Horizontal or Backward? FDI Spillovers, Input-Output ... · Horizontal or Backward? FDI Spillovers, Input-Output Tables and Industry Aggregation Karolien Lenaerts and Bruno Merlevede

Horizontal or Backward? FDI Spillovers, Input-Output Tables

and Industry Aggregation

Karolien Lenaerts and Bruno Merlevede

Outline

2

Overview of the Literature

Research Topic in the Paper

Empirical Approach & Data

Estimation Results

Conclusions

Overview of the Literature

Foreign Direct Investment

4

Governments all over the world develop policies to attract multinationals (MNEs)

Benefit from both direct and indirect effects of multinational activity:

- direct effects: employment, infrastructure

- indirect effects: FDI spillovers

FDI Spillovers

5

Markusen (1995): when investing abroad, MNEs bring proprietary technology with them to compete with local firms

MNE invests & brings technology

Technology leaks or is transferred

intentionally

The technology is adopted by

domestic firms, raising their

productivity level

FDI Spillovers

FDI Spillovers

horizontal and vertical FDI spillovers

raw materials final goods

goodsspillovers

Upstream Supplier

Foreign Subsidiary

Downstream Customer

Local Competitor

backward spillover

forward spillover

horizontal spillover

6

Supply Chain

Research Topic in the Paper

Research topic in the paper

8

Link with the literature:

- mixed empirical evidence on FDI spillovers

- many different explanations

Our contribution: importance of the level of industry aggregation in input-output tables


9

Focus: level of industry aggregation in the input-output (IO) tables

Why?

- spillovers are constructed from IO-tables

→ technical coefficients of vertical spillovers

- level of aggregation in the IO-tables determines

classification in horizontal or vertical spillovers

FDI Spillovers

10

FDI spillovers: computation

Proxy for the share of industry j’s output produced by foreign firms

Proxy for the foreign presence in industries supplied by industry j(linkages between MNEs and suppliers)

Proxy for the foreign presence in industries that supply industry j(linkages between MNEs and clients)

Horizontal or vertical?

11

a b a b a b

a

b

a

b

a

b

a b a b a b

a

b

a

b

a

b3

1 2 3

3

Intermediate Consumption

Industry

Intermediate Consumption

1

2

1

2

3

Industry1 2

IO-tables at aggregated and detailed level of industry aggregation

Importance of the diagonal

12

Consider specific sectors:

X = off-diagonal elements within the same 2-digit industry

X / within NACE 2-digit intermediate supply

X / total intermediate supply

FOOD 26 % 12.1%

CHEMICALS 47% 6.5%

MINERAL PRODUCTS 37% 4.3%


13

Additional research question:

Inclusion of within-industry intermediate supply and use of goods (include the diagonal of the IO-table)

→ BK as supplier-customer relationship

→ potential solution when tables are aggregated?

Empirical Strategy & Data

Empirical Strategy

15

Havranek & Irsova (JIE, 2011): best practice→ Javorcik (AER, 2004)

FDI spillover analysis: two-step estimation procedure in a production function framework

Two-step estimation procedure- first step: estimate total factory productivity (TFP)- second step: relate the estimated TFP to FDI

spillover variables, control variables,time, industry and region dummies

Empirical Strategy

First step: estimate total factor productivity

Issue: (potential) endogeneity between input

choices and productivity

OLS estimates will be biased

Alternative methods: OP, LP, ACF, DPD

Alternative specification: translog

16

Empirical Strategy

Second step: relate the estimated TFP to

FDI spillover variables, control variables and

time, region and industry dummies

Equation to estimate:

TFPijrt = αi + ψ1 f(FDIjt-1) + ψ2 Zi(j)t-1 + ξijrt

∆TFPijrt = ψ’1 ∆f(FDIjt-1) + ψ’2 ∆Zi(j)t-1 + αt + αj + αr + εijrt

17

Data

18

Romanian manufacturing firms with at least five employees on average (1996-2005)

Data sources:

- firm-level data: Amadeus database Bureau Van Dijk

- input-output tables: Romanian Statistical Office

→ detailed input-output table (NACE 3)

→ collapse to more aggregated level (NACE 2)

Data

Why Romania?

Excellent coverage in the Amadeus database

Characteristics of FDI in Romania:

- entry in the late 1990s

- concentrated in manufacturing industries

Note: stylized facts confirmed: foreign firms are larger

(labour, capital, output) and more productive

19

Estimation Results

Estimation results

21

ACF OP DPD TL

Agg. Det. Agg. Det. Agg. Det. Agg. Det.

HOR 1.908** 1.205*** 0.578** 0.344* 0.543** 0.327* 0.579** 0.346**

[0.734] [0.463] [0.240] [0.175] [0.239] [0.177] [0.242] [0.176]

BK 2.553 2.146** 1.426* 1.059*** 1.367* 1.071*** 1.287* 1.027***

[1.746] [0.958] [0.752] [0.330] [0.731] [0.325] [0.745] [0.328]

# obs. 73,255 73,255 96,681 96,681 96,728 96,728 96,728 96,728

R² 0.079 0.074 0.063 0.062 0.059 0.059 0.068 0.067

***/**/* denotes significance at 1/5/10 percent

Aggregated versus detailed input-output tables: zero-diagonal definition

Estimation results

22

The level of industry aggregation matters!

