How Global is FDI? Evidence from the Analysis of Theil Indices. Frank Bickenbach Wan-Hsin Liu Peter Nunnenkamp

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1 How Global s FDI? Evdence from the Analyss of Thel Indces Frank Bckenbach Wan-Hsn Lu Peter Nunnenkamp No December 2015

2 Kel Insttute for the World Economy, Kellne 66, Kel, Germany Kel Workng Paper No December 2015 How Global s FDI? Evdence from the Analyss of Thel Indces* Frank Bckenbach, Wan-Hsn Lu and Peter Nunnenkamp Abstract: It s open to queston whether the ntensfed worldwde competton for FDI has reduced ts tradtonally strong concentraton n a few large and relatvely advanced host countres. We calculate and decompose Thel ndces to track changes n absolute and relatve concentraton of FDI durng the perod We fnd that both absolute and relatve concentraton decreased when excludng offshore fnancal centers from the overall sample. In addton to the narrowng gap between OECD and non-oecd countres, the concentraton across non-oecd countres declned for major subgroups and for both the absolute and relatve measures. Fnally, recent developments ndcate that low-ncome countres are no longer at the losng end of the competton for FDI. Keywords: Foregn drect nvestment, concentraton, Thel decomposton. JEL classfcaton: F21 Frank Bckenbach Kel Insttute for the World Economy Kellne 66 D Kel, Germany Emal: frank-bckenbach@fw-kel.de Wan-Hsn Lu Kel Insttute for the World Economy Kellne 66 D Kel, Germany Emal: wan-hsn.lu@fw-kel.de Peter Nunnenkamp Kel Insttute for the World Economy Kellne 66 D Kel, Germany Emal: peter.nunnenkamp@fw-kel.de * We thank Mchaela Rank for excellent research assstance. Bckenbach and Lu gratefully acknowledge fnancal support from the Sno-German Centre for Research Promoton (Project Number GZ 943). The responsblty for the contents of the workng papers rests wth the author, not the Insttute. Snce workng papers are of a prelmnary nature, t may be useful to contact the author of a partcular workng paper about results or caveats before referrng to, or quotng, a paper. Any comments on workng papers should be sent drectly to the author. Coverphoto: un_com on photocase.com

3 1. Introducton Not only the usual suspects such as the OECD (2002), but even promnent globalzaton crtcs argue that the case for attractng FDI s compellng: Such nvestment brngs wth t not only resources, but technology, access to markets, and (hopefully) valuable tranng, an mprovement n human captal (Stgltz 2000: 1076). Hence, t s hardly surprsng that UNCTAD has observed snce the early 1990s that the vast majorty of polcy measures relatng to the entry and establshment of foregn nvestors am at lberalzng and promotng FDI nflows, rather than restrctng and regulatng them. 1 The UN Summt on Fnancng for Development n Monterrey n 2002 concluded that creatng the necessary condtons to facltate FDI nflows s a central challenge for developng countres, partcularly the poorest among them (Unted Natons 2003). It s open to queston, however, whether the ntensfed worldwde competton for FDI has reduced ts tradtonally strong concentraton n hghly developed host countres and a small number of large and relatvely advanced emergng economes. On the one hand, Kekc (2009) posts a dstnct shft n the pattern of FDI, mplyng that practce may be catchng up to theory accordng to whch FDI should flow from captal-abundant rch countres to captal-scarce poor countres. Accordng to UNCTAD, 2010 was the frst year n whch developed countres receved less than half of global FDI nflows; developng economes mantan ther lead n 2013 (UNCTAD 2014: x). On the other hand, skeptcal observers pont to a persstently strong concentraton of FDI stocks (e.g., Nunnenkamp and Thele 2013). On both sdes of the debate, assessments are typcally based on just a few smple ndcators such as the share of selected country groups n total FDI, whle systematc analyses of changes n the concentraton of FDI contnue to be lackng. 1 For detals, see UNCTAD s Investment Polcy Montor, January 2015: Upload/Documents/IPM%20No%2013.pdf (accessed: November 2015). See also Nunnenkamp and Thele (2013: Fgure 6). 2

4 We attempt to fll ths gap by constructng decomposed Thel ndces and trackng the changes n these ndces durng the perod The paper s organzed as follows. In Secton 2, we ntroduce our methodcal approach and our data. We present our emprcal results n Secton 3. Secton 4 concludes. 2. Method and data Thel ndex: defnton and decomposton We measure the concentraton of FDI nflows across host countres or, equvalently, the nequalty of host countres n terms of FDI nflows by means of the Thel ndex. 2 In a generalzed form, the Thel ndex s defned as: I x x = w ln 1 w w I x = x ln = 1 w T I, (1) = where I s the number of observatons, n our case the number of potental host countres of I =1 FDI, and I s the set of all potental host countres = 1,, I ; x = X /( X ) s the share of country ( I) n FDI nflows to all countres (wth X the nflow of FDI to country ); and I = 1 w denotes the relatve weght of country (wth w = 1 ). The Thel ndex s equal to zero (no concentraton) f each country s share n total FDI nflows x s equal to ts weght w. ; t takes ts maxmal value = ln(1/ w ), wth I T max w a =mn w, f all FDI nflows are concentrated n the country (or one of the countres) wth the smallest weght. The relatve weghts affect the value of the ndex,.e., the level of concentraton, n two dstngushable ways: on the one hand they defne a benchmark for assessng each country's share n global FDI nflows x, and on the other hand they defne the a 2 Ths secton draws on Bckenbach et al. (2015) and Bckenbach and Bode (2008), who provde a detaled dscusson of the propertes of the Thel ndex and ts decomposton. 3

