Download Trade and Foreign Direct Investment nexus in West Africa

Trade and Foreign Direct
Investment nexus in West Africa:
Does export categories matter?
Chukwuka Onyekwenaa, Idris Ademuyiwaa and Eberechukwu Unezeab
aCentre
for the Study of the Economies of Africa (CSEA), Nigeria.
bBaze University, Abuja,
Nigeria
Trade and FDI relationship
•
The relationship between trade and FDI has been debated
•
Both Economic and international business theories show that
FDI and trade are substitutes, particularly when FDI is
horizontal; but when FDI is vertical, trade and FDI can coexist.
•
Multi-product firms also allow for the coexistence of trade
and FDI – alternate between foreign investment and trade for
different goods. FDI for good A; trade for good B.
Trade and FDI relationship contd.
• Third party effect: FDI from a particular country to a
host country, promotes or debars trade between that
host country and other countries. This can yield a
combination of complementary and substitution
relationship between them.
• Available data on FDI and trade not sufficient to capture
the complex interplay – empirical results differ across
literature
• The lack of consensus points to the need for evidence
to support policies on trade and FDI promotion
Contribution
• Literature has been focused on the effect of outward FDI on
home country’s export of intermediate goods or host country’s
export of final goods, with little attention given to the effect of
inward FDI on host country’s exports – this study fills the void.
• The present study presents the “commodity-proximity” model
which explains how multinational’s presence in upstream
production in resource-abundant countries can stimulate the
extraction or processing of raw materials into intermediate
goods for onward exporting to source countries for
downstream production.
• Specifically, the present study investigates the effect of inward
FDI on ECOWAS exports to the EU – first to investigate FDITrade relationship in natural resource rich countries.
Stylized facts – ECOWAS-EU trade
• 90 percent of trade in the ECOWAS region is with partners
outside. BRICS, EU-28, and FTAA constitutes 70% of the
ECOWAS total exports.
• EU accounts for over 30% of the regions exports, as at 2013,
a decline from 43% in 1995. Decline attributable to the Euro
crisis and the emergence of new competitors in global trade
– BRICS.
• The share of BRICS in ECOWAS’s exports rose from less than
10% in 1995 to about 25% in 2013.
Stylized facts – ECOWAS-EU trade contd.
• Broad Economic Categories (BEC) show ECOWAS
trade across different export categories.
• Within ECOWAS, primary goods export remain
dominant, albeit declining from 86% in 2000 to 66%
in 2010.
• Within the same period, the share of intermediate
goods exports increased from 10% to 30%, while
final goods export remain steady at 5%.
Fig 1: Shares of Economic Groups in ECOWAS’ Exports, 1995 to
2013
Percentages
50
45
40
35
30
25
20
15
10
5
0
BRICS
FTAA*
1995
EU-28
Rest of Africa*
2005
Rest of the World
2013
Fig 2: ECOWAS Exports to selected EU countries in terms of BEC
79.9
77.1
75.7
70.5
25.3
8.0
12.1
15.6
8.6
2000
11.0
4.2
2001
Shares of Final Gds.
12.0
Shares of Intermediate Gds.
2007
2011
Shares of Primary Gds.
Theoretical foundations
•
•
•
Earlier trade and FDI models elaborate the
substitutability argument - Mundel (1957), Kindleberger,
1969.
International business theories also support
substitutability of FDI and trade - Dunning (1977) shows
the motives for serving a foreign market in the OLI
eclectic theory.
New trade theory led to the adjustment of the theory of
multinational corporations: Markusen (1984) – Horizontal
FDI; Helpman (1984) – Vertical FDI
Theoretical foundations contd.
• Categorization of FDI into vertical and horizontal is key to explaining the
coexistence of FDI and trade.
• Markusen (1997, 2002) vertical model show that the parent firm in a
skilled labour abundant country exports intermediate goods and
intangible assets to affiliates in the host country. The intermediate goods
usually consist of parts and components which utilizes high-skill labour
in the upstream, while the assembly of final goods is based in the lowskill host country.
