Asian Foreign Direct Investment in Europe

Prana Krishna Biswas, Robert Dygas, Prana Krishna Biswas, Robert Dygas

• Verlag: Routledge
• Jahr: 2021
• ISBN:
  9781000416398
• Auflage: 1
• Thema: Betriebswirtschaft
• Thema: Devisenhandel

This book analyses the most recent trends in Foreign Direct Investment from the major Asian economies to the EU, focusing on China and Japan's FDIs in the EU, and Poland in particular. The authors assert that, from a European perspective, there is a strong need for further Asian FDIs into EU nations, which will establish mutual benefits.

This is the first book to explore the outflow of FDI from Asian nations to other countries, especially to EU member states, whereas the extant literature focuses on the inflow of FDI to Asian nations. The authors analyse a multidimensional range of issues, covering macroeconomics, finance, technology, and examine the governments, local authorities, and institutions that support such investments. FDI has an instrumental role in the development of host countries. Large-scale capital flow becomes a vehicle for providing foreign technology, knowledge, skills, and other inputs for the integration with international marketing, production, and distribution networks and for improving the economic competitiveness of firms and economic performance of the host country.

The analysis in the book is presented using statistical and econometrical approaches, emphasising a profound level of investigation, which will be particularly useful for graduate and PhD students of International Economics, Business and Trade.

1
Research literature analysis on FDI and FDI flow between Asia and the EU member states

Smita Shukla

1.1 Introduction

The foreign direct investment (FDI) involves extension and expansion of the equity ownership across global markets (Dunning, 1970). Cross-border fund transfer involving equity capital, reinvested earnings, intra-company loans lending, and a long-term relationship and interest of resident enterprise in one country in an enterprise in another country including a significant degree of influence in the management of such enterprise is also a component of FDI (UNCTAD, 2007). Multinational enterprises (MNEs) lead the FDI flow. They can be termed as institutions that organise, through employment contracts, the interdependencies between individuals located in more than one country. In other words, MNE is a firm that has employees abroad. When a multinational corporation (MNC) finances its activities abroad with funds obtained from its home country, it undertakes FDI. FDI, in other words, can be termed as export and import of long-term capital by a country into investments that are controlled by its residents. A domestic manufacturer who contracts at arm’s length with local distributors abroad is not an MNE, but a domestic department store with its own overseas buying offices (employees abroad), but no foreign manufacturing is an MNE (Hennart, 1982). There are three motives of a firm for international expansion: rapid growth of markets; cheaper labour in certain countries making them conducive for international production destination; and domestic and international competition (Hymer, 1972). Traditionally, the purpose of the FDI had been defined as the vehicle for the transfer of elements of industrialisation and means for western investors to exert direct and continuous influence in less developed countries (Korbin, 1976).

For the creation of world markets, intertwined systems of law, governments, taxation, and regulations are necessary (Hymer, 1972). The successful integration in the world economy requires complementary policies and institutions at home. In fact, the home government policies are considered essential components of the action plan to attract FDI in less developed economies (UNCTAD, 2011). Policies that promote FDI make economic sense. Higher taxes deter foreign investment, while the educated workforce and market size attract FDI. It is also observed that the subsidies to manufacturers sometimes may also lower the national welfare (Baltzer & Hansen, 2011). Policies like investment promotion, domestic content mandate, export performance requirements, joint venture requirements, and technology transfer mandate impact the growth of a nation. The policies of the host nation on the aforementioned policy parameters can significantly impact in maximisation of benefits of FDI while minimising its dangers (Moran, 1998). The gross domestic product (GDP) growth rate of a country and its trade openness also play a significant role in attracting FDI (Supriani & Bayu, 2020). While the inter-nationalisation of a country is taking place, it is important to foster physical and human capital to match the process of internationalisation and for avoiding social conflicts that may emerge in the process (Rodrik, 1999). It also emerges that more productive firms in the developing countries self-select and prefer outward FDI (OFDI) due to internalisation (Herzer, 2011).

The recent FDI trends exhibit that the countries and regions where the need for the foreign capital investment, technology flow, and technical know-how is high have been generally side-lined by traditional MNEs. Now, with the rise of new multinationals from emerging economies, this disparity is being taken care of. The emerging market multinationals (non-traditional MNEs) prefer to invest in such side-lined economies (Andrés et al., 2013).

1.2 Composition of the research literature

Figure 1.1 Time spread of reviewed research studies

Source: Data based on EBSCO, ProQuest, and Science Direct.

