Research project paper about the impact of foreign direct investment and its effect on GDP particularly in the former USSR.

1. Roger Miller Special Project Presentation

2. Foreign Direct Investment’s influence on growth A Review of Literature

3. FDI and enterprise restructuring in Central Europe (Barrell and Holland 2000)* Panel of 11 manufacturing sectors in Hungary, Poland and Czech Republic Find evidence to show labor productivity increased from FDI learn techniques of management, technology, processes Some evidence to suggest that FDI has helped speed the process of enterprise restructuring Deeper restructuring has almost exclusively been in firms with foreign participation

4. FDI, Technological Change, and Economic Growth within Europe (Barrell and Pain 1997) Argue that FDI acts as important channel for diffusion of ideas and new innovations even between developed economies Suggest that technology is not exogenous as in the H-O model Hope their evidence prompts more research

5. How does FDI affect economic growth? (Borensztein, Gregorio and Lee 1998)* FDI has positive effect on growth but the magnitude depends on human capital stock Including interaction between FDI and HK (sse) improved performance of their model Strong complementary effects between FDI and HK on growth rate of income

7. FDI as Technology Transferred: Some Panel Evidence from the Transition Economies(Campos and Kinoshita 2002)* Theoretical lit identifies benefits, empirical lit has not been able to show significant positive link between FDI and growth of host countries 25 Central European and FSU nations (‘90-’98) – purer tech transfer in transition economies – FDI shows positive and significant impact in line with theory predictions Min threshold of HK is necessary (Gregorio and Lee) Positive effect of FDI is independent of presence of domestic investment (implied, 18)

8. From Table 5:

9. Corporate Governance in the FSU: An Overview (Estrin and Wright 1999) Slow progress – from weakness in implementing effective corporate governance or weaknesses in broader economic environment? Problems of transitions in FSU concern delays introducing corporate governance mechanisms and appropriate competitive market environment Most FSU countries have privatized successfully, some unwilling to reform (Ukraine, Belarus) Foreign Owners introduce new capital and Western experience, worker owned slows improvements like labor reduction and restructuring Entrepreneurs are good, they choose best locations Relatively short time since restructuring started, more time… Other factors may be important like more effective legal infrastructures and enhanced market competition, without which even governance issues are not able to be resolved well

10. The Transition Economies After Ten Years (Fischer and Sahay 2000) Best reforms are most consistent and committed reforms 25 transitional economies (1989-1998): Albania, Armenia, Azerbaijan, Belarus, Bulgaria, Croatia, Czech Rep., Estonia, Georgia, Hungary, Kazakhstan, Kyrgyz Rep., Latvia, Lithuania, Macedonia, Moldova, Poland, Romania, Russia, Slovak Rep., Slovenia, Tajikistan, Turkmenistan, Ukraine, Uzbekistan Least time under communism Initial decline in transition for all countries Both Macro stabilization and structural reforms are necessary Russia assumed all FSU foreign debt though modest

11. Does FDI increases GDP per capita growth in the Former Soviet Union? By Roger Miller

12. I. Introduction: Soviet Union: Centrally planned, quota driven Heavy industrial sector, overpaid agriculture Great citizen benefits, tied to job Many great market economies around them Theory says FDI should increase growth with productivity, technology, exposure to new processes, managerial skills, employee training, international production networks, access to markets (Alfaro et al. 2007)

13. Firm level studies have not shown positive effects on growth including technology (Carkovic and Levine 2002) Such benefits may be hidden in the numbers and difficult to measure directly Macroeconomic studies show FDI good for growth when financial markets can manage flows Market economies allow for people to find their niche, everybody wins ’94-’98 study found FDI in Europe’s transitioned economies is determined by risk, labor cost, market size, gravity factors, if joining EU – increases faith in that economy, FDI increases, which increases growth (Bevan and Estrin 2000)

14. MNC’s are more technologically advanced, smart business, lower cost to replicate technology, likely to improve also Work force must be capable of learning production and processes Aim: Show positive effects of FDI for FSU nations FSU isolated in analysis because of their history as a combined socially planned economy Corruption and governance may be problems, but are difficult to accurately measure Hope: showing benefits from FDI would stimulate policy to invite more of it

15. II. Structure of the Model Form is OLS: coefficient = effect, all else constant Start in 1995 allowing for more transition to have taken place, and stabilized Developing, growing, stabilizing, attracts FDI Causality, endogeneity, corrections

16. The Growth Model Dependant: GDPgpc = Growth per capita 5 year average 2001 – 2005 Independents: Initial Income per Capita = Ln(GDP base year 1999) Human Capital = Secondary School Enrollment and Crude Birth Rate FDI = net inflows as a % of GDP, 5 year average FSU = 0,1 indicator

17. Equation

18. III. Variables for analysis: Created Variable FDI (% of GDP)*FSU (indicator) Gross Domestic Savings (% of GDP) Gross Fixed Capital Formation (% of GDP), industrialization Secondary School Enrollment (% of gross) – HK Crude Birth Rate – HK Log of GDP in 1999 for initial capital Openness to trade X + I (% of GDP) Inflation, prices effect trade and investment? Governance: Rule of Law, independent and *FDI*FSU

19. IV. Data:

22. V. Results:

24. VI. Conclusion: Regression analysis to test significance of FDI in transitional economies testing the FSU Not significant when including FDI, FSU, FDI*FSU Significant and large coefficient on FSU Reliability of data, does data capture to isolate effects of FDI Short time since break up, time will tell…

25. Barrell, Ray and Dawn Holland (2000), ‘Foreign Direct Investment and Enterprise Restructuring in Central Europe.’ Economics of Transition, Volume 8, Issue 2, pp. 477-504. Barrell, Ray and Nigel Pain (1997), ‘Foreign Direct Investment, Technological Change, and Economic Growth Within Europe.’ The Economic Journal, Volume 107, Number 455 pp. 1770-1786 Borenstein, E., J De Gregorio, and J-W. Lee (1998), ‘How Does Foreign Direct Investment Affect Economic Growth?’ Journal of International Economics, Volume 45, pp. 115-135. Campos, Nauro F., and Yuko Kinoshita (2002), ‘Foreign Direct Investment as Technology Transferred: Some Panel Evidence from the Transition Economies.’ William Davidson Working Paper Number 438. Estrin, Saul and Mike Wright (1999), ‘Corporate Governance in the Former Soviet Union: An Overview.’ Journal of Comparative Economics, Volume 27, pp. 398-421. Fischer, Stanley and RatnaSahay (2000), ‘The Transition Economies After Ten Years.’ References: