: Threshold Barriers and Productivity Shocks
Tel Aviv University - Eitan Berglas School of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)
Tel Aviv University - Eitan Berglas School of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics
International Monetary Fund (IMF)
NBER Working Paper No. w11639
A positive productivity shock in the host country tends typically to increase the volume of the desired FDI flows to the host country, through the standard marginal profitability effect. But, at the same time, such a shock may lower the likelihood of making any new FDI flows by the source country, through a total profitability effect, derived from the a general-equilibrium increase in domestic input prices. This is the gist of the theory that we develop in the paper. For a sample of 62 OECD and Non-OECD countries over the period 1987-2000, we provide supporting evidence for the existence of such conflicting effects of productivity change on bilateral FDI flows. We also uncover sizeable threshold barriers in our data set and link the analysis to the Lucas Paradox.
Number of Pages in PDF File: 42
Date posted: November 24, 2005