Analysis Of Foreign Direct Invesment

Abstract

This paper discusses on two main topics: firstly, the impact of Foreign Direct Investment (FDI) on domestically-owned firms’ technology development and the effect of FDI on technology development in domestically owned firms is through the impact on competition, secondly, the interaction between the different modes of market access commitments in services (cross-border and establishment) market structure, and regulation.

1. Introduction

The first article which is assessed in this document discusses about the impact of Foreign Direct Investments on domestically-owned firms’ technology development and the competition among those industries. In order to examine the afore-said statement Chinese manufacturing sector and firm’s R&D were selected. The analysis was conducted on a large data set including all Chinese large and medium sized firms over the period 1998-2004.

In the second article, it is discussed the interaction between the different modes of market access commitments in services (cross-border and establishment) market structure, and regulation. In doing so the focus was on the impact of improved domestic market access for a Foreign Service provider on a domestic service market. Moreover it also talks about how the domestic industry was able to act as a cartel due to imperfect completion and domestic regulation.

2. Assessment

The study on Chinese Foreign Direct Investment (FDI) starts by examining the impact of FDI on price cost margins in Chinese 21 firms. FDI can be an important channel for developing countries’ ability to get access to new technology. The impact of FDI on domestically-owned firms’ technology development is less examined but it is frequently argued that technology externalities or demonstration effect could have a positive impact. Further the impact on competition, when FDI and technology development in domestically owned firms is another aspect that needs to be examined. FDI might affect the degree of competition, which in turn might affect efforts to upgrade technology in domestic firms. Here the author is trying to find out how FDI is expected to affect competition or how competition is expected to affect technology development. In doing so, the author strongly recommends the need of empirical studies but also stating limitation of the existing literature.

Continuing the results of the study, there is a strong and robust negative effect of FDI on firms price cost margins which suggest that FDI do increase the level of competition in Chinese manufacturing, as per the author. Further it states that robust positive effects on price cost margins from high efficiency (TFP) and from state ownership.

When examining the determinants of R&D with a special focus on the role of competition, it is concluded that a high degree of persistence in R&D and little evidence of any, negative or positive, effect of competition on R&D. Moreover, there is no indication of a spillover effect of FDI on R&D in domestic firms. Finally, firms with high R&D intensities tend to have a relatively skilled labor force, are relatively small in size, and State Owned Enterprises are more R&D intensive than are domestic and foreign private firms.

On the other hand, we look at the effects of market-access concessions for domestic and foreign firms and for domestic consumers. It also argued that the relative benefits of cross-border and establishment-related market-access concessions hinge critically on underlying issues of regulation and market structure. In particular, the interests of the domestic and foreign industry will depend, in part, on the impact that trade has on the market power of domestic firms.

Based on the analysis done, the author has summarized the results in three groupings: rather obvious, somewhat less obvious, and even less obvious. The last set of results constitutes the substantive contribution of the paper. On the rather obvious front, given an imperfectly competitive industry (alternatively perfect collusion), less market access (i.e., greater restrictions) implies the following: the foreign service provider will have a smaller market share and profits; domestic service providers will have higher profitability; and home firms face less competition from abroad resulting in a higher home market price. It also shows the effect of a regulatory environment that tolerates collusion among a small number of domestic firms, less competition has the following implications: the foreign firm will have higher profits the less competitive the domestic industry; profits of the home industry