Who Gains from Services FDI—Host or Home Economies? An Analysis of Disaggregated Services FDI Inflows and Outflows of 24 European Economies

Abstract

This study focuses on a sample of 24 European economies to examine the spillovers from disaggregated services foreign direct investment (FDI) on economic growth. We study the impact of 20 disaggregated services FDI inflows and outflows, respectively, on their host and home country services sector and overall growth. We find that both financial services and business services FDI are beneficial for growth in both host and home countries. Financial services FDI works though financial holding companies and home countries benefit especially from investment in foreign banks, which provides access to credit. Business services FDI works though management holding companies and home countries benefit, especially from investment in computer activities, which provides access to specialised human capital and high-value knowledge assets. The positive spillovers to home countries provide evidence for arguing against protectionism.

JEL Codes: F2, F21, F43

Keywords

Disaggregated services foreign direct investment (FDI)services FDI inflows services FDI outflows services sector growth aggregated growth

Get full access to this article

View all access options for this article.

References

Aitken

, & Harrison

(1999). Do domestic firms benefit from direct foreign investment? American Economic Review, 89, 605–618.

Aitken

, Hanson

G. H.

, & Harrison

A. E.

(1997). Spillovers, foreign investment, and export behavior. Journal of International Economics, 43(1–2), 103–132.

Alfaro

(2003). Foreign direct investment and growth: Does the sector matter. Harvard Business School, 2003, 1–31.

Alfaro

, Kalemli-Ozcan

, & Volosovych

(2008). Why doesn’t capital flow from rich to poor countries? An empirical investigation. The Review of Economics and Statistics, 90(2), 347–368.

Arellano

, & Bond

(1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Review of Economic Studies, 58(2), 277–297.

Arellano

, & Bover

(1995). Another look at the instrumental-variable estimation of error-components models. Journal of Econometrics, 68, 29–51.

Ashraf

, Doytch

, & Uctum

(2021). Foreign direct investment and the environment: Disentangling the impact of greenfield investment and merger and acquisition sales. Sustainability Accounting, Management and Policy Journal, 12(1), 51–73.

Avraham

, Selvaggi

, & Vickery

J. I.

(2012). A structural view of US bank holding companies. Economic Policy Review, 18(2), 65–81.

Aykut

, & Sayek

(2007). The role of the sectoral composition of FDI on growth. In Piscitello

& Santangelo

G. D.

(Eds.), Do multinationals feed local development and growth? (pp. 35–62). Elsevier.

10.

Barba Navaratti

, & Castellani

(2004, March). Does investing abroad affect performance at home? Comparing Italian multinational and national enterprises (Working Paper). CEPR.

11.

Blalock

, & Gertler

P. J.

(2003). Technology from foreign direct investment welfare gains through the supply chain (Working Paper). Department of Applied Economics and Management, Cornell University.

12.

Blomstrom

, Lipsey

, & Zejan

(1992). What explains developing country growth? (Working Paper No. 4132). NBER.

13.

Blundell

, & Bond

(1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115–143.

14.

Borensztein

, De Gregorio

, & Lee

(1998). How does foreign direct investment affect economic growth? Journal of International Economics, 45, 115–135.

15.

Caselli

, Esquivel

, & Lefort

(1996). Reopening the convergence debate: A new look at cross-country growth empirics. Journal of Economic Growth, 1(3), 363–389.

16.

Chakraborty

, & Nunnencakp

(2008). Economic reforms, FDI, and economic growth in India: A sector level analysis. World Development, 36(7), 1192–1212.

17.

Chari

M. D.

(2013). Business groups and foreign direct investments by developing country firms: An empirical test in India. Journal of World Business, 48(3), 349–359.

18.

Chen

T. J.

, Chen

, & Ku

Y. H.

(2012). Resource dependency and parent–subsidiary capability transfers. Journal of World Business, 47(2), 259–266.

19.

Crespo

, & Fontoura

M. P.

(2007). Determinant factors of FDI spillovers—What do we really know? World Development, 35(3), 410–425.

20.

Damijan

, Polanec

, & Prasnikar

(2007). Outward FDI and productivity: Micro-evidence from Slovenia. World Economy, 30(1), 135–154.

21.

Doytch

(2016). Capital flows and growth: A survey of the empirical evidence, CUNY Graduate Center. Journal of Northeast Asia Development, 18, 43–59.

22.

Doytch

, & Uctum

(2011). Does the worldwide shift of FDI from manufacturing to services accelerate economic growth? A GMM estimation study. Journal of International Money and Finance, 30(2011), 410–427.

23.

Doytch

, & Uctum

(2019). Spillovers from foreign direct investment in services: Evidence at sub-sectoral level for the Asia-Pacific. Journal of Asian Economics, 60, 33–44.

24.

Durlauf

, & Quah

(1999). The new empirics of economic growth. In Taylor

& Woodford

(Eds.), Handbook of macroeconomics (pp. 235–308). North Holland.

