Impact of Government Policies and Investment Agreements on FDI Inflows to Developing Countries: Empirical Evidence

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Impact of Government Policies andInvestment
Agreements on FDI Inflows to Developing
Countries Empirical Evidence

• Rashmi Banga
• Associate Professor
• Indian Council for Research on International
  Economic Relations Jesus and Mary College,
• Delhi University, India

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Motivation of the Study

• Changing Attitudes of the Developing Countries
  toward Inward FDI.
• Increase in Competition for FDI Inflows.
• FDI Incentives Removal of Restrictions
  Bilateral and Regional Investment Agreements.
• Prof. Amartya Sens Third R, Reason Why are
  we doing what we are doing?

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Changing Pattern of FDI Inflows(Source World
Investment Directory)
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Composition of FDI Source World
Investment Directory(1986-87to1996-97)
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Number of Bilateral Investment Treaties Source
UNCTAD
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Number of BITs Signed with Developed and
Developing Countries in 1999-2000
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Questions Asked by the Study

• How important are Economic Fundamentals in
  attracting FDI Inflows in the integrated world
  economy?
• How successful are Selective Government Policies
  that aim at Inward FDI?
• Do International Investment Agreements Matter?
• Do FDI from Developed Countries and Developing
  Countries Differ respond differently to Economic
  Fundamentals, Government Policies and Investment
  Agreements?

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Earlier Research on Determinants of Inward FDI

• Economic Fundamentals Dunnings OLI Paradigm
  (Root and Ahmed 1979, Schneider and Frey 1985,
  Bhattacharya et al 1996, Bende Nende, et al 2000,
  Trevino, et al 2002)
• Government Policies Impact of Taxes, Tariffs,
  Investment Incentives and Restrictions using time
  series or cross-section data.(Grubert and Mutti
  1991, Loree and Guisinger 1995, Taylor 2000,
  Dunning 2002, Blomstrom and Kokko 2002 and Kumar
  2002)

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Contributions to the Literature

• The Study estimates the Impact of International
  Investment Agreements on FDI Inflows.
• It also estimates the Determinants of FDI from
  Developed and Developing Countries and their
  response to Government Policies and Investment
  Agreements.
• It uses Panel data analysis to estimate the
  Impact of Government Policies. A score between
  0-2 is allocated to each country in each year.

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Model Estimated

• FDIit f (Economic Fundamental)it-1, (Tariff
  Policies) it ,(FDI Incentives)it , (Removal of
  Restrictions on FDI)it , (Bilateral Investment
  Agreements)dgct, (Bilateral Investment
  Agreements)dct, (Regional Investment Agreements)
  it
• where i stands for country and t stands for the
  time period 1980-81, 1981-82..1999-2000

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Methodology Adopted

• Panel Data for Fifteen developing countries in
  South, East and South East Asia for the period
  1980-81 to 1999-2000. (Bangladesh, China, China-
  Hong Kong, India, Korea, Malaysia, Nepal,
  Pakistan, Philippines, Singapore, Sri Lanka,
  China-Taiwan, Indonesia, Thailand and Viet Nam)
• Panel data for Ten developing countries for the
  period 1986-1987 to 1996-1997 uses FDI Approvals.
• Random Effects and Fixed Effects Models are
  estimated.

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Data Sources

• World Investment Directory (UNCTAD) Economic and
  Social Survey of Asia and the Pacific, United
  Nations (various issues), Asian Development
  Outlook and Country Economic Review, Asian
  Development Bank (various issues) and Country
  Reports on Economic Policy and Trade Practice,
  released by the Bureau of Economic and Business
  Affairs, U.S. Department of State.

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Economic Fundamentals
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Government Policies

• Investment Incentives
• Tax Holidays
• Tax Concessions in number of industries
• Repatriation of Profits and Dividends.
• Tariff Policies Average Tariff Rates.

• Removal of Restrictions
• Access to Industries
• Foreign Ownership Restrictions
• Ease of Entry
• Performance Requirements
• Corporate Profits Tax Rate

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Bilateral and Regional Investment Treaties

• Bilateral Investment Treaties
• Specific Standards of Investment Protection and
  Settlement of Disputes
• Fair and Equitable Treatment.
• National Treatment.
• Most favoured Nation Treatment.

• Regional Investment Agreements
• APEC Countries Non-Binding Investment Principles
  (NBIP) in 1994.
• ASEAN Countries ASEAN Investment Area (AIA) in
  1999

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Empirical Results Determinants of Aggregate FDI
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Results Economic Fundamentals Government
Policies

• Large Market Size Low Efficiency Wages High
  Skill Levels Low External Debt and Large Extent
  of Electricity Consumed.
• After controlling for Economic Fundamentals
  Government Incentives are not found to have a
  significant impact.
• But Removal of Restrictions have a significant
  positive impact.
• Low Tariff Rates have a significant positive
  impact.

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Results Investment Agreements

• An interesting finding is that the number of BITs
  signed have a significant positive impact on FDI
  inflows.
• But it is number of BITs signed with Developed
  Countries that are significant.
• Number of BITs signed with developing countries
  do not have a significant impact.
• While NBIP (APEC) is a significant determinant,
  AIA (ASEAN) does not have a significant impact.

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Empirical Results Determinants of FDI from
Developed and Developing Countries
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Determinants of FDI from Developed and Developing
Countries

• FDI From Developed Countries are attracted to
  Large Market Size, Higher Education Levels,
  Better Financial Health, Greater Transport and
  Communication and Lower Domestic Lending Rates
  Removal of RestrictionsBITs.
• FDI From Developing Countries are attracted to
  Large Market Size, Potential Markets, Low Labour
  Cost, Undervalued Exchange Rates, Transport and
  Communication and Lower Lending Rates Lower
  Tariff Rates FDI Incentives.

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Conclusions

• Along with Economic Fundamentals, Government
  policies play an important role in attracting FDI
  into Developing Countries, especially removal of
  restrictions.
• International Investment Agreements, especially
  Bilateral can form important policy instruments
  in attracting FDI from Developed Countries.
• FDI from Developed and Developing Countries
  respond differently to Economic Fundamentals,
  Government Policies and Investment Agreements.

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