حکومت، سرمایه گذاری مستقیم خارجی و رفاه داخلی
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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : International Review of Economics & Finance, , Volume 27, June 2013, Pages 406-415
The issue of economic governance is highly discussed pertaining to the question of industrialisation of a country, but the literature on trade and foreign direct investment (FDI) hardly pays attention to this aspect. We develop a simple model to show how good economic governance in the domestic country, reducing domestic marketing and distribution costs, affects inward FDI and domestic welfare. Whether good governance in the domestic country attracts FDI depends on the way it affects the marketing and distribution costs. The effect of good governance is ambiguous on domestic welfare and depends on the cost difference between the firms, international transportation cost and the extent of cost reduction. Our analysis reveals strategic reasons for poor governance in some situations in the presence of foreign competition.
Better economic governance for improving investment climate is an important objective of many developing countries in recent years, and is getting significant attention in both academic and policy circles. As mentioned in the World Development Report (2005), “A good investment climate provides opportunities and incentives for firms – from micro-enterprises to multinationals – to invest productively, create jobs, and expand.” There are several factors, such as policy uncertainty, macro instability, corruption, cost of access to finance, crime, regulation and tax administration, courts and legal system, electricity, labour regulations, transportation, access to land and telecommunications, affecting investment climates (World Development Report, 2005), and many, if not all, of which can be improved through better economic governance. As mentioned by Rodrik (2008), “The focus of reform in the developing world has moved from getting prices right to getting institutions right.” … “Governance reforms have become the buzzword for bilateral donors and multilateral institutions, in much the same way that liberalization, privatization, and stabilization were the mantras of the 1980s.” Due to the belief that good governance is important for investment, economic growth and development, its effects on foreign direct investments (FDIs), which are believed to promote economic growth and are important for many developing countries, 1 certainly deserve attention. However, to our knowledge, this aspect did not get much attention in the literature. 2 Some efforts have been made to show the relationship between economic governance and FDI empirically, yet the theoretical literature did not pay much attention to this aspect. A number of scholars like Sin and Leung (2001), Globerman and Shapiro (2002), Gani (2007) and Fan, Morck, Xu, and Lien (2007) show that economic governance and FDI are positively correlated. However, Chang (2007) points out that the performances of some countries with weak governance are better than their counterparts with strong governance. Weller and Ulmer (2008) mention that “… China has attracted significant foreign investment despite notoriously persistent corruption”. Hence, the effects of economic governance on international trade, investment and welfare may not be trivial, and it is due to the fact that real-world economies operate in a second-best environment because of multiple distortions of reform policies (Rodrik, 2008). This paper is an attempt to understand such phenomenon in a more systemic way. We develop a simple model to show the relation between good governance and inward FDI by analysing the effect of governance on the non-production costs in the domestic economy. To be more specific on the economic governance, we assume that economic governance by the domestic country reduces domestic marketing and distribution costs, which are likely to affect the domestic and foreign firms symmetrically irrespective of exporting or FDI decision taken by the foreign firm. Thus, our paper focuses on a specific but an important economic aspect of governance. Our motivation for looking at the domestic marketing and distribution costs comes from recent works showing the importance of these costs on a firm's foreign-market entry decision (Ishikawa et al., 2010, Nocke and Yeaple, 2007 and Qiu, 2010). The reduction in the domestic marketing and distribution costs can be the outcome of investment by the domestic government on road and infrastructure. It may also be due to better economic governance that is reducing corruption in the transportation sector.3 We consider an international duopoly market with a foreign firm and a domestic firm. These firms compete in the domestic country. The foreign firm can either export or undertake FDI. Exporting requires the foreign firm to incur a per-unit international transportation cost, while FDI requires the foreign firm to invest a fixed amount. These firms also incur per-unit domestic marketing and distribution costs, comprising of transportation cost and labour costs related to sales. In this framework, we examine the effects of economic governance (affecting either domestic transportation costs or the labour costs related to sales) on inward FDI and domestic welfare. We show that whether economic governance reduces the cost of domestic transportation or the labour costs related to sales may have important implications on inward FDI. If better governance reduces the transportation cost, which is considered to be independent of labour productivity in sales, it increases an incentive for inward FDI. However, if economic governance reduces the labour costs, which depend on the labour productivities, it may reduce the incentive for inward FDI. Our analysis can be extended easily to capture the situation where economic governance reduces the transportation cost as well as the labour costs related to sales. We further show that, irrespective of the way good governance affects the per-unit costs of the firms, the effects on domestic welfare are ambiguous, and they depend on the factors such as the domestic marketing and distribution cost (which is the sum of transportation and labour costs), international