25.

Durlauf

, Johnson

, & Temple

(2004). Growth econometrics (WP 18). Wisconsin Madison-Social Systems.

26.

European Commission web site (2021). https://ec.europa.eu/trade/policy/accessing-markets/investment/.

27.

Feliciano

, & Doytch

(2017). EU accession and foreign owned firms in Bulgaria. Post-Communist Economies, 29(3), 392–404.

28.

Gorg

, & Greenaway

(2004). Much Ado about nothing? Do domestic firms really benefit from foreign direct investment? World Bank Research Observer, 19(2), 171–197.

29.

Gorg

, & Strobl

(2001). Multinational companies and productivity spillovers: A meta analysis. Economic Journal, 111, 475, 723–739.

30.

Haskel

J. E.

, Pereira

S. C.

, & Slaughter

M. J.

(2007). Does inward foreign direct investment boost productivity of domestic firms? Review of Economics and Statistics, 89(3), 482–496.

31.

Helpman

, Melitz

, & Yeaple

(2004). Export versus FDI with heterogeneous firms. American Economic Review, 94, 300–316.

32.

Herzer

(2008). The long-run relationship between outward FDI and domestic output: Evidence from panel data. Economics Letters, 100(2008), 146–149.

33.

Islam

(1995). Growth empirics: A panel data approach. Quarterly Journal of Economics, 110(4), 1127–1170.

34.

Javorcik

B. S.

(2004). Does foreign direct investment increase the productivity of domestic firms? In search of spillovers through backward linkages. American Economic Review, 94(3), 605–627.

35.

Javorcik

(2020). Eight things development professionals should know about foreign direct investment synthesis. https://voxdev.org/topic/firms-trade/eight-things-policymakers-should-know-about-foreign-direct-investment

36.

Javorcik

B. S.

, & Spatareanu

(2008). To share or not to share: Does local participation matter for spillovers from foreign direct investment? Journal of Development Economics, 85(1–2), 194–217.

37.

Jiang

, Jiang

, Kong

, Hu

Y. C.

, & Lee

C. W.

(2020). A predictive analysis of China’s CO2 emissions and OFDI with a nonlinear fractional-order grey multivariable model. Sustainability, 12(10), 4325.

38.

Kalotay

(2008). FDI in Bulgaria and Romania in the wake of EU accession. Journal of East-West Business, 14, 5–40.

39.

Knoerich

(2017). Has outward foreign direct investment contributed to the development of the Chinese economy? Transnational Corporations, 23(2), 1–48.

40.

Lipsey

R. E.

(2003). Foreign direct investment, growth, and competitiveness in developing countries. In Cornelius

(Ed.), The global competitiveness report, 2002–2003 (pp. 295–305). Oxford University Press.

41.

Lipsey

R. E.

(2004). Home- and host-country effects of foreign direct investment. In Baldwin

R. E.

& Alan Winters

(Eds.), Challenges to globalization (p. 333). University of Chicago Press.

42.

Lipsey

R. E.

, & Sjoholm

(2005). The impact of inward FDI on host countries: Why such different answers? In Moran

, Graham

, & Blomstrom

(Eds.), Does foreign direct investment promote development? (pp. 23–43). Institute for International Economics Center for Global Development.

43.

Mankiw

N. G.

, Romer

, & Weil

(1992). A contribution to the empirics of economic growth. Quarterly Journal of Economics, 107(2), 407–437.

44.

Nayyar

, & Mukherjee

(2020). Home country impact on outward FDI from India. Journal of Policy Modeling, 42(2), 385–400.

45.

OECD International direct investment database. https://stats.oecd.org/

46.

Roodman

(2006). How to do xtabond2: An introduction to ‘Difference’ and ‘System’ GMM in Stata (Working Paper No. 103). Center for Global Development.

47.

Saggi

(2002). Trade, foreign direct investment and international technology transfer: A survey. World Bank Research Observer, 17(2), 191–235.

48.

Solow

(1956). A contribution to the theory of economic growth. Quarterly Journal of Economics, 70(1), 65–94.

49.

Stiroh

K. J.

(2004). Diversification in banking: Is noninterest income the answer? Journal of Money, Credit and Banking, 36(5), 853–882.

50.

UNCTAD, WIR (2010). World investment report 2010: Investing in a low-carbon economy. United Nations.

51.

UNCTAD, WIR (2020). International production beyond the Pandemic. United Nations.

52.

United Nations Statistical Division (2002). International Standard Industrial Classification of All Economic Activities (ISIC, Series M: Miscellaneous Statistical Papers, No. 4, Rev. 3.1). United Nations.

53.

, & Noy

(2008). Sectoral analysis of foreign direct investment and growth in the developed countries. Journal of International Financial Markets, Institutions and Money, 19(2009), 402–413.

54.

World Bank World development indicators. https://databank.worldbank.org/reports.aspx?source=world-development-indicators