how can foreign investment help a more inclusive …how can foreign investment help a more inclusive...
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How can Foreign Investment help
a more Inclusive Productivity?
Rodrigo Wagner
University of Chile – Business School &
Center for International Development at Harvard.
Invited keynote talk “New Aproaches to Economic Challenges”
OECD, Paris – February 25th , 2016
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A brief history of Chilean wine
French immigration in mid 1800s
bringing know in wine… and other skills*
• Pinochet
• Bachelet.
Phylloxera (Daktulosphaira vitifoliae)
100
years
Circa 1980
New techniques
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The pioneer was a
multinational that
understood the needs
of a large market
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Domsea farms that started Salmon in
Chile was an aquaculture subsidiary of
Union Carbide, a Multinational
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Critical mass in a B2B world
Size of country proportional to overall GDP
Expanding size of the market
may be less of a G2G and
more a B2B issue…
Map source: http://www.worldmapper.org/
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Multinationals could help achieve
critical mass (when there are W-shaped cost curves)
• Profitability at the margin is negative, despite big jump being profitable.
• Chicken and egg decision to “jump”; but need the B2B relationships.
Think of current
situation for
domestic firms
If Multinational / JV has
access to larger
customers / market; then
can be more competitive
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Multinationals tend to have better Management Practices
50
52
54
56
58
60
62
64
66
68
70
United States Australia Chile Multinationalsin Chile
World Management Survey – Mean for firms between 500 - 1000 workers (Bloom & Van Reenen, 2007; Bloom et al, 2011; Tokman, 2009; Figure from Velasco and Wagner, 2014)
Jumping to the
practices of
multinationals can
increase 5 -15%
productivity
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Why do we want multinationals?
• Get critical mass
• Improve management.
• Get organizational capital
• New sectors:
– Learn about production
– Learn about demand or markets
• Experimentation of comparative
advantage…
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WHERE DO WE WANT MORE
FDI ?
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Where do we want more FDI?
• Everywhere? Maybe
• Ideal: Maximize welfare
• Political Equilibrium: Max utility of “median voter”.
– Additional Taxes for transfers and public goods. » adapting models like Alesina-Rodrik (1996) to FDI.
– Externalities (including pecuniary!) • e.g. Better Jobs
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Can FDI fight against skill-biased
technical change?
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Principle : Focus a bit more on
sectors/projects that, if grow, would
demand labor from vulnerable groups
• Development is when wages go up in real terms… for people with less opportunities. In the medium run education is given.
• Pineapple packing facility vs. Web startup.
Wage for
non college
Educated
women
Quantity of
Workers
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Which type of FDI should one
promote?
In the era of Henry Ford you were unlikely to get rich
without creating many jobs. That’s a fundamental
disconnect created by skill biased technical change.
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Long commutes in Mega-cities… Labor market segmentation
(Lat Am vs some Asian)
Well paid service jobs for less skilled groups locate
where rich people live! Tradable manufacturing!
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Procurement Managers of
Multinationals
• Key forecast indicator… PMI
• Also agents for change:
• They search linkages!
Have a problem to fix
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FDI could matter for…
This does not mean you have to like or dislike Sustaineble Development Goals as currently stated… It’s just an example of a framework…
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Key concern: Taxing FDI
Coase Theorem 101
• Challenges of corporate taxation across
borders. • See Foley at al (2009); Feldstein et al. (2009).
• Efforts by OECD on Transfer Pricing … … and other rules. Essential for facilitating goodwill towards
FDI.
• Coase theorem!
• Too sweet for foreigners? Who is foreigner?
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I. BEWARE OF HOW WE
MEASURE FDI
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Observation # 1
Foreign Direct Investment
is not always investment!
• If Walmart sends to Walmart Mexico $1 of extra cash holdings to park in its balance sheet for provisions, then
– Inward FDI to Mexico grows by $1.
– Investment in Mexico grows by $0 • More cash is not Gross Fixed Capital Formation
$1 cash
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Observation # 2
Foreign Direct Investment
may not come from abroad!
• If Walmart Mexico keeps $1 of profits to repair a tile in one of its stores
– Inward FDI to Mexico grows by $1.
– Outward FDI from the US grows by $1
– Mexico’s current account deficit grows by $1
– Investment in Mexico grows by $1 But no penny crossed the Rio Grande !
$1 cash
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Locally Produced FDI is a type of Saving!