5 relatve mportance (weght) attrbuted to ndvdual countres n summng up country-specfc observatons nto a sngle ndex. 3 The Thel ndex fgures most promnently among the so-called general entropy (GE) class of nequalty measures. All GE measures satsfy a number of normatve crtera, among whch the addtve decomposablty of the measure s partcularly mportant for our emprcal analyss. Addtve decomposablty mples that, for any mutually exclusve (dsjont) and exhaustve set of subgroups of host countres, the total nequalty across countres can be meanngfully decomposed nto the nequalty wthn these subgroups (wthn-group component) and the nequalty between these subgroups (between-group component). 4 More specfcally, the wthn-group component corresponds to a weghted sum of the levels of nequalty between the countres wthn each group; 5 and the between-group component corresponds to the level of nequalty between the dfferent group averages. The decomposton property of the Thel ndex thus allows us to trace changes over tme n the overall concentraton of FDI nflows across countres to changes (dfferences) n the correspondng concentraton wthn and between dfferent subgroups of countres. More specfcally, wth A, B, and C beng three dsjont and exhaustve subsets of the set of all potental host countres I, the decomposton property of the Thel ndex (2) mples T + I ABC ABC = TW TB, (2) where TW ABC s the wthn-group component, gven by: TW ABC = S= A, B, C X S X I X S X S ln X X S ω / ω S = A B ω T + ω T + A B ω T C C (3) 3 As dscussed n more detal below, we wll use two dfferent defntons of weghts throughout our analyss. 4 Other frequently used nequalty measures, such as the Gn ndex or the coeffcent of varaton (CV) do not have ths property. 5 In the case of the Thel ndex, the sum of these weghts s always equal to one so that the wthn-group component s actually a weghted average of the group-specfc nequalty measures. 4

6 ( wth ω = X / X ) the share of subset S n FDI nflows of I and T S the Thel ndex of S S I concentraton of subset S (S = A, B, C); and where TB ABC s the between-group component gven by: TB ABC = S= X S A, B, C X I 1 ln w S X S X I. (4) As ω A +ω B +ω C =1, the wthn-group component, TW ABC, s a weghted average of the Thel ndces of the dfferent subgroups wth weghts equal to the respectve subgroup s share n total FDI nflows (n the followng, A A T ω wll be referred to as group A s contrbuton to the wthn-group component). The between-group component, TB ABC, s a Thel ndex tself, whch results from assgnng each country of a specfc subgroup of countres the average FDI nflows of the countres of that subgroup. It thus measures the nequalty between the subgroups n terms of ther countres average FDI nflows. Importantly, throughout the followng analyss, we calculate two dstnct varants of the Thel ndex correspondng to two dfferent choces of relatve weghts n the defnton of the generalsed Thel ndex of equaton (1) above. The frst varant, the absolute Thel ndex, treats all countres symmetrcally, rrespectve of ther sze. It s gven by the specal case where the weghts n equaton (1) are the same for all countres (w = 1/I for all ). In ths case, the country-specfc attractveness for FDI s gven by absolute amounts of FDI nflows and the aggregaton of country-specfc observatons nto the absolute Thel ndex gves equal weghts to all countres. 6 The second varant, the (populaton-weghted) relatve Thel ndex, s obtaned from equaton (1) by settng each country s weght equal to ts share n total I populaton, w = POP / POP, where POP s the populaton of country. In contrast to the = 1 I = =1 6 I The absolute Thel ndex s thus gven by T x ln( Ix ). It s equal to zero (no concentraton or perfect equalty) f all countres receve the same amount of FDI nflows. It takes ts maxmal value T I max = ln( I) f all FDI goes to just one country. 5

7 absolute Thel ndex, the relatve Thel ndex accounts for the countres populaton n two respects: () by measurng the country-specfc attractveness for FDI n terms of per-capta nflows of FDI, and () by usng the countres populaton as weghts when aggregatng country-specfc observatons nto the relatve Thel ndex. 7 Note that the absolute Thel ndex s conceptually closer than the relatve Thel ndex to the frequently mentoned hgh shares of a lmted set of host countres n worldwde FDI flows, alluded to n the Introducton. However, the relatve Thel ndex appears to be more approprate to reveal the attractveness for FDI of varous small countres, whch are mnor hosts of absolute FDI nflows almost by defnton. 8 At the same tme, the aggregaton of country-specfc observatons wth populaton as weghts appears to be better suted to assess the concentraton of FDI from a global perspectve. Data source and some aggregate statstcs We draw on UNCTAD s FDI database for FDI nflows. 9 Ths source allows us to base the calculaton of Thel ndces on long tme seres of FDI nflows durng the perod To smooth short-term fluctuatons we aggregate annual flows over four-year sub-perods. Hence, our analyss s based on 11 sub-perods from to. Our sample covers essentally all host countres of FDI (ncludng those wth margnal or at tmes zero nflows). 10 The sample of 196 hosts of FDI 11 ncludes 23 OECD countres (as 7 The (populaton-weghted) relatve Thel ndex s zero (no concentraton or perfect equalty) f each country s share n total FDI nflows s equal to ts share n total populaton. It takes ts maxmal value I T max = ln( POP / POP a ) f all FDI goes to the country (denoted by a) wth the smallest populaton. 8 Conversely, FDI per capta tends to be relatvely low for (very) large countres where nternatonal transactons generally play a less mportant role compared wth small countres. 9 The FDI data are avalable at: (accessed: Aprl 2015). Populaton data used to calculate relatve weghts are manly also from UNCTAD. They have been augmented by data from the World Bank s World Development Indcators avalable at data-catalog/world-development-ndcators (accessed: Aprl 2015) and from the IMF s Internatonal Fnancal Statstcs Database (February 2015 Edton). 10 Note that FDI nflows can be negatve, for example, f proft remttances and repayments of loans receved from the parent company exceed new equty nflows. Negatve values observed after takng four-year aggregates have been set to zero for the calculaton of Thel ndces. Alternatve treatments of negatve values, such as the consoldaton wth nflows from the nearest four-year nterval wth suffcently postve nflows, have lttle 6

