«IOSR Journal Of Humanities And Social Science (IOSR-JHSS) Volume 20, Issue 3, Ver. III (Mar. 2015), PP 35-42 e-ISSN: 2279-0837, p-ISSN: 2279-0845. ...»
IOSR Journal Of Humanities And Social Science (IOSR-JHSS)
Volume 20, Issue 3, Ver. III (Mar. 2015), PP 35-42
e-ISSN: 2279-0837, p-ISSN: 2279-0845.
Regional location determinants of Foreign Direct Investments in
Youssef Ettoumi1PhD, Amal Maâninou1, Benaissa Chidmi2
1 (Department of economics, Mohammed V university, faculty of souissi, Morocco)
(Department of agricultural and applied economics, Texas Tech university, USA)
Abstract: Foreign direct investments play an important role in the economic development of host countries however these investments can also contribute to the widening of regional inequalities. Indeed Multinational firms have a tendency to concentrate in few developed regions within the recipient countries.
This paper explores the location choice determinants of foreign companies located in 7 Moroccan regions between 1992 and 2011. We analyze the role of 4 economic variables: The agglomeration economies, the market size, the infrastructure, and the human capital. We built a linear model and conducted a separate regression analysis for each region. Results show that the 7 Moroccan regions of our sample rely on different factors in draining FDI inflows: while the market size and the availability of the human capital have a positive impact on attracting FDI for all regions (except for the northern region of Tanger-Tetouan), the variables agglomeration economies and infrastructure have controversial effects.
Keywords: Foreign direct investment, Linear model, Location determinants, Morocco, Regional inequalities I. Introduction Over the past three decades global foreign direct investment flows have been increasing dramatically passing from 13 346 million in 1984 to 1 350 926 US $ in 2014. This rise is mainly due to the significance of this type of investment for MNF as well as for home and host countries. Indeed, FDI can benefit to host countries in many ways: help decrease the unemployment rate by creating new jobs, allow technology and knowledge transfer, improve human capital development. For these reasons developing countries have been competing to attract the largest shares possible of FDI.
Morocco as a developing country has also focused on FDI as a way to enhance its macroeconomic fundamentals. In fact Morocco has attracted a large amount of FDI in comparison to other developing countries.
Although FDI have contributed to boost the Moroccan economy, these investments are still concentrated in few developed regions. Indeed 4 regions out of 16 concentrate over 80% of FDI. These regions are the Grand Casablanca, Tanger-Tetoaun, Rabat Salé ZZ, And Marrakech Tansif al Haouz and these are the same regions that contribute to more than 60 % of the country’s GDP. This geographical concentration of FDI can lead to the widening of regional inequalities. Given these facts one important question arises: What are the determining factors that influence foreign firms’ location choices to the Moroccan regions?
In this article we try to give an answer to this question by analyzing the location choice of foreign
industrial firms1 in 7 regions through the period 1992-2011. We investigate the role of 4 economic determinants:
Agglomeration economies, Market size, Human capital and Infrastructure. This article is empirical in nature and is divided into 4 sections: the first one is dedicated to a brief review of the eclectic theory which is the most comprehensive theory of FDI determinants, in the second section we review some empirical studies, the third section is for the model, and finally the fourth section is for discussing results.
II. Brief Review of the Theoretical Literature: The Eclectic Theory of Dunning.
The lacks of a specific theory on the regional determinants of FDI lead us to focus on the theories of FDI determinant in general. These are generally classified into two categories: Macroeconomic theories and Microeconomic theories. The first ones are based on the hypothesis of perfect competition; these theories analyze the determinants from the host country perspective. The second ones are based on the hypothesis of imperfect competition and analyze the determinants of FDI from the firm perspective.
In this section we briefly review the eclectic theory of Dunning, which stands at the intersection of the macroeconomic and microeconomic theory. It’s also inspired from the theory of location, and the theory of industrial organization.
