Steven Poelhekke

Foreign Direct Investment and Urban Concentrations: Unbundling Spatial Lags

Cross-country regressions suggest that urbanization and FDI are important drivers of growth. However, it is not clear that primacy eventually hurts growth performance. Since it is tough to interpret cross-country growth regressions, we provide detailed evidence on the determinants of outward FDI from the US. FDI is higher in countries that are close to the US and have good institutions, well developed financial systems, a high road density, a high income per capita and substantial natural resource exports. Countries also attract more FDI if they have more medium-sized cities and primacy is not too large. We show that good institutions in neighbouring countries are important drivers of FDI. FDI is higher if neighbours suffer from primacy. However, FDI is attracted if surrounding countries have fewer cities, restrictions on international trade and low market potential (income per capita). We tentatively conclude that cities are important drivers of FDI and growth and unbundling spatial lags matters. Robustness is verified by re-estimating our regressions with fixed effects and for the sample of OECD countries.

Do Natural Resources Attract Nonresource FDI

A new and extensive panel of outward nonresource and resource FDI is used to investigate the effect of natural resources on the different components of FDI. Our main findings are as follows. First, for countries which were not a resource producer before, a resource discovery causes nonresource FDI to fall 16% in the short run and by 68% in the long run. Second, for countries that were already a resource producer, a doubling of resource rents induces a 12.4% fall in nonresource FDI. Third, on average, the contraction in nonresource FDI outweighs the boom in resource FDI. Aggregate FDI falls by 4% if the resource bonanza is doubled. Finally, these negative effects on nonresource FDI are amplified through the positive spatial lags in nonresource FDI. We also find that resource FDI is vertical, whereas nonresource FDI is of the export-fragmentation variety. Our main findings are robust to different measures of resource reserves and the oil price and to allowing sample selection bias.

Do Natural Resources Attract FDI? Evidence from Non-Stationary Sector-Level Data

A new and extensive panel of outward foreign direct investment (FDI) at the sector level is used to estimate the determinants of non-resource and resource FDI. Since FDI is I(1), we estimate panel error-correction models of FDI with spatial lags for FDI and market potential. Our main result is that subsoil assets boost resource FDI, but crowd out non-resource FDI. The effect on non-resource FDI dominates, so that aggregate FDI is less in resource-rich countries. Spatial lags aggravate this crowding out of non-resource FDI. In addition, we find that (i) resource FDI is mainly vertical whereas other FDI is of the export-fragmentation variety; (ii) trade openness, free trade agreements and institutional quality do not impact non-resource FDI but institutional quality does have a positive effect on resource FDI; and (iii) the short-run dynamics comes mostly from shocks to FDI itself. Our main and ancillary results are robust to different measures of resource reserves and the oil price and to allowing for sample selection bias.

The Impact of Natural Resources: Survey of Recent Quantitative Evidence

Abstract The cross-country empirical evidence for the natural resource curse is ample, but unfortunately fraught with econometric difficulties. A recent wave of studies on measuring the impact of natural resource windfalls on the economy exploits novel datasets such as giant oil discoveries to identify effects of windfalls, uses natural experiments and within-country econometric analysis, and estimates local impacts. These studies offer more hope in the search of quantitative evidence.

Green Havens and Pollution Havens

We test for pollution haven effects in outward foreign direct investment (FDI) for different sectors using a comprehensive and exhaustive dataset for outward FDI from the Netherlands, one of the most environmentally stringent countries and a major source of global FDI. Our evidence suggests that in the sectors natural resources extraction and refining, construction, retail, food processing, beverages and tobacco, and utilities, a less stringent environmental policy in the host country significantly attracts FDI. What is important for these pollution haven effects is not only regulation but also enforcement of environmental policy. In contrast to earlier results, it is not only footloose industries that display pollution haven effects, but also the traditional pollution-intensive industries. But for the sectors machines, electronics and automotive and transportation and communication a more stringent and better enforced environmental policy attracts more FDI as this may help their reputation for sustainable management and CSR. These sectors display green haven effects. These findings have important implications for the sector distribution of FDI in destination countries.

Home Bank Intermediation of Foreign Direct Investment

This paper investigates the benefits of banks’ direct investment in foreign subsidiaries and branches for non-financial multinationals. The paper builds on the literature on international banks which has primarily focused on the implications for host countries, rather than for its international clients, and on the literature on foreign direct investment (FDI), which emphasizes significant costs of investment. Using a new detailed data set of non-stationary sector-level outward FDI, this paper finds that the volume of FDI by home market banks boosts FDI by non-financial firms from the same home market. Domestic and third-country foreign banking provide imperfect substitutes, especially in countries that are corrupt or have weak rule of law. The result rests on banks’ FDI in local branches and subsidiaries rather than cross-border lending. These findings are consistent with a role for home market multinational banks in intermediating information asymmetry in opaque foreign markets. The sale of a major international bank to third-country counter parties during the recent crisis may thus result in persistently lower volumes of outward FDI from the bank’s home market.

Former Foreign Affiliates: Cast Out and Outperformed?

The literature has documented a positive effect of foreign ownership on firm performance. But is this effect due to a one-time knowledge transfer or does it rely on continuous injections of knowledge? To shed light on this question we focus on divestments, that is, foreign affiliates that are sold to local owners. To establish a causal effect of the ownership change we combine a difference-in-differences approach with propensity score matching. We use plant-level panel data from the Indonesian Census of Manufacturing covering the period 1990-2009. We consider 157 cases of divestment, where a large set of plant characteristics is available two years before and three years after the ownership change and for which observationally similar control plants exist. The results indicate that divestment is associated with a drop in total factor productivity accompanied by a decline in output, markups as well as export and import intensity. The findings are consistent with the benefits of foreign ownership being driven by continuous supply of headquarter services from the foreign parent.

Mining Matters: Natural Resource Extraction and Local Business Constraints

We estimate the impact of local mining activity on the business constraints experienced by 25,777 firms across nine large and resource-rich countries. We find that the presence of active mines in firms’ immediate vicinity (<20 km) deteriorates the business environment in tradeable sectors. Access to inputs and infrastructure becomes more constrained for these firms and this adversely affects their growth. In contrast, nearby active mines have a positive effect on firms in non-tradeable sectors. Moreover, we show that the presence of mines at a greater distance (21-150 km) relaxes business constraints of all firms, in line with positive regional spending effects.

How expensive should CO2 be? Fuel for the debate on optimal climate policy

Most people are convinced that climate change is a threat and that it should somehow be dealt with. It is also clear that CO2 emissions are still too cheap and must be priced higher to sufficiently curtail emissions. Yet how high should a carbon tax be? Answering this question requires scientific insights on the costs and benefits of a carbon tax but also ethical - and thus political - judgements on how we value the damages from climate change that will happen in the near and in the far future. This paper reviews the evidence on the social cost of carbon and discusses global and unilateral policy options. It finds that a price of

Follow the Money: Does the Financial Sector Intermediate Natural Resource Windfalls?

77 per metric ton of carbon is defensible if we give 95% weight to damages occurring two generations (or 50 years) from now but higher if we want to further reduce the risk of catastrophic change. It is best implemented as part of trade agreements and in combination with R&D investment.