transportation cost and the extent of marginal cost reduction.4 Our results can be summarised in the following way. Whether good governance reduces domestic transportation costs or the labour costs related to domestic sales, we get that: (i) Good governance increases domestic welfare by attracting FDI, if the domestic marketing and distribution cost difference between the firms is large compared with international transportation cost. (ii) Good governance may reduce domestic welfare by attracting FDI if the domestic marketing and distribution cost difference between the firms is small compared with international transportation cost, since the benefit of good governance may be taken away by the foreign firm. Hence, good governance, reducing domestic marketing and distribution cost, may not be beneficial to the domestic country even if it attracts FDI when other benefits of FDI such as knowledge spillover, and the policies, such as taxation to extract foreign profits, remain the same. Good governance creates two further implications, if good governance reduces the domestic marketing and distribution costs by reducing the labour costs related to domestic sales: (iii) Good governance reduces domestic welfare by preventing FDI if the domestic marketing and distribution cost difference between the domestic and the foreign firms is large enough compared with international transportation cost. Hence, the domestic country may not have the incentive to improve governance unless they are complemented by other FDI-attracting policies. (iv) Good governance may increase domestic welfare by preventing FDI if the domestic marketing and distribution cost difference between the domestic and the foreign firms is small compared with international transportation cost. Hence, the domestic country would prefer to improve governance to prevent FDI if there are no other benefits of FDI, such as knowledge spillover. This is in contrast to case (iii), where good governance may increase domestic welfare by attracting FDI. Thus, our results may provide justifications for the mixed empirical evidences arising from improved economic governance on inward FDI mentioned in the above empirical works. Interestingly, the above-mentioned result (iii) may find justification from the Chinese situation discussed in Weller and Ulmer (2008). If other FDI-attracting policies remain the same, poor governance may help to increase Chinese welfare by attracting FDI. In a different strand of literature, a number of studies are establishing the relationship between FDI and economic development (see, Reiter & Steensma, 2010 and the references therein), both theoretically and empirically, but no unanimous result has emerged. However, it has been found that a more selective approach towards FDI, which attracts FDI in certain sectors but not in all sectors, has a more positive influence on human development compared with a situation where FDI comes to all sectors (Reiter & Steensma, 2010). Thus, it justifies the relevance of strategic and discriminatory policies towards inward FDI. Our results reveal similar sentiment. If other favourable effects of FDI are kept at the same level, it is not trivial that good governance itself attracts FDI and increases domestic welfare. Instead, the domestic country's preference for good governance may depend on several factors, such as the way it affects domestic marketing and distribution costs of the firms, the marketing and distribution cost difference between the firms relative to the international transportation cost and the extent of domestic marketing and distribution cost reduction, which may vary across sectors. In an interesting work, Banerjee (1997) argued why government bureaucracies were often associated with red tape, corruption, and lack of incentives. He showed that the presence of asymmetric information may create the rationale for misgovernance by a benevolent government. We provide a new reason for poor governance and show that the presence of foreign competition may create strategic reasons for poor economic governance. For example, as shown in the above-mentioned result (iii), if good governance prevents FDI, a country may have the incentive for poor governance. The remainder of the paper is organized as follows. Section 2 shows the model and derives the results. Section 3 discusses the implications of some assumptions considered in our model. Section 4 concludes.
نتیجه گیری انگلیسی
It is a general consensus that good economic governance encourages the firms – from micro-enterprises to multinationals – to invest more due to a better investment climate. While several branches of economics literature widely discussed the implications of economic governance for the development of a country, the literature on international trade and FDI did not pay much attention to this aspect. In a simple model, we show the implications of good economic governance on the incentive for inward FDI and domestic welfare. We show that the effects on FDI depend on the way good governance affects the per-unit domestic transportation costs and labour productivities. Further, whether good governance increases domestic welfare is ambiguous and depends on the factors such as the per-unit marketing and distribution cost difference between the firms, international transportation cost and the extent of marketing and distribution cost reduction. Thus, our analysis shows that the usual perception, i.e., good governance attracts FDI and also increases domestic welfare, is not obvious, and there may be strategic reasons for maintaining lower level of economic governance. Whether good governance affects per-unit marketing and distribution costs by the same amount or by the same proportion is important for our results. It is worth pointing out that this type of effects prevails in other aspects of the economic analysis with asymmetric cost of firms. For example, whether the governments impose unit taxes/subsidies, which affect the marginal costs by the same amount, or they impose ad-valorem taxes/subsidies, which affect the marginal costs by the same proportion, may have significant implications for trade and industrial policies. Hence, the basic mechanism of our analysis has broader applicability than the context of this paper.