8 of 1993) and 136 non-oecd countres; offshore fnancal centers (OFCs) are excluded from non-oecd countres and treated as a dstnct subgroup. 13 The broad country coverage mtgates sample selecton bas and renders t possble to decompose the Thel ndces n several dmensons. Fgure 1 dsplays long-term trends n FDI nflows. Total nflows soared about 100- fold from about 64.2 bllon US$ n to almost 6.53 trllon US$ n. However, the boom of worldwde FDI was assocated wth consderable volatlty, even though we smooth annual fluctuatons. In partcular, the rsng trend was sharply nterrupted at the turn of the century when the prevous wave of mergers and acqustons (M&As) collapsed. Another declne n overall FDI nflows occurred after the fnancal meltdown n FDI nflows to the OECD countres dropped sharply n both ncdents, whereas FDI nflows to OFCs and to non-oecd countres (excludng OFCs) contnued to rse. From Fgure 1, we also see that the OECD countres share n total FDI nflows strongly decreased over tme, whle that of the other two groups strongly ncreased over tme. 14 Whle ths seems to suggest some convergence n the relatve mportance of dfferent countres or country groups, a thorough analyss of ths ssue should go far beyond such aggregate analyss. Not only should t take nto account dfferences n the number of countres and n the populaton of the dfferent country groups, but t should also take nto account changes n the concentraton of FDI nflows wthn the dfferent country groups. The followng secton wll do so by lookng at the development of absolute and relatve Thel effects on the results presented below. FDI nflows smaller than 001 mllon dollars were treated as zero nflows. 11 Durng the observaton perod several countres have splt up or unfed as n the case of Germany. To get a balanced country panel, the successor states of the Unon of Socalst Sovet Republcs and of the Socalst Federal Republc of Yugoslava as well as of Czechoslovaka were treated as f they exsted throughout the whole observaton perod. Ertrea and Ethopa are treated as one entty (observaton) throughout the observaton perod. The same s true for Belgum and Luxembourg (for whch separate FDI data would be avalable only from 2002 onwards). 12 Throughout the subsequent analyss, we defne OECD countres accordng to OECD membershp by the end of The lst of OFCs s manly taken from the Internatonal Monetary Fund (for detals, see Zoromé 2007). However, we consder Luxembourg and Swtzerland as OECD countres. 14 For detals on the development of FDI nflows for the dfferent subgroups see Table A1 n the Appendx. 7

9 ndces of concentraton and ther decompostons along dfferent country groups and subgroups. 3. Results on FDI concentraton Overall concentraton: measurement matters For a start, we assess the concentraton of FDI for our overall sample of 196 host countres. For each 4-year nterval we dfferentate between two subsets of countres: Z={ X = 0},.e., the subset of countres that attracted zero FDI nflows over the gven tme perod; and P={ X > 0},.e., the subset of countres wth strctly postve (nonzero) FDI nflows over that perod. In ths specfc case the decomposton of the Thel ndex of overall concentraton (equatons (2)-(4)) smplfes to: 15 T TW + TB I ZP ZP =, (5) where the wthn-group component s now smply the concentraton wthn the subgroup P of countres wth strctly postve nflows X ZP TW = ln / = P X X w P P P X w T P (6) and the between-group component s smply the logarthm of the nverse of the aggregate weght (n the specal case of the absolute Thel ndex, the share) of countres n the sample that do receve strctly postve FDI nflows ZP 1 TB = ln. (7) w P In ths case, the wthn-group component of the overall Thel ndex represents the ntensve margn of concentraton across country group I and the between-group component represents 15 In dervng equatons (6) and (7) we make use of the fact that for subset P the weght ω P from equaton (3) s equal to 1. As ln(x) s not defned for x = 0 we substtute xln(x) by lm x 0 xln(x) = 0. For a smlar decomposton n the context of trade dversfcaton see Cadot et al. (2013). 8

10 the extensve margn of concentraton. 16 It reveals the mportance of the changng number (or weght) of zero FDI observatons (.e., countres n subset Z wthout FDI nflows n the specfc tme perod) for the development of overall concentraton (note that w = P 1 w ). Z As dscussed before, we consder two alternatve measures of concentraton. The absolute Thel ndex whch treats all countres symmetrcally (w =1/I for all ), gnorng ther dfferent populaton sze, s shown n the left panel of Fgure 2. The relatve Thel ndex whch consders dfferences n populaton sze s shown n the rght panel of Fgure 2. As can be seen, the development of FDI concentraton clearly depends on the choce between absolute and relatve Thel ndces. The absolute Thel ndex ncreases durng the 1970s and 1980s before trendng downwards n the more recent past. Comparng the last subperod wth the frst sub-perod, the absolute Thel ndex ponts to lower overall concentraton of FDI nflows (1.5 versus 2.0). In contrast, the relatve Thel ndex stayed almost constant (at around 1.6) durng the frst half of the observaton perod and fluctuated consderably thereafter, before returnng almost to ts startng level n the last sub-perod. Whle dfferences between the absolute and relatve Thel ndces are manly due to the wthn-group component (ntensve margn), we observe smlar trends for the betweengroup component (extensve margn) n both panels of Fgure 2. The extensve margn fell and was close to zero snce the early 1990s mplyng a very low share (absolute concentraton) and populaton-weght (relatve concentraton) of countres wth zero FDI nflows. The strong declne of zero observatons and ther neglgble role for overall concentraton n the more recent past can be attrbuted to the openng-up to FDI of the transton countres n Eastern Europe and Central Asa (see also below). 17 Consequently, the value of the ntensve margn of concentraton closely resembled the value of overall concentraton snce the early 1990s. 16 A declnng number (or weght) of countres wth zero FDI nflows s thus referred to as a lower extensve margn of concentraton. Ths should not be confused wth a lower extensve margn of FDI, whch generally refers to a rsng number of countres wth zero FDI nflows n the lterature. 17 The pronounced declne of the extensve margn n for the relatve measure n the rght panel of Fgure 2 was assocated wth Chna s openng-up to FDI. Note that the Chnese case llustrates one of the man 9