ACF OP DPD TL


HOR 1.908** 1.205*** 0.578** 0.344* 0.543** 0.327* 0.579** 0.346**

[0.734] [0.463] [0.240] [0.175] [0.239] [0.177] [0.242] [0.176]

BK 2.553 2.146** 1.426* 1.059*** 1.367* 1.071*** 1.287* 1.027***

[1.746] [0.958] [0.752] [0.330] [0.731] [0.325] [0.745] [0.328]

# obs. 73,255 73,255 96,681 96,681 96,728 96,728 96,728 96,728

R² 0.079 0.074 0.063 0.062 0.059 0.059 0.068 0.067


Estimation results

23


ACF OP DPD TL


HOR 1.908** 1.205*** 0.578** 0.344* 0.543** 0.327* 0.579** 0.346**

[0.734] [0.463] [0.240] [0.175] [0.239] [0.177] [0.242] [0.176]

BK 2.553 2.146** 1.426* 1.059*** 1.367* 1.071*** 1.287* 1.027***

[1.746] [0.958] [0.752] [0.330] [0.731] [0.325] [0.745] [0.328]

# obs. 73,255 73,255 96,681 96,681 96,728 96,728 96,728 96,728

R² 0.079 0.074 0.063 0.062 0.059 0.059 0.068 0.067


Estimation results

24


ACF OP DPD TL


HOR 1.908** 1.205*** 0.578** 0.344* 0.543** 0.327* 0.579** 0.346**

[0.734] [0.463] [0.240] [0.175] [0.239] [0.177] [0.242] [0.176]

BK 2.553 2.146** 1.426* 1.059*** 1.367* 1.071*** 1.287* 1.027***

[1.746] [0.958] [0.752] [0.330] [0.731] [0.325] [0.745] [0.328]

# obs. 73,255 73,255 96,681 96,681 96,728 96,728 96,728 96,728

R² 0.079 0.074 0.063 0.062 0.059 0.059 0.068 0.067


Estimation results

25


Aggregated table: horizontal

↔ Detailed table: horizontal and backward

Upward bias of horizontal spillover coefficient

Bias against finding significant backward spillovers

Results hold for FE and LP

Estimation results

26

Zero-diagonal or non-zero-diagonal?


ACF OP

Agg. Det. Agg. Det.

zero non-zero zero non-zero zero non-zero zero non-zero

HOR 1.908** 2.020** 1.205*** 0.712 0.578** 0.700* 0.344* 0.216

[0.734] [1.002] [0.463] [0.497] [0.240] [0.382] [0.175] [0.190]

BK 2.553 2.251 2.146** 2.344** 1.426* 0.918 1.059*** 0.923***

[1.746] [1.964] [0.958] [1.004] [0.752] [0.710] [0.330] [0.323]

# obs. 73,255 73,255 73,255 73,255 96,681 96,681 96,681 96,681

R² 0.079 0.076 0.074 0.074 0.063 0.060 0.062 0.061

Estimation results

27

Zero-diagonal or non-zero-diagonal?ACF OP

Agg. Det. Agg. Det.

zero non-zero zero non-zero zero non-zero zero non-zero

HOR 1.908** 2.020** 1.205*** 0.712 0.578** 0.700* 0.344* 0.216

[0.734] [1.002] [0.463] [0.497] [0.240] [0.382] [0.175] [0.190]

BK 2.553 2.251 2.146** 2.344** 1.426* 0.918 1.059*** 0.923***

[1.746] [1.964] [0.958] [1.004] [0.752] [0.710] [0.330] [0.323]

# obs. 73,255 73,255 73,255 73,255 96,681 96,681 96,681 96,681

R² 0.079 0.076 0.074 0.074 0.063 0.060 0.062 0.061


Estimation results

28

Zero-diagonal or non-zero-diagonal?

Aggregated table: no impact

↔ Detailed table: horizontal effect disappears

No solution for the biases

Estimation results

29

Contribution to TFP level– sector 15

Estimation results

30

Contribution to TFP level– sector 24

Conclusions

Conclusions

32

Literature: mixed evidence of FDI spillovers

→ channels, determinants, measurement

In this paper:

- level of industry aggregation in IO-tables matters

- zero-diagonal versus non-zero-diagonal definition

In the analysis of FDI spillover effects, use IO-tables with a sufficiently detailed industry classification!

Documents

Horizontal or Backward? FDI Spillovers, Input-Output ... · Horizontal or Backward? FDI Spillovers, Input-Output Tables and Industry Aggregation Karolien Lenaerts and Bruno Merlevede