Working Paper: NBER ID: w11639
Authors: Assaf Razin; Efraim Sadka; Hui Tong
Abstract: 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.
Keywords: No keywords provided
JEL Codes: F2; F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Positive productivity shock in the host country (O49) | Increase in desired FDI flows (F21) |
| Positive productivity shock in the host country (O49) | Decrease in likelihood of new FDI flows from the source country (F23) |
| Increase in desired FDI flows (F21) | Negative correlation with likelihood of obtaining new FDI flows (F64) |