11 OFCs: mnor mpact on overall concentraton In the next step of our analyss, we assess the role of OFCs for the development of overall concentraton portrayed above. A pror t s hard to tell whether OFCs should be expected to have an mportant mpact on overall concentraton. As for ther effect on the absolute Thel ndex, OFCs, on the one hand, account for almost 20 percent of countres n our sample (37 of the 196) gvng them a relatvely hgh weght. On the other hand, FDI nflows per country were not much dfferent for the OFCs than for the group of all countres (Table A1) suggestng that ther effect on the absolute Thel ndex for overall concentraton may actually be small. For the relatve Thel ndex, by contrast, the aggregate weght of the OFCs s very low (n the last sub-perod all OFCs together accounted for only about 0.5 percent of the aggregate populaton of all countres n the sample), whereas ther per-capta nflows of FDI were exceptonally hgh (Table A1). Moreover, ncreased per-capta nflows resulted n a wdenng gap compared to other host countres, notably n the last sub-perod when FDI flows to OFCs strongly ncreased whle overall FDI flows strongly decreased (Table A1). Indeed, Fgure 3 shows that OFCs have just a margnal effect on the level and development of overall concentraton as measured by the absolute Thel ndex. The curves for the overall sample of 196 countres, ncludng the 37 OFCs, and for the reduced sample after excludng the OFCs closely resemble each other n the left panel of Fgure 3. Ths also holds for the comparson of the relatve Thel ndces for the full and the reduced country samples from the begnnng of our observaton perod untl the early 2000s. However, the two curves n the rght panel devate consderably durng the two last sub-perods ( ). Specfcally, the relatve Thel ndex appears to be trendng downwards at least snce ts dfferences between the absolute and the relatve measures of concentraton. For the absolute measure, Chna counts as just one out of 196 countres. For the relatve measure, Chna represents a heavyweght wth almost 20% of total populaton. In the rght panel of Fgure 2 Chna s openng-up to FDI thus led to a strong decrease n the extensve margn (20% of world populaton now receve FDI), but also to a notable ncrease n the ntensve margn (20% of world populaton receved stll qute low per-capta nflows). 10

12 temporary peak around the turn of the century (and possbly even snce the early 1990s) when excludng the OFCs. 18 Importantly, ths mples that the recent development of relatve concentraton becomes much more smlar to the recent development of absolute concentraton once the sample s reduced by excludng OFCs. After excludng OFCs, both the absolute and the relatve measure of concentraton clearly decreased at least snce the begnnng of the century and were substantally lower at the end of our perod of observaton than at ts begnnng. OECD vs. non-oecd countres: convergence from the top The subsequent steps of our analyss are based on the reduced sample after excludng OFCs (the correspondng set of countres s denoted by I\F). 19 In ths sub-secton, we decompose the (absolute and relatve) Thel ndces for the 159 remanng sample countres accordng to OECD membershp as of The dstncton between tradtonal OECD countres and the typcally less advanced other host countres s clearly relevant to assess whether FDI has ncreasngly become global. It s well known that tradtonal OECD countres absorbed large shares of worldwde FDI n the past. It s also wdely reported, as mentoned n the Introducton, that FDI flows have shfted toward non-oecd hosts recently (see also Fgure 1). 21 The followng analyss wll show that ths shft can ndeed explan a substantal part of 18 The dfference between the relatve Thel ndces n panel b of Fgure 3 can be attrbuted to two OFC-related developments n the last sub-perods: Frst, when decomposng the overall ndex between OFCs and all other countres n our sample, the between-group component ncreased consderably (not shown). Ths s due to the above noted wdenng gap n terms of per-capta FDI nflows n favor of OFCs. Second, concentraton strongly ncreased wthn the subgroup of OFCs, whch together wth the OFC s ncreasng share of total FDI nflows, mples that the OFCs contrbuton to the wthn component of overall concentraton ncreased as well. These two factors are no longer pushng overall relatve concentraton upwards once OFCs are excluded. 19 We prefer excludng OFCs from our further analyss snce ther lmted effects on overall concentraton do not offer relevant nsghts on whether FDI has become more global n the sense of ncreasngly nvolvng host countres across the developng world. Mostly, OFCs serve only as stop-over destnatons rather than fnal destnatons of FDI and t s generally unknown where FDI flows channeled through OFCs are ultmately used for nvestment. 20 The large and heterogeneous group of non-oecd countres wll be further decomposed n the next subsectons. 21 At the begnnng of our observaton perod, the 23 OECD members accounted for more than 75 percent of FDI nflows to all 159 remanng sample countres. In the last sub-perod, the 136 non-oecd countres have ncreased ther share to almost 50% (Table A1). 11