The eclectic theory distinguished between three factors or motivations that can push a firm to go multinational. These are the following: Monopolistic advantage, Internalization, and Location specific
advantages. Monopolistic advantage: When the multinational firm possesses some kind of managerial advantages2 that foreign firms in the host country lack. These advantages are mobile and transferable. In fact in order for the firm to invest abroad, its monopolistic advantage should allow to offset the additional costs related to difficulties to operate abroad. Indeed the economic, political, and social environment of the host country can be very challenging for the MNF. Internalization: It allows Multinational Firms to run and coordinate their assets in the host country at a minimum transaction costs. In fact the eclectic theory argues that it is beneficial to the MNF to choose a direct plant rather than a partnership arrangement (exporting or licensing). The point here is that internalization can allow the MNF to protect its monopolistic advantage.
In fact the possession of a monopolistic advantage as well as the ability to internalize it are important factors in the location choice of the firm, however these two elements are not sufficient. Indeed the existence of location specific advantages in the host country is necessary.
Location specific advantages or (country specific): These are factor endowments (Natural and human Resources of better quality and cost, and other specific advantages that the host country possesses. This can be a better legal and institutional environment (policies and legislation), the cultural environment. These advantages are immobile and non transferable.
Overall, the eclectic theory tries to explain FDI location decision by focusing on the role of two types of determinants: the microeconomic and the macroeconomic ones, in our empirical review we focus on these latter and particularly on the location aspect from the host country perspective.
III. Empirical Review Until the late 1980s the empirical literature on the regional determinants of FDI was still focused on the case of developed countries. This is due to two main reasons: first, Developed countries were the most important destination of FDI inflows. Second, these countries were the first to experience the issue of the uneven distribution of FDI and regional inequalities that result. In the early 1990s, the attention of scholars started to shift from the analysis of developed countries to the analysis of emerging and developing countries. Indeed countries such as China, Brazil, India, Turkey, and others started to attract huge amount of FDI flows, and therefore experienced the same issue of regional concentration and increasing inequalities.
In this section we review some empirical studies on the case of developed as well as developing
countries3 we focus on some of the most commonly used explanatory variables. These are the following:
Agglomeration economies, the Market size, the Human capital, and the Infrastructure.
3.1 Agglomeration economies The geographical concentration of firms is a determining factor in firms’ location decision. Indeed firms
seek to benefit from the advantages that the spatial concentration can offer. These advantages are:
- Access to a large demand( Backward linkages)
- Proximity to a large number of suppliers (Forward linkages)
- Access to a specialized labor market (labor pool)
Krugman (1998), Oxford review of economic policy, p. 8. Vol. 14, NO.2;
- Some empirical evidence with regard to the Agglomeration economies Popescu (2013) on the case of 8 Romanian regions found that the spatial concentration of foreign firms measured by the invested stock of foreign capital has a positive impact on FDI inflows. Kwan and Chen (2000) found similar results on the case of Chinese regions. (Self reinforcing effect of FDI). Deichmann, Karidis and Sayek (2003) analyzed the case of Turkish regions and found that agglomeration economies have a positive influence on FDI inflows. Chidlow and Young (2008) on the case of Mazowieckie region in Poland concluded that agglomeration economies are the major pull factor of FDI. Similar results were found by Wei, Parker and Vaidya (1999) on the case of Chinese regions and Petrakou (2013) on the case of Greek regions.
Other evidence in favor of the positive role of agglomeration economies were found on the case of Sao Paolo: Korez-Vide1, Voller and Bobek (2014) found that firms that chose to locate in this region are motivated by the Investor-nation specific agglomeration as well as the industrial specialization and backward linkages (The geographical proximity to customers).
3.2 Market size The importance of a large market for FDI can be justified by the fact that a large market allows firms to benefit from economies of scales as well as a rational use of resources. For these reasons this variable is used in almost all empirical studies dealing with the determinants of FDI.
