Research Proposal:

1
Research ProposalForeign Direct Investment,
Natural Resources and Institutions in Space. The
Case of Argentina
February 2009 Lucio Castro
Av. Callao 25, 1 C1022AAA Buenos Aires,
Argentina - Tel [phone] Fax (54 11)
4371-1221 infocippec_at_cippec.org www.cippec.org
2
Three questions

• Why is this project innovative?
• Why is it relevant for other developing
  countries?
• How this project can be a window of opportunity
  for policy changes?

3
Our institution

• CIPPEC (Center for the Implementation of Public
  Policies Promoting Equity and Growth) strives to
  generate and translate innovative research ideas
  into concrete policies.
• One of the most recognized policy research and
  implementation think tanks in Argentina
• Close partner of GDN three times finalists and
  several projects,
• Currently providing technical assistance to the
  National Investment Development Agency
  (Prosperar), the investment promotion agency of
  Argentina.

4
Our Team

• Experienced in applied and policy oriented
  research
• Effects of infrastructure on FDI location for
  CAF.
• Cross-country study of the impact of FDI on
  growth.
• Determinants of Asian firms FDI in LAC.
• Trade and export promotion in the Argentine
  provinces funded by the UK government.
• Consolidated research team experience working
  with FDI and regional economic data.
• Experience advising local and national
  governments as well as international
  institutions.
• Advisory to the Argentine National Investment
  Agency
• Binding constrains for investment in Buenos Aires
  city.

5
Motivation

• What are the determinants of the location of FDI
  in the Argentine provinces?
• How do natural resources and political
  institutions influence the amount and the type of
  FDI?
• Are natural resources and political
  neighbouring effects important? Is geography
  important?
• What policy lessons can be drawn from the
  Argentine case that can be applied to other
  similar developing countries?

6
Objectives

• Contribute to closing the gap between research
  and investment policy formulation in Argentina
• Improve understanding of the interactions between
  natural resources, institutions and geography in
  determining FDI location
• Inform the public debate about how to improve
  institutions and policies to attract FDI in
  natural resources abundant economies

7
Key Issues

• Differences in factor endowments the core of FDI
  location theories.
• FDI into natural resource-intensive sectors could
  crowd-out foreign investment from other sectors.
• Institutions influence differently FDI location
  in natural resource abundant economies.
• Economic and institutional neighbouring
  effects.

8
Stylized Fact ILarge inward FDI stock
FDI

• Argentina attracted 6 of the total FDI to
  developing countries (4th largest destination) in
  the 1990s.
• Inward FDI stock grew annually 25 in 1990-2001
• As a result the stock of FDI as share of GDP
  increased sixfold (from 5 to 30 in 01)

9
Stylized Fact IIConcentrated and skewed towards
natural resources
FDI

• Buenos Aires and Buenos Aires city attracted half
  of the cumulative FDI inflows.
• Followed by other large markets Cordoba,
  Mendoza, and Santa Fe.
• NNRR abundant provinces received proportionally
  more FDI
• FDI sharply skewed towards NNRR sectors,
  particularly in provinces with weak institutions

10
Stylized Fact IIIGeographical concentration of
Natural Resources
Natural Resources
Cropped surface
Cattle
Oil

• Agriculture and energy production are strongly
  concentrated
• Agriculture is dominated by the Center Region
• Cattle production extends to the North East
  region.
• Three provinces are responsible for 90 of the
  oil production.
• Vast variety of natural resources (oil, mining
  and agriculture) relevant for countries with
  different resource endowment.

11
Stylized Fact IVInstitutional heterogeneity
Institutions

• Natural resource-rich provinces are characterized
  by large and sometimes indebted government
  sectors
• