Foreign direct investment, labor markets, environment and economic development: a case study on Argentina

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Foreign direct investment, labor markets,
environment and economic development a case
study on Argentina

• Daniel Chudnovsky
• Sebastián Galiani
• Andrés López
• Martina Chidiak
• Germán Pupato

GDN Conference January 2005, Dakar
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Motivation (I)

• FDI Boom
• In 1992-2001, FDI inflows amounted to more than
  US 76,000 million (2 of GDP or more annually)
• Besides privatization of State firms, most
  inflows involved take over of domestic private
  firms
• Oil, manufacturing and services attracted most
  FDI
• Natural resources attracted resource seeking
  investments
• Growth of domestic market and Mercosur attracted
  market and efficiency seeking investments

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Motivation (II)

• Wages were relatively high in us dollars to
  attract FDI for exports
• Environmental regulations are good but mostly
  command and control and their enforcement is
  loose
• Argentina shows pollution levels higher than
  expected for a mid income country
• Loose environmental regulations did not attract
  FDI in natural resources

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FDI Flows during the 90s
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FDI Policies
Investor friendly policy approach during the
90s

• The policy approach was FDI is good the more
  the better
• No attention to quality issues
• No investment promotion agency

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Research Objectives

• To analyze the quality of FDI by assessing its
  impact on the following key development issues
• Employment and income distribution
• Environmental Management and Corporate Social
  Responsability (CSR)
• Foreign trade
• Technological innovation
• Overall impact and policy implications

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Employment

• Previous research at the firm level is very
  scarce, even internationally
• Research questions
• Employment in TNCs
• Do foreign firms employ, ceteris paribuss, less
  labor than domestic firms?
• Do foreign firms reduce unskilled employment more
  than skilled employment?
• Effects on domestic firms
• Does FDI sectoral presence affect employment in
  domestic firms?
• Does FDI sectoral presence affect skilled and
  unskilled employment in domestic firms?

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Income Distribution (Wage inequality)

• No studies on Argentina are available. In related
  work, Galiani Sanguinetti (2003) showed that
  trade liberalization can explain only a small
  proportion of the observed rise in wage
  inequality. This was confirmed by Gasparini
  (2004).
• Research questions
• Does increased FDI sectoral presence raise the
  wages of individuals employed in that sector?
• Does FDI presence affect wage inequality between
  skilled and unskilled workers?

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Environmental and CSR Management (I)

• In a small sample of firms, Chudnovsky, López and
  Freylejer (2000) found that environmental
  activities are more diffused in TNCs than in
  domestic firms. Spillovers were not analyzed
• The second innovation survey (1998-2001) provides
  data on environmental management activities
• End of the pipe treatment (e.g. abatement,
  mitigation)
• Pollution prevention measures (e.g. recycling,
  reuse of materials)
• Environmental innovations (e.g. process
  modifications, product reformulation)
• Research questions
• Does foreign ownership explain differences in
  environmental activities performed by private
  firms?
• Are environmental activities in domestic firms
  explained by spillovers from foreign firms
  presence?
• Does this effect depend on the absorption
  capabilities of domestic firms?

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Environmental and CSR Management (II)

• Two previously unexplored issues in Argentina are
  CSR management and the Pollution Haven
  hypothesis (Zarsky, 2002)
• Research questions
• To what extent does foreign ownership explain
  differences in CSR expenditures?
• To what extent are CSR expenditures in domestic
  firms explained by spillovers from foreign firms
  presence?
• Do higher pollution abatement costs in developed
  countries industries induce foreign investment
  flows at the sectoral level?

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Foreign Trade

• In previous research, Chudnovsky and López (2001)
  found that
• Exports were significant in resource seeking
  investments
• Export coefficients were relatively low and
  import coefficients high in enlarged market
  seeking investments in 1992 and 1997
• A similar trend occurred in the few efficiency
  seeking investments
• But these findings could not be tested
  econometrically and for a longer period of time.
  Besides, spillovers were not analyzed

• Research questions
• Do foreign firms show higher export and / or
  import intensities than domestic firms?
• Do domestic firms receive export and / or import
  spillovers from TNCs activities?

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Technological Innovation
In recent research, we did not find difference in
innovation expenditures between TNCs and domestic
firms. Nevertheless, the impact of these
activities on the innovation output could be
different in TNCs. Besides, spillovers in
innovation were not analyzed

• Research questions
• Does the impact of innovation activities differ
  between foreign and domestic firms?
• Is the impact of the innovations on productivity
  different between foreign and domestic firms?
• Are innovative inputs and outputs in domestic
  firms explained by spillovers from foreign firms?

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Data Sources

• Innovation Surveys (1992-2001)
• - Representative of the manufacturing industry
• The ongoing Household Survey
• - Urban population since 1990
• A survey on environmental management and
• social responsibility to be launched

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Empirical Analysis (I)

• General specification that applies to most of our
  research questions
• For firm i, in sector j and period t we estimate
  the following regression function

Where yijt dependent variable (total / skilled
employment, productivity, etc) sfdiijt causing
variable of interest. Share of FDI in firm
capital zijt relevant control variables for
explaining yijt (including output) trendjt
trend per sector µj firm fixed effect
If FDI has a positive impact on y, we expect fgt0
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Empirical Analysis (II)

• Specification for testing FDI spillovers at the
  sector level

Where, in addition sfdijt share of FDI in
sector j
If FDI generates positive spillovers on y, we
expect f2gt0
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Empirical Analysis (III)
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Policy implications

• Argentina has a significant stock of FDI, and FDI
  flows may grow again in the near future
• How to design initiatives aimed at enhancing the
  attraction of the host country for FDI while
  improving its quality is the key policy issue.
• Rich country policies should not only emphasize
  the rights of investors, but also encourage them
  to contribute to human and sustainable
  development in poor countries.