Essays on foreign direct investment and globalization

Abstract

This dissertation is composed of three essays investigating the implications of foreign direct investment (FDI) inflows for developing countries and the forces driving such flows. Lately, many economies have been opening their retail sector to FDI, yet little is known about possible implications of such liberalization. In Chapter 2, using data from Romania, I look at how the presence of global retail chains affects the supplying industries. I show that the subsidiaries of global chains are larger in size, more capital intensive and exhibit higher labor productivity than other retailers. I then apply a difference-in-differences method and find that the expansion of global chains leads to a significant increase in TFP in the supplying industries. These results suggest that the opening of the retail sector to FDI may stimulate productivity growth in upstream manufacturing. Existing studies have focused on productivity spillovers from FDI postulating a constant marginal effect. In Chapter 3, I use markup as an alternative measure of firm performance, exploring multiple dimensions of the impact of FDI, and examine the possibility that marginal spillovers diminish. Using Romanian data, I find that the relationship between downstream FDI and upstream markups is in the shape of an inverse-U, i.e. at some critical value of FDI, the marginal effect turns from positive to negative; the intra-industry impact of FDI is weak but, when considering companies with minority foreign ownership, the relationship is also inverse-U shaped. My findings support the idea of diminishing marginal spillovers, which advance current belief on positive vertical spillovers and offers an explanation to the ambiguous evidence on horizontal spillovers.International vertical integration is an important reason behind the growth in FDI, yet little evidence is available on why it varies across industries. In Chapter 4, I examine the theory of Antras and Helpman and provide an empirical answer to the question. My approach takes advantage of the correspondence between the pattern of international investment and that of trade in intermediates. I show that productivity dispersion and input intensities influences an industry's propensity to import intermediates from developing countries and, hence, the extent of vertical integration.