13 the declne n overall concentraton documented n the precedng sub-secton. It wll also show, however, that there were other mportant factors at work as well. As ndcated above, total nequalty across countres can be meanngfully decomposed nto the nequalty wthn subgroups (here: OECD and non-oecd countres, ndexed O and N, respectvely) and the nequalty between these subgroups. Specfcally, applyng equatons (2)-(4), the Thel ndex for the sample wthout OFC countres, T I\F, can be addtvely decomposed nto a wthn-group component, TW ON, and a between-group component, TB ON to gve: I F ON ON O O N N T \ = TW + TB = ω T + ω T + TB, (8) ON where the full set of all countres, I, and the number of countres n that set, I=#I =196, have to be replaced by the reduced set of countres I\F and the correspondng number of countres #(I\F)=159, n equatons (1)-(4) as well as n the defnton of weghts. Note that after these renormalzatons, we agan have ω ω = 1, so that the wthn-group component TW ON s O + N the weghted average of the Thel nequalty ndces, T O and T N, for the two subgroups O and N. Fgure 4 reveals how the dfferent components contrbuted to the development of overall concentraton across the remanng 159 sample countres of I\F. Comparng the development of overall concentraton, T I\F, wth that of ts between- and wthn-group components, TB ON and TW ON, we see that at least from the late 1980s onwards, the development of the overall concentraton has been drven manly by ts between-group component. Ths holds for both the absolute (panel a) and the relatve (panel b) Thel ndex: the tmng of peaks (and lows) of the overall ndex and ts between-group component concdes and both curves appear to be trendng downwards. The strong peaks n the between-group component, TB ON, observed for the and sub-perods correspond to partcularly strong ncreases and hgh shares of FDI 12

14 flows to the OECD countres, mplyng large dfferences between OECD and non-oecd countres n both per-country nflows (absolute measure) and per-capta nflows (relatve measure). Smlarly, the drops n the between-group component after the and sub-perods can be attrbuted to declnng amounts and shares of FDI flows to the OECD countres n the recessons followng the dot-com meltdown and terror attacks of 2001 and the fnancal crss of Whle these peaks and lows were all largely due to strong changes n the level of FDI nflows to the OECD countres, the strong declne of the betweengroup component n the early and md-1990s was largely due to a partcularly strong ncrease (by more than 600 percent) n FDI nflows to the non-oecd countres. Turnng to the wthn-group component we observe that for the absolute Thel ndex, the wthn-group component was the man source of the ncrease of FDI concentraton durng the 1970s and early 1980s; but contrbuted to the declne of overall absolute concentraton thereafter. The ncrease n wthn-group concentraton, TW ON, over the frst four sub-perods was fueled by a temporary ncrease n the absolute concentraton of FDI nflows wthn both country groups, T O and T N, whch both peaked n the frst half of the 1980s (panel c of Fgure 4). Overall, the wthn-group component of the absolute Thel ndex was slghtly hgher n the last sub-perod than n the frst one. Ths s even though the absolute concentraton of FDI nflows decreased slghtly wthn both subgroups. For the relatve Thel ndex, by contrast, the wthn-group component was lower at the end of the observaton perod than at ts begnnng. That declne was almost exclusvely due to a strong declne durng the second half of the 1980s, whch, n turn, was exclusvely due to a very strong decrease n the relatve concentraton of FDI nflows across the non-oecd countres, T N, durng that perod (panel d of Fgure 4). More generally, relatve concentraton across the non-oecd countres ncreased untl the md-1980s but very strongly decreased 13

15 thereafter, partcularly between the md-1980s and the md-1990s. 22 By contrast, the relatve concentraton of FDI nflows across the OECD countres, T O, changed comparatvely lttle over tme. It decreased from the begnnng of the observaton perod untl the md-1980s and slghtly ncreased thereafter stll stayng below ts startng level, however. Taken together, Fgure 4 ponts to a knd of convergence from the top. For both the absolute and the relatve measure the between-group component tended to decrease over tme, reflectng a narrowng gap between OECD-countres and non-oecd countres n FDI nflows per country (absolute measure) as well as per-capta (relatve measure). At the same tme, the concentraton across OECD countres remaned largely constant (or even decreased slghtly) between the begnnng and the end of the observaton perod, suggestng that the narrowng gap between OECD and non-oecd countres was not smply due to an ncreasng nequalty wthn the group of OECD countres. Despte ths convergence, dfferences n FDI nflows between OECD countres and non-oecd countres, both per country and per capta, were stll pretty large even at the end of our observaton perod. 23 And even though the OECD s share, ω O, n total FDI nflows appeared to be trendng downwards, t fluctuated heavly. Gven the large volatlty of ω O t cannot be taken for granted that the declne of that share, and the convergence from the top more generally, wll prove to be a longer-term, or even permanent phenomenon. Ths s even more so as the strong declne of the OECD countres share n FDI nflows snce the turn of the mllennum (from almost 80% n to slghtly more than 50% n ) seems to be due mostly to a specfc weakness of the OECD countres n the recessons of the early 2000s and after the fnancal meltdown of 2008, rather than to a partcularly strong 22 Whle the relatve concentraton of nflows across the non-oecd countres, T N, contnued to strongly decrease throughout most of the 1990s, the effect of that decrease on the wthn-group component of the overall relatve Thel ndex, T I\F, was overcompensated after the end of the 1990s by the ncreasng share of nflows to non- OECD countres, ω N. As the concentraton of FDI nflows across the non-oecd countres was hgher than that across the OECD countres, any ncrease n ω N, ceters parbus, ncreased the wthn-group component of overall concentraton. 23 Both per-country nflows and per-capta nflows to the OECD were stll more than sx tmes hgher than those to the non-oecd n the last sub-perod, (Table A1). 14