The objective of this chapter is to trace the literature on the concept of FDI, determinants of FDI, the impact of policy, and related considerations on the flow of FDI. The chapter also delves into the determinants of OFDI through literature review. The chapter focus on factors leading to FDI flows to Europe and factors impacting FDI flows between Asia and Europe. The paper has traced literature on FDI through open sources like SSRN as well as through research databases of EBSCO, ProQuest, and Science Direct. The literature reviewed for this chapter has a spread of 50 years. The earliest study being referred to in this chapter is of the year 1970 and the latest literature is of the year 2020. The findings assist in identifying the determinants of FDI, OFDI, and determinants FDI flow in the European region and FDI movement determinants from Asia to Europe. The total number of research studies reviewed is 77. Literature on FDI is traced through open sources like SSRN as well as through research databases of EBSCO, Pro-Quest, and Science Direct. The time spread and the year-wise specification of research papers reviewed are as follows.

The theoretical construct used in the literature studied can be categorised as follows:

Table 1.1 Theoretical construct for FDI analysis

Theoretical constructs emerging through literature	Literature
Eclectic paradigm or OLI (ownership, location, and internalisation) model of FDI	Dunning (1970), Hymer (1972), Dunning (1979), Dunning (1988), Denisia (2010), Mateev(2014)
Internationalisation approach of FDI Internalisation occurs when firms perceive the benefits of external investment being greater than that of the cost involved. The process involves knowledge and technology flows by linking them to improved production efficiency from an upstream production facility to a downstream facility or vice versa	Hymer (1972), Findlay (1978), Mansfield and Romero (1980), Hennart (1982), Borensztein et al. (1995), Kokko (1994), Kokko et al. (1996), Dent (1999), Rodrik (1999), Shatz and Venables (2000), Smarzynska, (2002), Alfaro (2003), Ramachandran(2004), Tolentino (2008), Denisia (2010), Subramanian et al. (2010), Herzer (2011), Ahmed (2014), Dhar and Wani (2017), Hertenstein et al. (2017)
Institutional approach of FDI The approach links the institutional variable like economic, financial political, and judicial institutional set up, with the FDI flows	Kobrin (1976), Hennart (1982), Moran (1998), Lim Ewe-Ghee (2001), Gorgulu (2015), Baier andWelfens (2019), Abotsi(2018)
Resource-based approach or spring board approach of FDI The approach suggests that FDI decision of a firm is guided by its international and management experience and competencies, resource capabilities, and environmental necessities	Luo and Tung (2018), Tolentino (2008), Pradhan(2008),Ali etal. (2018), Luo and Tung (2018)
Linkage, leverage, learning approach of FDI This approach looks at firm-specific advantages of emerging market multinationals and suggests that the international expansion of emerging market multinationals is driven by resource linkage, leverage, and learning	Mathews (2006), Andres et al. (2013), Morris and Jain (2013)
CAGE distance approach of FDI The approach identifies that the cultural, administrative, geographic and economic differences, or distances between countries can be used to understand patterns of trade, capital, information, and people flows	Ghemawat (2001), Dent (2001), Bitzenis (2004), Wei and Andreosso-o'callaghan (2008), Witkowska (2009), Morris and Jain (2013), Witkowska (2013), Roman and Vasile (2018)
Strategic asset-seeking orientation It emerges that the intent of seeking strategic assets is a determining factor in explaining the FDI made in developed markets by the emerging market MNEs	Pradhan (2008), Yang et al. (2014), Meyer and Peng (2016), Hertenstein et al. (2017), Ramon et al. (2017), Haasis et al. (2018)
Economic growth and income inequality and FDI	Alter (1994), Blomstiom et al. (1994), Lipsey (2002), Gorg and Greenaway (2002), Tytell and Yudaeva (2005), Herzer and Schrooten (2007), Kowalewski and Weresa (2008), Wang (2009), Balgar and Dragoi (2014), Kurecic (2015), Alili (2015), AH (2017), Dhar and Wani (2017), Okara (2018), Escobar and Muhlen (2018), Sultanuzzaman et al. (2018), Jurcic et al. (2020), Sayed Hasant Shah et al. (2020)
Exchange rate movement and FDI Taxes, subsidies and FDI Export and import and bilateral treaties and FDI	Aliber(1970), Cushman(1985) Baltzer and Hansen (2011)Camarero and Tamarit (2003), Andreosso-O'Callaghan and Nicolas (2007), Bankole and Adewuyi (2013)

In view of the multiple theoretical constructs explaining the determinants of FDI, it can be stated that different theories do not replace each other. They, in fact, explain different aspects of same phenomenon (FDI) and in view of this it should be accepted that reasons for FDI cannot be explained by any single theory and combination of theories better explain the determinants of FDI (Faeth, 2009).

