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Ninth Annual East Asian Seminar on Economics.

The NBER, in cooperation with the Chung-Hua Institution for Economic Research, Hong Kong University of Science and Technology, Korea Development Institute (KDI), National University of Singapore, and the Tokyo Center for Economic Research, held its Ninth Annual East Asian Seminar on June 25-7 in Osaka, Japan. Takatoshi Ito, of NBER and Hitotsubashi University, and Anne O. Krueger, of NBER and Stanford University, organized the conference which focused on the role of foreign direct investment in economic development. The program was:

Rene Belderbos, Maastricht University; Giovanni Capannelli, Bank of Italy; and Kyoji Fukao, Hitotsubashi University, "Local Procurement by Japanese Electronics Firms in Asia"

Discussants: Toshihiko Hayashi, Osaka University, and Lee G. Branstetter, NBER and University of California, Davis

Shujiro Urata, Waseda University, and Hiroki Kawai, Keio University, "Foreign Direct Investment and International Technology Transfer in East Asia: The Case of Japanese Manufacturing Firms"

Discussants: Eiji Ogawa, Hitotsubashi University, and Hong-Tack Chun, KDI

Fukunari Kimura, Keio University, "Location and Internalization Decisions: Sector Switching in Japanese Outward Foreign Direct Investment"

Discussants: Eiji Ogawa and Ng Hock Guan, National University of Singapore

Lee G. Branstetter, "Is Foreign Direct Investment a Channel of R&D Spillovers? Evidence From Japan's FDI in the United States"

Discussants: Akiko Tamura, Hosei University, and Mariko Sakakibara, University of California, Los Angeles

Robert E. Lipsey, NBER and Queens College, "U.S. and Japanese Multinationals in Southeast Asian Production and Trade"

Discussants: Hong-Tack Chun, and Yuzo Honda, Osaka University

Kenzo Abe, Osaka University, and Laixun Zhao, Niigata University, "International Joint Ventures, Economic Integration, and Government Policy"

Discussants: Shin-Ichi Fukuda, University of Tokyo, and Mahani Zainal-Abidin, University of Malaysia

Leonard K. Cheng and Yum K. Kwan, Hong Kong University of Science and Technology, "What Are the Determinants of the Location of Foreign Direct Investment? The Chinese Experience"

Discussants: Yumiko Okamoto, Kobe University, and Shang-Jin Wei, NBER and Harvard University

Shang-Jin Wei, "Why Does China Attract So Little Foreign Direct Investment?"

Discussants: Marl Pangestu, Centre for Strategic and International Studies, and Akira Kohsaka, Osaka University

June-Dong Kim and Sang-In Hwang, Korea Institute for International Economic Policy, "The Productivity Effects of Foreign Direct Investment Into Korea"

Discussants: Hong-Tack Chun, and Yur Nagataki Sasaki, Takachiho University

Seungjin Kim, KDI, "Effects of Outward Foreign Direct Investment on Home Country Performance: Evidence From Korea"

Discussants: Mariko Sakakibara, and Chong-Hyun Nam, Korea University

Tain-Jy Chen, National Taiwan University; and Ying-Hua Ku, Chung-Hua Institution for Economic Research, "Foreign Direct Investment and Industrial Restructuring: The Case of Taiwan's Textile Industry"

Discussants: Yum K. Kwan, and Munehisa Kasuya, Kobe University

Vei-Lin Chan, Academia Sinica, "Economic Growth and Foreign Direct Investment in Taiwan's Manufacturing Industries"

Discussants: Mari Pangestu, and Masatsugu Tsuji, Osaka University

Belderbos, Capannelli, and Fukao examine the determinants of one important aspect of embeddedness of foreign firms in local economies: the degree to which foreign-owned subsidiaries have established vertical linkages, as measured by the local content of manufacturing operations (local value-added and procurement of inputs from local suppliers). Using a dataset of 157 Asian subsidiaries of Japanese multinationals in the electronics industry, they find that greenfield subsidiaries and subsidiaries of R and D-intensive parents have lower local content ratios than other subsidiaries. Subsidiaries of parent companies that belong to a vertical keiretsu with strong intra-keiretsu supplier relationships also have a higher local content, in particular in ASEAN countries. Membership in a vertical keiretsu facilitates the achievement of higher local content through coordinated investments by the assembler and related suppliers.

Urata and Kawai find that technologies can be absorbed in direct relation to the educational level and experience in industrial activities of workers in host countries. To absorb technologies from foreign firms, there must be either intrafirm technology transfer (from Japanese parent firms to foreign affiliates) or technology spillovers (from foreign affiliates of Japanese firms to local firms). But the authors find that technology transfer takes time and experience. This result indicates the importance of providing a stable economic environment in which foreign firms can maintain their operations. Further, the authors find that high equity participation by parent firms in their overseas affiliates tends to promote intrafirm technology transfer but to discourage technology spillover.

Kimura concentrates on the sector switching of Japanese parent firms and foreign affiliates between manufacturing and nonmanufacturing activities, using microdata from the Japanese Ministry of International Trade and Industry (MITI)'s Basic Survey of Business Structure and Activity. Parent firms and affiliates are often in different industries, and multinational enterprises obviously choose internalization and location in a strategic manner. Large manufacturing parent firms tend to have both manufacturing and nonmanufacturing affiliates, the latter of which are located mainly in North America and Western Europe. Small manufacturing parent firms and firms with fewer affiliates are likely to concentrate on production activities at their affiliates, particularly in East Asia. About half of nonmanufacturing parent firms, both large and small, have at least one manufacturing affiliate located mainly in East Asia. Large nonmanufacturing parent firms, mostly general trading companies, have extensive networks of production and wholesale trade activities covering the world.