16 growth of FDI nflows to the non-oecd countres. It may therefore prove premature to conclude that globalzed FDI patterns necessarly allow non-oecd countres to close the tradtonal gap n attractveness to FDI. Non-OECD subgroups: decreasng concentraton at least snce the 1980s When stressng the central challenge to moblze FDI as a major source of fnancng sustaned economc growth (Unted Natons 2003), the UN Summt on Fnancng for Development n Monterrey n 2002 was not only concerned about developng countres as a whole laggng behnd OECD countres n terms of attractveness for FDI. In addton, the Monterrey Consensus explctly referred to specfc subgroups such as low-ncome countres and economes n transton, for whch t mght be partcularly dffcult to lure FDI nflows. Indeed, the reduced concentraton across the set of all OECD and non-oecd countres (upper panels of Fgure 4) as well as across the non-oecd countres (lower panels of Fgure 4) may obscure that specfc subgroups of non-oecd countres dd not beneft from boomng FDI durng our perod of observaton. Hence, we proceed by assessng changes n concentraton for the sub-sample of 136 non-oecd countres. Ths secton dstngushes three subgroups of non-oecd countres: ten G20 members among the non-oecd countres, transton countres n Eastern Europe and Central Asa, 25 and all other non-oecd countres (whch are further dfferentated by ncome status n the next secton). Whle non-oecd G20 members stand out wth regard to ther sze and strategc mportance (for foregn nvestors and governments), the transton countres entered the competton for FDI only after the regme change at the begnnng of the 1990s. Assessng changes n concentraton wthn and between these subgroups can thus be expected to offer more specfc nsghts. 24 Argentna, Brazl, Chna, Inda, Indonesa, Mexco, Russa, Saud Araba, South Afrca, and South Korea. 25 Albana, Armena, Azerbajan, Belarus, Bosna & Herzegovna, Bulgara, Croata, Czech Rep., Estona, Georga, Hungary, Kazakhstan, Kyrgyzstan, Latva, Lthuana, Macedona, Moldova, Mongola, Montenegro, Poland, Romana, Serba, Slovaka, Slovena, Tajkstan, Turkmenstan, Ukrane, and Uzbekstan. 15

17 Denotng the subsets of the G20 members, the transton countres and the other non- OECD countres by G, T and R, respectvely, we can once agan apply equatons (2)-(4) to decompose the (absolute and relatve) Thel ndex of concentraton of FDI nflows to the non- OECD countres, T N, nto the correspondng wthn-group and between-group components: N GTR GTR G T R GTR ω GT + ωtt + RT TB, (9) T = TW + TB = ω + where I and I have now to be replaced by N and N=#N=136 n equatons (1)-(4). The results of ths decomposton are dsplayed n Fgure 5. In the lght of the UN s above noted concerns, one mght suspect that overall concentraton for the remanng non-oecd sample s drven manly by the between-group components of the Thel ndces. However, Fgure 5 shows that ths conjecture s only partally confrmed for the absolute Thel ndex (panel a), and s not confrmed at all for the relatve Thel ndex (panel b). The peak n overall absolute concentraton n the frst half of the 1980s as well as ts ncrease n the most recent sub-perod concded wth correspondng changes n the betweengroup component,.e., (temporary) ncreases n the nequalty of FDI nflows per country between the three country groups. 26 Throughout the perod of observaton, the between-group component of absolute concentraton appears to be relatvely hgh, reflectng the fact that (average) FDI nflows per-country are very much hgher for the G20 countres than for two other country groups. 27 In marked contrast, the between-group component of the relatve Thel ndex was close to zero throughout the observaton perod (panel b). 26 A more detaled look at the development of per-country FDI nflows for the dfferent country groups (Table A1) reveals that the causes for the dfferent peaks n the between-group component were qute dfferent from each other. The strong peak n the md-1980s was due to a strong ncrease n nflows to the G20 members that was accompaned by stagnatng FDI nflows to the other country groups. By contrast, the ncrease of the between-group component n the 1990s was manly caused by weak growth of FDI nflows to the other non- OECD countres; and ts ncrease n the last perod was manly caused by a decrease of FDI nflows to the transton countres. 27 Ths s partcularly true snce the md-1990s when per-country nflows to the G20 have been between 18 and 23 tmes hgher than those to other non-oecd countres, and between 8 and 15 tmes hgher than those to the transton countres (Table A1). 16

18 The strkngly dfferent role of the between-group components for the absolute and relatve Thel ndces s manly because the G20 members represent just 10 countres n the large sample of 136 non-oecd countres, whereas they account for almost 60 percent of the populaton lvng n all non-oecd countres. As a consequence, FDI nflows per country are very much hgher for the group of G20 members than those for the other two groups, whle FDI nflows per capta are of a smlar level as those of the other groups. Most surprsngly perhaps, the large and heterogeneous group of (98) other non-oecd countres, R, were almost as successful as the G20 members n terms of attractng per-capta FDI nflows. And per-capta nflows to the transton countres were even substantally hgher than those to the G20 member countres, arguably rebuttng the fears expressed by the Monterrey Consensus (see above) at least partally. 28 Importantly, the decompostons of both the absolute and the relatve Thel ndex reveal the major role of the wthn-group component for declnng overall concentraton of FDI flows to non-oecd countres. In panel a, t can be seen that the decreasng trend of the absolute measure of overall concentraton of FDI nflows across the non-oecd countres (T N ) durng most of the 1990s and 2000s was manly due to the contnuous decrease of the wthn-group component durng that tme. The development of absolute concentraton wthn the dfferent country groups (panel c) shows that all three subgroups contrbuted to ths declne. For all subgroups the absolute concentraton of FDI nflows decreased snce the early 1980s at the latest. Whle t was only n the early-2000s that the level of overall absolute concentraton fell below ts level observed n the 1970s, the declne n relatve concentraton started earler and was farly steep from the early 1980s to the md-1990s (upper panels of Fgure 5). The sze and the development over tme of the relatve concentraton measure across all non- OECD countres was almost dentcal to that of ts wthn-group component, whch n turn 28 In the last sub-perod, the transton countres receved about 1000 US$ per capta compared to about 400 US$ per capta for the G20 member countres and 330 US$ for other non-oecd countres. 17