Indeed, Artige and Nicolini (2005) claim that market size measured by the GDP is the most important FDI determinant in econometric studies. The GDP per capita and the GDP growth rate are also very often used.
- Some empirical evidence with regard to the market size variable Cheng and Kwan (2000) on the case of 29 regions in China from 1985 to 1995 found that the regional market has a positive impact on the attractiveness of FDI. In the same line of thoughts Wei, Parker as well as Vaidya (1999), Lighfoot and Na (2006) found similar results on the case of Chinese regions and provinces.
Other evidence in favor of the positive role of the market size is provided by the work of Chidlow and Young (2008) who studied the case of the Mazowieckie region of Poland (warsaw included), the authors found that the market size is the main determining factor in the attractiveness of FDI. Ferreiro, Rodriguez and Serrano (1996) reached the same conclusion on the case of the Basque region of Spain. Petrakou (2013) on the case of Greek regions also concluded on the importance of the regional market.
Even though most empirical studies found that the regional market size has a positive impact on FDI inflows, some studies found contradictory results. Popescu (2013) for example on the case of Romanian regions found that this variable isn’t important for FDI inflows.
3.3 Human capital It’s very important to note that with the passage of time the concentration of firms can generate some external diseconomies that can push 4 some firms to leave this location in search for others that are more suitable: indeed the spatial concentration of firms means a tough competition on immobile factors (land and rent) which make prices go up.
5 Transport costs play a critical role in the location decision of firms; in fact there is tradeoff between from one hand, gains to win by being located in the center (economies of scale and agglomeration economies) and from the other hand the possibility to serve other peripheral markets that have also an important demand.
Most of the literature agrees on the importance of the level of education of the workforce in attracting FDI flows. The availability of a qualified labor force is a key factor in the location choice of firms. (UNCTAD 1998)
- Some empirical evidence with regard to the human capital Most empirical studies that dealt with the role of the Human capital in the attraction of FDI in the case of Chinese regions and provinces reached the same conclusion: Human capital is an important factor in attracting FDI flows. (Kang, Helldin, 2007 ; Lighfoot, Na, 2006 ; Cheng, Kwan, 2000 ; Wei, Parker et Vaidya, 1999).
Other evidence in favor of the positive role of the human capital is provided by the study of KorezVidel, Voller and Bobek (2014) who analysed the location decision of German and Austrian firms in the region of Sao Paolo, the authors found that a high level of education as well as qualified labor are essential factors in the location choice of these firms. Finally Petrakou (2013) on the case of Greek regions found similar results.
Even if most empirical studies agree on the positive role of the human capital some studies found contradictory results. Popescu (2013) found that the number of workers in R&D is seen by firms as a negative aspect of regions.
In fact the quality of the human capital is an important aspect in the location decision of MNF, but it’s not the only one.when it comes to the human capital, the cost is an essential aspect that should be taken into account. Popescu (2013) found that the cost of the labor force is an encouraging factor in the attraction of FDI.
Kang and Helldin (2007) found similar results on the case of eastern regions in China. As for any variable there exist some contradictory results: Wei, Parker and Vaidya (1999) found that the effective rate of wages is not a significant factor in draining FDI flows.
3.4 Infrastructure A good quality of infrastructure is a very important factor for attracting FDI: foreign investments need roads, ports, railways, airports and telecommunication in order to operate efficiently. Indeed, good quality of infrastructure increases the returns potential of investments in a country and therefore encourages FDI inflows.
Popescu (2013) measured the role of infrastructure by road density and found that this variable has a positive impact on FDI inflows. (Cheng and Kwan 2000; Kang and Helldin 2007) found similar results.
Deichmann, Karidis and Sayek (2003) measured the role of infrastructure by the proxy public investment and found that it has a positive impact on FDI inflows. Le Le (2007) found that infrastructure is an important drive but only for small FDI.