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Bridging the Gap: the Role of Trade and FDI in the Mediterranean Effect of FDI on the Productivity of the Egyptian Industrial Sector Nada Massoud Naples, June 2006 Effect of FDI on the Productivity of the Egyptian Industrial Sector 1. Can Egypt Benefit from FDI Productivity Spillovers? 2. Are there any Productivity Spillovers? 3. What Factors affect the Direction of Spillovers? Effect of FDI on the Productivity of the Egyptian Industrial Sector 1. Can Egypt Benefit from FDI Productivity Spillovers? A- Comparative Productivity of Foreign and Domestic firms B- Egypt’s Absorptive Capacity Can Egypt Benefit from FDI Productivity Spillovers? • Productivity Comparison between Foreign and Domestic Firms – Average Productivity per Worker: Real output per worker – Total Factor Productivity: A residual from regressing the real value added of the each industry on the capital stock and the number of employees of the industry Productivity Comparison between Foreign and Domestic Firms Average Productivity TFP Manufacturing Industries Higher Higher Textiles, Garments and Leather Higher Higher Paper & Products and Printing & Publications Higher Higher Chemical Products Higher Higher Building Material Higher Lower Basic Metal Products Higher Higher Machinery and Equipment Higher Higher Other Manufacturing Higher Higher Source: CAPMAS, GOFI, and GAFI unpublished data Productivity Comparison between Foreign and Domestic Firms • In general, based on the Average Productivity per Worker and TFP Foreign firms are more productive Can Egypt Benefit from FDI Productivity Spillovers • Egypt’s Absorptive Capacity – Technology Gap (Controversial) – Human Capital – Financial Development – Institutional Quality Egypt’s Absorptive Capacity • Technology Gap: Threshold by Li and Liu 2005: 12.6% (US GDP per Capita - Egypt GDP per Capita)/Egypt GDP Per Capita (1984-2005) 30.00 25.00 Gap 20.00 15.00 10.00 5.00 1984 1987 1990 1993 1995 196 1997 1998 1999 2000 2001 2003 Years Egypt's Technology Gap Source: Calculated from the WDI, World Bank website, www.worldbank.org Technology Threshold 2004 2005 Egypt’s Absorptive Capacity • Human Capital Quality: Threshold by Borensztein 0.52 Average Years of Secondary Schooling of the Male Population above 25 years Yrs of schooling (1980-2000) 6.00 4.00 2.00 0.00 1980 1985 1990 1995 years Average Years of Schooling Source: Barro and Lee 2000 Borensztein Educational Threshold 2000 Egypt’s Absorptive Capacity • Financial Development: Threshold by SB: 13%, by HL: 12% % Banking Credit to the Private Sector in Egypt as % of GDP (1984-2005) 50.00 45.00 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 1984 1987 1990 1993 1995 196 1997 1998 1999 2000 2001 2003 2004 Years Domestic credit to private sector (% of GDP) Financial Development T hreshold (HL) Source: World Bank website, www.worldbank.org Financial Development T hreshold (SB) 2005 Egypt’s Absorptive Capacity • Institutional Quality: Threshold by Kaufmann: -0.84 Egypt’s Institutional Quality Assessment, (1996-2004) 0.4 0 -0.1 0.2 -0.2 0 -0.2 1998 1996 2000 2002 2004 -0.3 -0.4 -0.4 -0.5 -0.6 -0.6 -0.8 -0.7 -1 -0.8 -1.2 -0.9 Voice and Accountability Political Stability Governmnet Effectivness Regulatory Quality Rule of Law Control of Corruption T hreshold Source: World Bank Governance and Anti-Corruption, http://info.worldbank.org/governance/kkz2004/country_report.asp?countryid=67 Egypt’s Absorptive Capacity Below Threshold Technology Gap Above Threshold yes Human Capital yes Financial Development yes Institutional Quality yes Can Egypt Benefit from FDI Productivity Spillovers? • Higher productivity for foreign firms • Sufficient absorptive capacity There is room for Egypt to benefit from FDI productivity spillovers Are there Any Productivity Spillovers? • Horizontal Spillovers: Intra-Industry • Vertical Spillovers: Inter-Industry Through regressing a linear function for the period 1984-2005 based on an unbalanced panel data set of industrial production that includes 12 industries at the 12-digit ISIC classification Are there Any Productivity Spillovers? Variable Variable Specification Dependant Variable Productivity Total value added / Total # of employees Independent Variables Foreign Presence Employees in foreign firms / Total employees Capital Intensity Total Fixed assets / Total # of employees Human Capital While-collars / Blue-collars Scale Average gross production by domestic plants / gross production of the largest domestic plant Concentration ∑ squared individual plants production shares Horizontal Spillovers • All sectors had no significant spillovers, except three sectors: – Two had positive productivity spillovers to domestic firms: Oil and Natural Gas – Machinery and Equipment – One had negative effect on the productivity of domestic firms: Textiles, Garments and Leather Vertical Spillovers • Backward Linkages • Forward Linkages Used a cut-off point that the industry i must demand/supply at least 5% of gross output in industry j, based on Egypt’s InputOutput tables. Vertical Spillovers • Backward Linkages • No backward spillovers in all sectors which implies: – TNCs depend on importing their inputs (consistent with FDI effect on imports from other studies and surveys) Vertical Spillovers • Forward Linkages: • Negative Spillovers from three sectors: Oil and Gas, Manufacturing Industries, and Building Material • Positive Spillovers from one sector: Machinery and Equipment Are There Any Productivity Spillovers? • Intra-industry spillovers in less than 20% of the examined sectors • No Backward inter-industry spillovers • Forward inter-industry spillovers in 20% of the studied sectors, and negative in the rest Spillovers are not on a large scale despite Egypt’s sufficient absorptive capacity and the higher productivity of foreign firms What are the Factors Affecting the Direction of Spillovers? • Size of Technology Gap • Industry Characteristics • Foreign Market Share in the Industry Size of Technology Gap within a specific industry Gross Value Added per Worker in Foreign Firms to that of Egyptian Firms (1984-2005) 4.5 4 Technology Gap 3.5 3 2.5 2 1.5 1 0.5 0 31 32 33 34 35 36 Indust ries Source: GOFI 2005, unpublished data No Pattern Observed 37 38 39 Industry Characteristics • Average Capital Intensity • Average Productivity Industry Characteristics Average Capital Intensity in Manufacturing and Extraction Industries (1984-2005) 300 250 200 150 100 50 0 22 23 29 31 32 33 34 35 36 Source: CAPMAS 2005, unpublished data No pattern observed 37 38 39 Industry Characteristics Average Productivity of Manufacturing and Extraction Industries Productivity (1984-2005) 30 25 20 15 10 5 0 22 29 31 32 33 34 35 36 Industries Source: CAMPAS 2005, unpublished data No pattern observed 37 38 39 Foreign Market Share in the Industry Average Foreign Participation in the Manufacturing and Extraction Industries (1984-2005) 0.35 0.3 % 0.25 0.2 0.15 0.1 0.05 0 38 23 29 31 32 33 34 35 36 36 39 Industries Industries with foreign participation of 5% or more witnessed horizontal productivity spillovers 22 Conclusion 1. Are Foreign Companies more productive than Domestic Companies? Yes 2. What is the absorptive capacity of Egypt? Above thresholds 3. Are there horizontal productivity spillovers from foreign to domestic companies? Mixed Effects 4. Are there vertical productivity spillovers from foreign to domestic companies? Mixed Effects 5. What are the factors affecting the direction of spillovers? Foreign market share more than 5% Conclusion • Further investigation is needed to test the effect of: – FDI mode of entry – Nationality of the existing affiliates – Institutional/individual nature of FDI