19 was largely determned by the contrbuton of G20 members (panel b). Specfcally, the strong peak of overall concentraton n corresponds to both a strong ncrease n the share of G20 members n total FDI nflows and a strong peak n the relatve concentraton of nflows across the G20 members. And the strong decrease n relatve overall concentraton snce the md-1980s largely reflects the strong decrease n relatve concentraton across G20 members. The lower panels of Fgure 5 reveal that the concentraton across non-oecd countres declned, for all three subgroups and for both the absolute and relatve measures, when comparng the begnnng and the end of our perod of observaton. 29 Yet, there are notable dfferences across country groups. For the group of G20 members, concentraton strongly depends on measurement: nequalty across G20 members n terms of per-capta nflows (relatve concentraton) has been much larger (at the begnnng of the observaton perod) and has declned much stronger than nequalty n terms of per-country nflows (absolute concentraton). For the transton countres, both absolute and relatve concentraton declned sharply, notably durng the frst years after the regme change n For the other non- OECD countres, whch wll be analyzed n more detal n the subsequent secton, the declne n concentraton was less pronounced and of smlar magntude for the absolute and relatve measures. Low-ncome countres: fnally convergng? In ths secton, we focus on the wdespread concern that manly poor countres could be on the losng end of the worldwde competton for FDI nflows (e.g., Unted Natons 2003). We therefore exclude the G20 members and transton countres from our further analyss and 29 Ths neglects the zero concentraton for transton countres n the frst sub-perod whch s economcally meanngless, however, snce there were no FDI nflows to any country n ths group at that tme. 30 Because of the low but ncreasng weght, ω T, of transton countres durng most of the observaton perod, the strong declne n concentraton across transton countres had lttle effect on ther contrbuton to the wthngroup component, however. 18

20 restrct our sample to the group of the 98 other non-oecd countres, R. Wthn that group we now dstngush low- and hgher-ncome countres, and calculate the between- and wthngroup components of the (absolute and relatve) Thel ndex n lne wth the general equatons above. Wth L representng the low-ncome group and H representng the hgher-ncome group 31 we thus get: R LH LH L L H H T = TW + TB = ω T + ω T + TB, (10) LH where I and I have now to be replaced by R and R = #R = 98. From Fgure 6 t can be seen agan that both the absolute and the relatve concentraton across the 98 other non-oecd countres decreased over tme. For both measures the development of overall concentraton was largely determned by the development of the wthn-group component, TW LH, whch, n turn, closely resembles the development of concentraton across the hgher-ncome countres, T H. 32 However, n lne wth the man subject of ths sub-secton, the followng analyss focuses on the development over tme of the dfferences n FDI nflows between low- and hgher-ncome countres summarzed by the between-group component, TB LH, and of the concentraton of FDI nflows across the lowncome countres, T L. The upper panels of Fgure 6 ndcate that the level of the between-group component s hgher for the relatve than for the absolute measure: the gap n FDI nflows between the hgher-ncome countres and the low-ncome countres s larger for per-capta nflows than for per-country nflows, whch smply reflects the fact that the populaton of low-ncome countres s larger on average than that of the hgher-ncome countres. More mportantly, the development over tme of the absolute and the relatve between-group components resemble 31 More precsely, group L comprses 46 countres wth low per-capta ncome accordng to the World Bank s ncome classfcaton for the year 2005 (or the closest year for whch data are avalable). Group H comprses 52 countres whch the World Bank classfes as lower-mddle, upper-mddle and hgh ncome countres. 1.4 bllon people were lvng n L countres at the end of our perod of observaton, whle 840 mllon people were lvng n H countres. 32 The declne n overall absolute concentraton n the 1970s was exclusvely due to decreasng concentraton across low-ncome countres, however. 19

21 each other qute closely. For both measures, we observe three dstnct sub-perods: the between-group components and thus the gap between FDI nflows to the hgher-ncome countres and those to the low-ncome countres () ncreased durng the 1970s, () changed only lttle durng the 1980s and 1990s, and () declned n the new mllennum. Concerns that the low-ncome countres could be on the losng end of the ncreased competton for FDI nflows mght be justfed by the fact that the between-group component was stll hgher n the last sub-perod () than n the frst sub-perod (). When consderng the more recent past, however, FDI nflows to the low-ncome countres dd not only grow faster (both per-country and per-capta) than those to the hgher-ncome countres (as reflected n the declne of the between-group components n Fgure 6); they even grew much faster than the nflows to any other country group analyzed n ths paper (see last row of Table A1). It thus seems that the low-ncome countres may fnally have started to catch up to the other countres n terms of FDI nflows. Moreover, the lower panels of Fgure 6 suggest that ths recent development nvolved more than just a few low-ncome countres. In the longer run, both absolute and relatve concentraton strongly decreased across the 46 low-ncome countres (n partcular snce the md-1980s). Focusng on the recent past when FDI nflows to the low-ncome countres have grown faster than those to the other country groups, absolute concentraton slghtly decreased, whereas relatve concentraton slghtly ncreased (n the last sub-perod). In other words, the recent catch-up of the low-ncome countres has not been accompaned by an ncrease, at least not by a strong ncrease, n the nequalty of FDI nflows across the low-ncome countres. It seems that the catch-up process has not been lmted to a few low-ncome countres only. Ths last pont s corroborated when decomposng the (absolute and relatve) concentraton of FDI nflows across the 46 low-ncome countres, T L, nto ts ntensve 20