Recently much empirical work has attempted to measure the extent to which international trade fosters international spillovers of R and D. Branstetter uses a modified version of the econometric framework developed by Jaffe (1986) to measure international R and D spillovers at the firm level for a panel of 208 Japanese firms. He directly tests the hypothesis that firms with substantial stocks of foreign direct investment (FDI) in the United States are able to make better use of such R and D spillovers in their own innovative activity. He finds that FDI does increase the impact of R and D spillovers from the United States, but that the measured effect, though robust, is quite small.

After 1977, and in some countries starting before that, most Southeast Asian countries' export patterns in manufacturing changed from industry distributions typical of developing countries to distributions more like those of advanced countries. Lipsey describes how the process of change in most cases started with inward FDI to produce for export in new industries, particularly by U.S. firms in electronics and computer-related machinery. In electrical machinery Japanese multinationals followed U.S. firms. Over time, in most cases, the U.S.-owned affiliates turned more to sales in the host country markets, and their share in host country exports declined, although the host countries' specialization in the new industries continued. U.S. and Japanese firms played somewhat different roles. Investments of U.S. firms were distributed more along the lines of U.S. export comparative advantage. The distribution of Japanese investments more closely followed the direction of the host countries' comparative advantage and were less export-oriented than U.S. investments. However, Japanese investment now has become more like U.S. investment in both export orientation and industry composition.

Abe and Zhao model economic integration and trade policy in the presence of an international joint venture in a developing country. They show that economic integration in the form of custom unions may reduce the welfare of the developing country. However, the developing country can offset the welfare loss by introducing production subsidies. A mutually beneficial policy to both the developing and developed countries is a subsidy to the joint venture, which in practice is adopted by many developing countries to attract foreign investment.

Cheng and Kwan estimate the effect of a number of potential determinants of the location of FDI using data for 29 Chinese regions from 1986-95. Their model emphasizes a distinction between the agglomeration effect (that is, new FDI is attracted by the stock of past FDI) and the comparative statics effect of these potential determinants. Their results show that both national and regional markets attract FDI, but wage cost has a negative effect on FDI. In addition, there is a strong agglomeration effect. By comparing the equilibrium and actual stocks of FDI in 1985 with those in 1995, the authors find that there was no absolute convergence in the regions' equilibrium stocks of FDI, but there was relative convergence in the deviation of actual from equilibrium FDI.

Wei explains how the absolute values of FDI into China in recent years seem very impressive, but they mask an unusual composition of source countries. A significant fraction (about 15 percent) of Hong Kong investment in China may be "round-tripping" mainland capital in disguise. This should be counted as false FDI and deleted from the statistics on FDI into China. The remaining Hong Kong investment in China should be regarded as quasi-FDI: Hong Kong has always been a special extension of China, even under British rule, and legally has been part of China since July 1, 1997. Removing these two sources of FDI would reduce the annual flows of FDI into China in recent years by half, and the stock by 60 percent. Compared with its predicted potential, China is thus a significant underachiever as a host of FDI from major source countries. China's relatively high corruption discourages a significant amount of FDI. Regulatory burden may be another important impediment that discourages investors from the major source countries from investing more in China.

Kim and Hwang investigate the productivity effects of FDI into Korea. Using the available annual data, they find that FDI had a significantly positive effect on the productivity of Korean manufacturing subsectors, such as textiles and clothing and electric and electronics, from 1970-96. The authors also examine whether FDI prevents bailout loans in a currency crisis. Using cross-section data from 90 developing countries, they conclude that the incidence of bailout loans from the International Monetary Fund during 1994-7 is negatively associated with the FDI stock relative to total gross domestic product.

Kim examines the characteristics of Korean outward FDI and its effects on the home country. He finds no evidence that Korean outward FDI has adverse effects on home country performance. This lack of adverse impact seems to come as a result of: the low ratio of outward FDI to gross domestic product; the high share of developing countries receiving FDI; simple strategies followed for investment; and increasing overseas financing of FDI.

Chen and Ku view FDI as a Schumpeterian innovation whereby an old production structure is dismantled in favor of a new one. By examining firm-level data from Taiwan's textile industry for 1992-5, they find that restructuring was indeed extensive and sweeping. The average textile firm reduced its number of product lines and increased product concentration, and some even switched main products or sectors. Nearly half of sales revenue in 1995 came from product lines introduced since 1992, which is disproportionate to revenue from expansion of existing lines.

Chart investigates the causal relationships of fixed investment, trade share, and FDI to the growth in real gross domestic product (GDP) per capita at the two-digit industry level in Taiwan's manufacturing sector. In general, his results support the causal relationships between investment and trade share. The relative importance of fixed investment, trade share, and FDI in affecting the growth of GDP is quite divergent for individual two-digit industries. In particular, FDI is the only determinant that promotes economic growth in the electric and electronic machinery industry, the leading manufacturing industry in Taiwan over the past two decades.

These papers and their discussions will be published by the University of Chicago Press as Volume 9 of the series, NBER East-Asian Seminar on Economics. Its availability will be announced in a future issue of the NBER Reporter.
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Title Annotation:seminar of the National Bureau of Economic Research
Publication:NBER Reporter
Date:Sep 22, 1998
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