Foreign Direct Investment

Assaf Razin and Efraim Sadka are the authors of Labor, Capital, and Finance. Razin is the Bernard L. Schwartz Chair for the Study of Global Competitive Markets at Tel Aviv University, the Friedman Professor of International Economics at Cornell University, and a research fellow at the NBER, CEPR, and CESifo. Sadka is the Henry Kaufman Professor of International Capital Markets at Tel Aviv University and a research fellow at CESifo and IZA.

• List of Figures ix List of Tables x Preface xi Chapter 1: Overview 1 1.1 Channels of International Capital Flows 1 1.2 Micro-Level Studies 5 1.3 Macro-Finance Studies 6 1.4 Scope and Purpose 8 1.4.1 Bilateral FDI Flows 9 1.4.2 Roadmap 9 Part I. Foreign Direct Investors and Liquidity Shocks Chapter 2: Foreign Direct Investment and Foreign Portfolio Investment: Theory 15 2.1 Introduction 15 2.2 The Model 18 2.2.1 Management and Efficiency 19 2.2.2 Liquidity Shocks and Resale Prices 20 2.3 Ex-Ante Choice between FDI and FPI 22 2.3.1 Expected Value of FDI 22 2.3.2 Expected Value of FPI 23 2.3.3 FDI and FPI 24 2.4 Market Equilibrium 24 2.4.1 Allocation of Investors between FDI and FPI 24 2.4.2 Probability of Early Withdrawals 27 2.4.3 Welfare Analysis 28 2.5 Extension: Aggregate Liquidity Shocks 29 2.6 Conclusion 30 Appendix 2A: Derivation of Figure 2.1 31 Chapter 3: Foreign Direct Investment and Foreign Portfolio Investment: Evidence 34 3.1 Introduction 34 3.2 Data 34 3.3 The Econometric Model 35 3.4 Results 38 3.5 Conclusion 39 Part II: Foreign Direct Investment with Threshold Barriers: Theory Chapter 4: Foreign versus Domestic Direct Investment: Cream-Skimming 43 4.1 Introduction 43 4.2 FDI and Skimming High-Productivity Firms 44 4.3 FPI Inflows versus FDI Inflows 48 4.3.1 Gains to the Host Country 48 4.3.2 The Size of Investment in Capacity in the Host Country 50 4.4 Conclusion 51 Chapter 5: FDI Flows with Endogenous Domestic Wages: Heterogeneous Firms 53 5.1 Introduction 53 5.2 Wage Determination 53 5.3 M&A and Greenfield Investments 56 5.4 Conclusion 59 Appendix 5A.1: Some Comparable Statics Derivations 59 Appendix 5A.2: Reconciliation of the International Flow Paradox according to Lucas 61 Chapter 6: Country-Specific Aggregate Shocks: Representative Firm 63 6.1 Introduction 63 6.2 Country-Specific Productivity Shocks 64 6.3 Conflicting Effects of Source- and Host-Country Productivity Shocks 65 6.4 Conclusion 69 Part III. Foreign Direct Investment with Threshold Barriers: Empirics Chapter 7: Overview of the Econometric Equations 73 7.1 Introduction 73 7.2 The Heckman Selection Model 73 7.3 The Tobit Model 76 7.4 Conclusion 77 Chapter 8: Application to a Baseline Sample: OLS, Tobit, and the Heckman Selection Models 79 8.1 Introduction 79 8.2 Data and Variables 79 8.3 Estimation 80 8.4 Evidence for Fixed Costs 85 8.5 Conclusion 88 Chapter 9: Productivity Shocks 89 9.1 Introduction 89 9.2 Data 90 9.3 Empirical Evidence 91 9.4 Conclusion 97 Chapter 10: Source and Host Corporate Tax Rates 99 10.1 Introduction 99 10.2 Source and Host Taxation 100 10.3 Empirical Evidence 102 10.4 Conclusion 106 Appendix 10A: Basic Principles of International Taxation of Capital Income 106 Part IV. Policy in a Globalized Economy Chapter 11: Tax Competition and Coordination 111 11.1 Introduction 111 11.2 A Source-Host Country Model of Taxes and Public Goods 112 11.2.1 Production 112 11.2.2 Private Consumption 114 11.2.3 Government 116 11.3 Tax Competition 117 11.4 Tax Coordination 118 11.5 Conclusion 122 Epilogue 124 Notes 127 Bibliography 135 Index 141

"Razin and Sadka provide a modern treatment of aggregate foreign direct investment flows and their relationship to portfolio investment and taxation. A unique perspective of this treatise is the emphasis on the role of threshold effects that emerge from fixed costs of FDI. Importantly, there is theory and evidence, which combine into an integrated view of the subject. Scholars and students of international economics will greatly benefit from reading this book."—Elhanan Helpman, Harvard University