Global value chains and inward foreign direct investment in the 2000s

Abstract

In this paper, we make use of recent data published by the World Input‐Output Database to: (i) provide evidence on trade in value added of the major Organization for Economic Co‐operation and Development (OECD) member countries and major emerging economies (designated by OE country group), namely by measuring the degree of participation in global value chains (GVCs) at the country and sectoral levels; and (ii) estimate whether the GVC participation of OE countries has positively influenced foreign direct investment (FDI) inward stocks in the 2000s. The pooled regression model estimated shows that the country′s degree of GVC participation has contributed positively for bilateral FDI inward stocks, after controlling for other possible FDI determinants.

Mergers and acquisitions & trade: A global value chain analysis

“…For the case of sub-Saharan African countries and Vietnam, Amendolagine et al (2019) demonstrate that GVC participation and upstream position (i.e., production of intermediates which are later incorporated in the production process in other countries) encourage foreign firms to use inputs from local suppliers. In line with this growing strand of the literature, several works suggest that countries' involvement in GVCs may serve as a localisation advantage for attracting FDI (Amador & Cabral, 2016;Amendolagine et al, 2019;Martinez-Galan & Fontoura, 2019;UNCTAD, 2013).…”

“…Similarly, M&As can be motivated to reduce production costs, as a more efficient firm acquires a less efficient one and lead countries to specialise in their competitive advantage (Chakrabarti, Hsieh, & Chang, 2017;Erel, Liao, & Weisbach, 2012;Neary, 2007). In addition, M&As serve MNEs as an instrument to diminish its dependence in external agents by internalising upward or downward firms in the value chain, reducing in this way risk and transaction costs, and seek convergence in corporate governance (Erel et al, 2012;Hillman, Withers, & Collins, 2009;Martinez-Galan & Fontoura, 2019;Rossi & Volpin, 2004). Moreover, through M&As MNEs are able to quickly acquire market knowledge, existing distribution networks and complementary assets from the target (Antras & Yeaple, 2014;Blonigen, Fontagne, Sly, & Toubal, 2014;Nocke & Yeaple, 2007).…”

“…Similarly, results are not conclusive when countries' overall trade openness is considered. Indeed, there is a relevant strand of the literature which provides evidence indicating that trade openness fosters inward FDI (Aizenman & Noy, 2006;Asiedu, 2002;Botrić & Škuflić, 2006;Habib & Zurawicki, 2002;Martinez-Galan & Fontoura, 2019;Medvedev, 2012;Ramasamy & Yeung, 2010;Roman, Bengoa, & Sanchez-Robles, 2016;Teixeira, Forte, & Assuncao, 2017). On the other hand, there are studies which report a nonsignificant (Kolstad & Villanger, 2008;Vijayakumar, Sridharan, & Rao, 2010) or negative relationship (Wheeler & Mody, 1992).…”

“…Finally, the empirical literature that directly addresses the relationship between FDI and GVCs is scarce. The existing evidence indicates that FDI has a positive impact on countries' GVC participation (Buelens & Tirpak, 2017;Del Prete, Giovannetti, & Marvasi, 2018) and Martinez-Galan and Fontoura (2019) report that GVC participation increases inward FDI stock. 7 Moreover, Beugelsdijk et al (2009) show, for US foreign affiliates, that GVC specialisation is driven by exports within MNEs' foreign affiliates in terms of trade in intermediates, which are then further used for production.…”

“…Alternatively, higher competition brought by imports from numerous countries entails lower expected profits, allowing us to test whether foreign competition through trade deters FDI. The GVC participation and position indexes represent the degree in which and how gross exports incorporate domestic and foreign value added (Martinez‐Galan & Fontoura, ), offering further insight on the relationship between FDI and the fragmentation of production across borders.…”