(Local or Cash-bases saving)
ARM
AUS
AUT
AZE BEL
BEN
BFA
BGD
BGR
BIH
BLR
BWA
CAN
CHE
CHN
CIV
CMR
COL
CYP
CZE
DEU DNK
EGY
ESP
EST
FIN
FRA
GAB
GBR
GEO
GHA
GIN
GMB
GRC
HKGHND
HRV
HUN
IND
IRL
ISR ITAJPN
KAZ
KGZ
KHM KORLBR
LBYLKA
LSO
LTULVA
MAR
MDAMKD
MLI
MOZ
MWI
NAM
NER
NGA
NLD NOR
NZL
PAKPHL
PNG
POL
PRT
RUS
SEN
SLE
SVK
SVN
SWE
SWZ
TGO
THA
TTO
TUR
TZA
UGA
UKR
USA
BOL
CHL
CRIDOM
ECU
GTM
MEX
PANPER
PRYSLV
URY
VEN
GLS = GNS - [net Retained Earnings FDI in BOP]
.91
1.1
1.2
1.3
Gro
ss L
ocal S
avin
g [G
LS
]
as s
hare
of G
ross N
atio
na
l S
avin
g [G
NS
]
(200
3-2
00
7)
0 20000 40000 60000GDP per capita PPP (2011 USD)
See Hansen and Wagner (2015). Is the Reinvestment of Multinationals a Capital Flow? Saving and the Cash Based Current Account
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Observation # 3
Not all dollars of FDI bring the
same additional “extra bytes” of
new productivity; no easy answers
• Greenfield vs M&A • But still M&A could matter for.
• New vs. Expansion. • How many new “bytes” of information or
externalities does the expansion bring?
• Retained Earnings vs. New Equity (*)
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II.
WHAT DOES PREVENT FDI ?
- MARKET FAILURES
- ORGANIZATIONAL FRICTIONS
- POLITICAL FRICTIONS.
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Why isn’t the additional desirable
FDI project happening?
• To create a cost-effective policy …
• … one needs at least a working hypothesis
for this question!
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Let’s start with some obvious
restrictions to FDI…
• Ownership restriction !
• Still one can by-pass regulations
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Only 20% of sectors show some
restriction and 1.5% full prohibition
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Do sectors in which more ownership is
allowed to foreigners get more FDI?
Original OECD
countries
Poor African
and Asian
China,
Peru ,
Tunisia Richer Lat Am
& Eastern Europe
Co
rre
lati
on
of
frie
nd
lier
ow
nrs
hip
ru
les o
n F
DI
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Do sectors in which more
ownership is allowed to
foreigners get more FDI? … Inverse U – shape on the level of development
• Poor countries. NO POWER
– tax what they can.
• Middle Income countries YES
– Show correlation predicted by “ownership theories” • More restriction goes with less investment
• High income countries. NO POWER
– … with good institutions
– Have other means to secure FDI beyond ownership
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Types of constraints…
• Taxes
• Other government imposed frictions.
• Rule of Law
• Coordination: B2B vs B2G…
• Lack of complements/inputs
• Unawareness
Usually less mentioned
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Histogram: all possible projects by IRR Project privately pursued if IRR > r [1+t]
0
t1rr
If Cov(IRRi ,ti)=0
Good stuff
happens
anyways!
][ Project ofReturn of Rate i iIRR
)(IRRf
Distortion is not
necessarily a tax
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Also known as size related distortions
# 2: Distortion worse for better projects
)(f
][ Project ofReturn of Rate i 0
ir t1
If Cov(IRRi ,ti)>0
Policy reform
has more effect!
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Decision to evaluate a project is not
based on IRR but on NPV (area) ! R
etu
rn 7
0%
+ 3
0%
= 1
00%
Amount Invested
US$40,000
Retu
rn 3
0%
Amount Invested
US$1.000.000
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How much water does the broken barrel holds?
FDI policies can be…
Complements or Substitutes
Low
socia
l conflic
t
Adm
in B
urd
en
Infra
stru
ctu
re
Hum
an c
apita
l
Low
taxes
Fin
ancin
g
Low social conflict
Admin Burden
Infrastructure
Human capital
Low taxes
Financing
Multiplication*? Summation The minimum
How do measures produce results ?
Reality lies
somewhere in
between…
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What constraints the next $1 b of
foreign investment? • Are all the great projects taken?
• Are all project evaluated?
• A single constraint for most sectors? • When in ER / ICU, usually yes…
• But not when you exit ER / ICU.
• Are policies complements or substitutes?
• Do the sectors exist? • Or the industry has not born yet? Coase Theorem does not apply…
» Difficult to negotiate
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III.
MODERN “INDUSTRIAL POLICIES”
FOR FDI…
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Claim: The hardest challenge is
Public-Public coordination (and for good resons e.g. Tirole, 1986) – No Price System !
• Challenge for FDI projects that need multiple government provided inputs.
• Failure of Coase Theorem.
Ministry 1
Tool 1
Indicator 1
Ministry 2
Tool 2
Indicator 2
Ministry 3
Tool 3
Indicator 3
Ministry 4
Tool 4
Indicator 4
President/Prime Minister or Min of Finance / Planning?