22 margn and ts extensve margn of concentraton. 33 For both the absolute and the relatve measure, the extensve margn of concentraton has been decreasng snce the md-1980s and has been very low n the recent past. Ths mples that the number of countres that receved zero FDI nflows (n a gven four-year perod) as well as ther share n total FDI have been very small n recent years. 34 Altogether the evdence n ths sub-secton suggests that concerns about the lowncome countres beng on the losng end of worldwde competton for FDI may have been justfed for the 1970s and possbly for the 1980s and 1990s but probably no longer for the more recent past. Snce the turn of the mllennum, the growth n FDI nflows to the lowncome countres has been much hgher both per-country and per-capta than that to the overall sample or to any of the other country groups. In addton, there was no polarzaton wthn the group of low-ncome countres durng that perod. It remans to be seen, however, whether ths postve development wll contnue nto the future. 4. Concluson Ths paper addressed the queston of whether the ntensfed worldwde competton for FDI has reduced ts tradtonally strong concentraton n a few large and relatvely advanced host countres. We calculated and decomposed Thel ndces to track changes n concentraton of FDI durng the perod We calculated absolute Thel ndces where all countres are treated symmetrcally, rrespectve of ther sze, as well as populaton-weghted relatve Thel ndces. Startng wth a large overall sample of 196 host countres, we subsequently consdered dstnct sub-samples by () excludng offshore fnancal centers (OFCs), () 33 Ths decomposton resembles the procedure descrbed for the overall sample at the begnnng of ths secton (equatons (5) to (7)). For the sake of brevty, we provde only a summary of results, here. 34 In the second last sub-perod ( ) all countres receved strctly postve FDI nflows, and n the last subperod only two out of 46 low-ncome countres representng slghtly more than 2% of the low-ncome country group s total populaton receved zero FDI nflows. 21

23 dstngushng OECD and non-oecd countres, () dfferentatng between major subgroups of non-oecd countres, and (v) focusng on low-ncome countres. The extensve margn of concentraton across the overall sample proved to be very low snce the early 1990s, mplyng that very few countres dd not receve any FDI nflows. Once OFCs are excluded from the sample, both the absolute and relatve measures of concentraton clearly decreased n the recent past and were substantally lower at the end of the observaton perod than at ts begnnng. A large part of the declne n overall concentraton has been due to the narrowng gap between OECD and non-oecd countres (n terms of FDI nflows percountry and per-capta). It may prove premature, however, to conclude that non-oecd countres wll be able to further close the tradtonal gap n attractveness to FDI. In the past, the observed convergence from the top was at least as much the result of temporary external shocks affectng prmarly the OECD, such as the fnancal meltdown n 2008, as t was the result of strong and sustaned growth of FDI to non-oecd countres. Focusng on three subgroups of non-oecd countres, we fnd that the between-group component of the relatve Thel ndex was close to zero throughout the perod of observaton. Strkngly, non-oecd G20 members proved to be less attractve n terms of per-capta nflows of FDI than the subgroup of transton countres, and hardly more attractve than the large and heterogeneous subgroup of other non-oecd countres. The absolute and relatve measures of concentraton both reveal the mportant role of the wthn-group component for the declnng overall concentraton of FDI n non-oecd countres. The concentraton across non-oecd countres declned for all three subgroups when comparng the begnnng and the end of the observaton perod. Fnally, recent developments ndcate that low-ncome countres are no longer at the losng end of the competton for FDI nflows. Rather, ths group may fnally have started to catch up to more advanced host countres n terms of attractveness. Importantly, the strong growth of FDI nflows to the low-ncome countres after the turn of the mllennum has not 22

24 been accompaned by consderably hgher nequalty of FDI nflows across the low-ncome countres. Concerns that just a few of them have benefted from recent trends thus appear to be unjustfed. If sustaned, these trends mght reduce fears, as expressed n the Monterrey Consensus of 2002, that globalzed FDI hardly nvolves poor host countres. 23

25 References Bckenbach, F., and E. Bode (2008). Dsproportonalty Measures of Concentraton, Specalzaton, and Localzaton. Internatonal Regonal Scence Revew 31 (4): Bckenbach, F., W.-H. Lu and P. Nunnenkamp (2015). Regonal concentraton of FDI n post-reform Inda: A dstrct-level analyss. Journal of Internatonal Trade and Economc Development 24(5): Cadot, O., C. Carrère, and V. Strauss-Kahn (2013). Trade Dversfcaton, Income, and Growth: What Do We Know? Journal of Economc Surveys 27 (4): Kekc, L. (2009). The global economc crss and FDI flows to emergng markets. Vale Columba Center on Sustanable Internatonal Investment, Columba FDI Perspectves 15. New York. Nunnenkamp, P. and R. Thele (2013). Fnancng for development: The gap between words and deeds snce Monterrey. Development Polcy Revew 31(1): OECD (2002). Foregn Drect Investment for Development: Maxmsng Benefts, Mnmsng Costs. Pars: OECD. Stgltz, J.E. (2000). Captal market lberalzaton, economc growth, and nstablty. World Development 28(6): UNCTAD (2014). World Investment Report New York and Geneva: Unted Natons. Unted Natons (2003). Fnancng for Development. Monterrey Consensus of the Internatonal Conference on Fnancng for Development. (accessed: January 2015). Zoromé, A. (2007). Concepts of offshore fnancal centers: In search of an operatonal defnton. IMF Workng Paper WP/07/87. Internatonal Monetary Fund, Washngton, DC. 24

26 Appendx Table A1: Total FDI nflows (n bllon US$) and FDI nflows per capta (n US$) for dfferent country groups (1) (2) (3) (4) (5) (6) (7) (8) (9) country group All I OFC F OECD O Non-OECD N G20 members G Transton T Other R Low-ncome L Hgher-ncome H # countres FDI FDI FDI FDI FDI FDI FDI FDI FDI Total p.c. Total p.c. Total p.c. Total p.c. Total p.c. Total p.c. Total p.c. Total p.c. Total p.c. 1: : : : : : : : : : : Sum Growth n % perod 1 to 11: n.a. n.a perod 6 to perod 8 to 11 : Note: Total = total FDI nflows n bllon US$; p.c. = FDI nflows per capta n US$. I = F O N; N=G T R; R=L H 25

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