• The present study presents the “commodity-proximity” model – an
entirely different configuration – major departure from previous models
– abundance of natural resources plays a key role – “reverse” Markusentype vertical FDI and trade model – Upstream production in the host
country – involves primary goods extraction and mild processing – fits
into the West African FDI and export pattern
Fig 3: Vertical specialization (Markusen 1997, 2002)
Home
Abroad
Export of intermediate goods
MNC parent –
MNC affiliate
- downstream
upstream
Export of final goods to source country
Sale of final
goods in host
country
Fig 4: Commodity proximity Vertical FDI – Reverse “Markusen- Type”
Home
(EU)
Abroad
(ECOWAS)
Transfer of knowledge based assets
MNC parent –
downstream
MNC affiliate
– upstream
(skilled labour
abundant)
(unskilled labour
abundant)
Export of primary/ semi processed intermediate goods
Commodity proximity model
Two scenarios are plausible:
•
•
First case: Resource-seeking multinationals engage mainly
in the extraction of resources and export them to the
source country where other stages of production takes
place. The upstream production is generally capital
intensive, and the labour component is usually lower
skilled than the downstream
Second case – multinational presence in upstream
production can drive both extraction and subsequent
processing into intermediate goods, which are exported
for further processing in the downstream of the source
country – product design, marketing, and distribution
Empirical model
• Aim – to investigate the relationship between
inward FDI into ECOWAS countries and the
bilateral trade with EU countries
• Gravity model is appropriate empirical model
(Clausing, 2000; Amiti and Wakeline, 2003;
Mullen and William 2011)
• The present study augments the conventional
Gravity model to control for multilateral trade
resistance.
Empirical model contd.
•
Following Anderson and Van Wincoop (2003) and Balwin and
Tagioni (2006, 2011):
𝑙𝑛 𝐸𝑋𝑃𝑂𝑅𝑇𝑖𝑗𝑡 = 𝛼0 + 𝛼1 𝑙𝑛 𝐺𝐷𝑃𝑖𝑡 + 𝛼2 𝑙𝑛 𝐺𝐷𝑃𝑗𝑡 + 𝛼3 𝑙𝑛 𝐷𝑖𝑠𝑡𝑖𝑗
+ 𝛼4 𝐿𝐴𝑁𝐺𝑖𝑗 + 𝛼5 𝑙𝑛 𝐷𝑃𝐶𝐼𝑖𝑗𝑡 + 𝛼6 𝑙𝑛 𝐹𝐷𝐼𝑖𝑡 + 𝜌𝑡 + 𝛾𝑗𝑡
+ 𝜀𝑖𝑗𝑡 … … … 3
• Employed least square variable technique (LSDV) estimation
technique. Equation (3) is estimated for the three categories of
exports: primary, intermediate, and final exports
Table 1: Variable Description
Variable/Symbol
Description
A-priori expectation
EXPORT
total exports
positive
GDP
Source and partner countries nominal GDP
positive
Dist
Bilateral distance between the two partners (distance
between the major port cities)
negative
LANG
dummy variable that capture the sharing of common
language
positive
DPC
differences in per capita income between the two trading
partners – proxy for differences in relative factor
endowments
positive
FDI
Inward Foreign Direct investment in the host country
Complementary –
Positive ; Substitutes
– Negative
𝛾
Nations dummies for all trade flows involving a particular
nation – to control for multilateral resistance
𝜌
Year dummies to control for the correlation that may exist
between the resistance term and the included variables
Table 2 Data Description
Data
Source
Bilateral exports from 10 ECOWAS
members to 7 EU countries for the
period 2000-2010, based on Broad
Economic Classification s (BEC)
UN Comtrade Database
Data on bilateral distances and
common language
CEPII Database
Nominal GDP and per capita income
World Development Indicators (WDI)
Database
FDI
UNCTAD Statistics Database
Table 3: Empirical Results – Year and country effects
Independent
Variables
lnDist
Primary Exports Intermediate
Exports
Final Exports
-0.725
-1.121
-1.498**
-0.949
-1.587
0.699
0.592***
0.546***
0.800***
0.094
0.162
0.071
-1.510
-1.320
-2.99***
-1.075
-1.863
0.818
0.586**
-1.431***
0.001
0.229
0.390
-0.168
Constant
5.840
-3.107
0.751
-5.209
-0.048
-2.277
Adjusted R2
N
0.60
0.35
0.57
649
770
718
LANG
lnDPCI
lnFDI
Conclusion
•
•
•
Results from the gravity model show that while increased
inflow of FDI promotes the export of primary goods from
ECOWAS to the EU, it is associated with a reduction in the
exports of intermediate goods and has no significant
effect on final goods exports.
One plausible explanation for this persistent observation
is that FDI into the ECOWAS remain resource-seeking
We recommend that in order to achieve export
diversification and commodity based industrialization,
ECOWAS members should align their investment
promotion priorities with their industrialization policies
Thank You