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  5. International Capital Flows, FDI, and Global Value Chains
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International Capital Flows, FDI, and Global Value Chains

Paper Session

Saturday, Jan. 4, 2025 8:00 AM - 10:00 AM (PST)

San Francisco Marriott Marquis, Foothill A
Hosted By: International Economics and Finance Society
  • Chair: Alexander McQuoid, U.S. Naval Academy

Global Value Chains and International Risk Sharing

Giancarlo Corsetti
,
European University Institute
Lucio D'Aguanno
,
Bank of England
Aydan Dogan
,
Bank of England
Simon Lloyd
,
Bank of England
Rana Sajedi
,
Bank of England

Abstract

Unlike final-goods trade, intermediate-input trade through Global Value Chains (GVCs) creates supply-side linkages across borders. We study the mechanisms through which these linkages enable a country to share macroeconomic risks when cross-border financial markets are incomplete. We show that the global production-cost interdependence generate gives rise to specific interactions between goods-trade and finance that, in equilibrium, may mute relative-price and relative-consumption misalignments in response to country-specific disturbances. While, with sufficient complementarity among production inputs, GVCs can exacerbate risks, cost interdependence can act as a novel channel through which GVCs endogenously contain inefficient wealth effects from productivity disturbances—enhancing international risk sharing. We provide empirical evidence that corroborate this key finding.

Foreign Investment and Domestic Productivity: Identifying Knowledge Spillovers and Competition Effects

Christian Fons-Rosen
,
University of California-Merced
Sebnem Kalemli-Ozcan
,
University of Maryland
Bent Sorensen
,
University of Houston
Carolina Villegas-Sanchez
,
ESADE Business School
Vadym Volosovych
,
Erasmus University Rotterdam

Abstract

We study the impact of FDI on the productivity of host-country firms. FDI has positive spillovers only when foreign and domestic firms use similar technologies. Channeling FDI to sectors where firms share similar technology would significantly increase productivity spillovers from FDI. We show that inventor mobility across sectors is a key channel of technology transfer. To deal with endogeneity concerns we control for sectoral productivity growth, construct a Bartik-style instrument based on the productivity growth of neighboring countries, and exploit differences in knowledge flows across sectors captured by an asymmetric patent citation matrix.

Knowledge Diffusion Through FDI: Worldwide Firm-level Evidence

JaeBin Ahn
,
International Monetary Fund
Chan Kim
,
University of Maryland
Nan Li
,
International Monetary Fund
Andrea Manera
,
International Monetary Fund

Abstract

This paper examines the impact of Foreign Direct Investment (FDI) on knowledge diffusion by analyzing the effect of firm-level FDI activities on cross-border patent citations. We construct a novel firm-level panel dataset that combines worldwide utility patent and citations data with project-level greenfield FDI and cross-border merger and acquisitions (M&A) data in the past two decades, covering firms across 60 countries. Applying a new local projection difference-in-differences methodology, our analysis reveals that FDI significantly enhances knowledge flows both from and to the investing firms. Citation flows between investing firms and host countries increase by up to around 10.6% to 13% five years after the initial investment. These effects are stronger when host countries have higher innovation capacities or are technologically more similar to the investing firm. We also uncover knowledge spillovers beyond targeted firms and industries in host countries, which are particularly more pronounced for sectors closely connected in the technology space.

Gross FDI Co-movement, Capital Diversity, and Welfare Gains from Financial Openness

Alexander McQuoid
,
U.S. Naval Academy
Jacek Rothert
,
U.S. Naval Academy
Katherine Smith
,
U.S. Naval Academy

Abstract

Among the G7 economies, gross foreign direct investment (FDI) positions are very large, averaging over 100% of GDP and dwarfing the absolute values of net FDI positions in most countries. Additionally, inward and outward FDI flows exhibit robust positive correlations over the business cycle. To understand these stylized facts on gross FDI flows, we extend the standard international business cycle (IBC) model to allow domestic and foreign ownership of physical capital to be imperfect substitutes. We calibrate the elasticity of substitution between foreign and domestic capital to be 2.12 to match the magnitude of FDI stocks- a value much smaller than the implicitly assumed infinite elasticity in the IBC literature. Given this elasticity we are able to generate a positive co-movement of FDI inflows and outflows consistent with stylized facts. Our results uncover a new source of welfare gains from openness to FDI among otherwise identical developed economies - a capital diversity channel, akin to product variety in trade models. The channel is quantitatively important: openness to FDI in the model yields welfare gains equivalent to about a 4-5% increase in life-time consumption, a truly palatable gain to international financial integration.

Discussant(s)
Thuy Lan Nguyen
,
Federal Reserve Bank of San Francisco
Andrea Presbitero
,
International Monetary Fund
Laura Alfaro
,
Harvard Business School
Mario Crucini
,
Purdue University
JEL Classifications
  • F2 - International Factor Movements and International Business
  • F3 - International Finance