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It isn’t “picking winners”, but max
“treatment effect” of FDI policies
• Max “Treatment Effect menus cost”
– Different from what a Venture Capital would like…
• g is a VECTOR of multiple government inputs
• Think as a Portfolio…
– It diversifies risk …
– Changes political economy of evaluation
– Makes easier an evaluation…
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Differences with 1960s FDI for Import Substitution…
• Focus on “Consumer Durables” in small markets.
• Inability to adapt procurement or spillovers
• Avoid cannibalization of Import Substituter FDI in neighbor
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New Container Manufacturing Plant…
Awareness: somebody evaluated the project!
• No tax breaks!
• Provision of specific public goods.
• 2000+ jobs; half of them for women Marginal
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How to create “signals of scarcity”
in Gov. to promote FDI?
• Voucher per job…
• Evaluate Projects for Private Sector. – When problem is not the $...
– … But the organizational bandwidth.
• Land & Local Govs prepared to receive FDI…
• Coordinating Office. Not a new Ministry! Not new Silo – Committment at the top…
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A checklist for Targeted Policies (e.g. FDI project)
Questionnaire for industrial policy targeting Answers
1. If successful, can it “make a dent”? Can it be large enough
either directly or indirectly?
2. “The Chicago Questions”
a. If so profitable, why isn’t the (FDI) project already working?
a. If there are market failures, what prevents an efficient
negotiation? (Failures to Coase Theorem)
3. Contributes to other goals besides “plain vanilla” growth?
(better jobs, hedging, stepping stone to other industries…)
4. What do the proxies for success probability suggest?
5. What are the implementation challenges
6. Exit strategy. A policy with costly exit? How to mitigate or
provision for them?
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Summing up • Some FDI might be a tool for development goals.
• Beware of measuring what you want! NPV of taxes and externalities…
• Include pecuniary externalities (better jobs!)
• Distortions to FDI may not be taxes & procedures…
• Sometimes it is too little State Involvement rather than too much…Sometimes.
• “Industrial policies” attracting FDI should target today’s most binding constraints… which might not be yesterday’s constraints (when agencies were created)
• Usual institutions related to taxes, legal security (mining)
• New channels on State Coordination, GVCs…
• Use some kind of smart & flexible checklist…
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Thinking of a Scorecard (case by case risk assessment)
• Why and when was this regulation imposed?
• What’s the risk of tax revenue reduction if ownership regulation is removed? (Profit shipping as Desai &
Foley, 2001; Limited Fiscal Capacity Besley & Persson,2010)
• What’s the risk that the powerful groups that receive rents from FDI ownership restriction require some other (potentially more distortive) rent? (Seesaw effect in
Acemoglu & Robinson,2003)
• Are there reasons to justify that joint ownership can create learning? (Javorcic, 2004)
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Why too little FDI?
Financiamiento
Low social
return
¿Y Utilidades
reinvertidas?
Management Factores
“Contratos”
Firmas con alto
potencial que
NO Nacen
(Start-up)
Problemas de
Scale-up
Infraestructura
y Bienes
públicos
Tamaño del
Mercado y
Masas críticas
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SOME EXAMPLES OF NEW
PRODUCTS…
Wagner, Rodrigo & Zahler, Andrés, 2015. "New exports from emerging markets:
Do followers benefit from pioneers?," Journal of Development Economics
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Despite centuries of know how,
modern wine exports from Chile…
started with a foreign firm
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Thinking of a Scorecard (case by case risk assessment)
• Why and when was this regulation imposed?
• What’s the risk of tax revenue reduction if ownership regulation is removed? (Profit shipping as Desai &
Foley, 2001; Limited Fiscal Capacity Besley & Persson,2010)
• What’s the risk that the powerful groups that receive rents from FDI ownership restriction require some other (potentially more distortive) rent? (Seesaw effect in
Acemoglu & Robinson,2003)
• Are there reasons to justify that joint ownership can create learning? (Javorcic, 2004)
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FDI and Jobs…
OPEX
• Manufacturing is unskilled
labor intensive in its
Operational Expenses.
• Day to day business…
CAPEX
• Mining is NOT labor
intensive…
• But in the investment
stage it is very labor
intensive
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Claim: A better image of FDI in
recipients cannot come only
from CSR
• Jobs
• Taxes.
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SOME COUNTRIES INTERNALIZE
THE EXTERNALITY OF A
COUNTRY’S BRAND AS
INVESTOR…
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Why do the Chinese send more
FDI to Argentina than to Chile?
0
100
200
300
400
500
600
Argentina Chile
Ch
ines
e F
DI M
illio
n
USD
(fd
iMar
kets
)
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Clearly NOT a China-Latin America exception
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The model as an example
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Labor Demand shifter !
• Think about *FDI* as a black box
that can raise the demand for the type of
labor that needs more inclusion.
• Could be a sustitute for