The most common statistical methodologies applied in the research literature are as follows: Most of the research literature has used the time series analysis, ordinary least square regression, ARDL & NARDL, and correlation. Other methods used are causality test, logit model, gravity model, system generalised method of moments, and panel-corrected standard error techniques. A literature on FDI research literature indicates that most commonly used statistical method for FDI study has been ordinary least square (OLS) regression. Other commonly used statistical techniques in order of their usage are as follows: correlation, descriptive statistics, Granger causality test, F-test, co-integration analysis, vector autoregressive (VAR), time series analysis, cross-section analysis, t-test, and Phillips-Perron test (Paul & Singh, 2017).

1.3 Literature trend on the determinants of FDI

The Eclectic (OLI) paradigm indicates that locational variables, technological variables, cost considerations, ownership considerations, internalization benefits, etc., are motivators of FDI (Denisia, 2010). The Eclectic theory of international production highlights the significance of ownership and location-specific variables for explaining the industrial pattern and geographical distribution of sales of affiliates of US companies in 14 manufacturing countries spread in seven countries in 1970 (Dunning, 1979). Eclectic paradigm has continued to be a robust justification for foreign direct investment. Ownership consideration, locational advantages and internationalization benefits are dominating factors determining FDI flows to a region. (Dunning, 1988). The multinational activity in high-income countries is mainly horizontal and focuses on production for sale in the host countries. While the multinational activity in low-income countries is vertical involving manufacturing at intermediate stages of production. Thus, only very limited output of US affiliates operating in Europe is sold back in the US market. Whereas, almost 40% of what is produced by US affiliates in Mexico is sold back in the home market. The same is applicable to the MNCs’ from Japan. The vertical activity of multinational firms in developing markets is motivated by factor costs, tariffs, transport costs, etc. Many MNCs’ from the US undertake vertical investment in Mexico, the EU firms do the same in central and Eastern Europe and Japan does that in Asia.

(Shatz & Venables, 2000)

Internalisation paradigm indicates that the rapid growth of markets, cheap labour, and so on generally makes countries conducive in evolving as international production destination (Hymer, 1972). Here, it is important to highlight the importance of fostering physical and human capital to match the process of internationalisation as this is important for avoiding social conflicts that may otherwise emerge in the process of internalisation (Rodrik, 1999). In fact, the positive impact of FDI and higher productivity of FDI are more visible in countries that have better human capital (Borensztein et al., 1995). There is also a positive role of FDI in the technology transfer and both have a positive linkage (Findlay, 1978). The OFDI strategies of the Chinese auto-component MNCs are shaped by the business relationships established with the developed market MNCs. The strong presence of business networks with foreign MNCs, an outcome of prior inward FDI, shapes the OFDI made by the emerging market enterprises. Such business networks are critical in driving internationalisation and include the choice of investment location, strategic asset-seeking orientation, and entry mode decision (Hertenstein et al., 2017).

Institutional paradigm highlights that the successful integration in the world economy requires complementary policies and institutions at home. The home government policies are considered essential components of the action plan to attract FDI in less developed economies (UNCTAD, 2011). On the one hand, higher taxes deter foreign investment, on the other hand, the subsidies sometimes may also lower the national welfare (Baltzer & Hansen, 2011). Policies like investment promotion, domestic content mandate, export performance requirements, joint venture requirements, and technology transfer mandate impact the FDI flow and also the growth of a nation. In addition to the above, the market size, infrastructure quality, political and economic stability, free trade zones, and so forth appear to be important determinants of FDI. On the other hand, the fiscal incentives, investment climate, labour cost, and openness may not necessarily have positive influence on the FDI (Ewe-Ghee, 2001).

Resource-based approach or Spring board paradigm indicates that the FDI decision of a firm is often guided by its international and management experience and competencies, resource capabilities, and environmental necessities. The national technological capability in certain industries leads to more OFDI from those industries (Tolentino, 2008). An example for this can be the Indian automobile sector, IT, ITES sector, and so on. Companies that make FDI may do it for seeking new markets, for creation of strategic assets, and for connecting with specialised skills and enhancing global competitiveness (Pradhan, 2008). Multinational companies from China have treated the international expansion as a springboard to acquire critical resources worldwide (Luo & Tung, 2018).

Linkage, leverage, and learning paradigm make an interesting observation on the growth of multinationals from emerging market economies, and in the year 2006, it has resulted in eme...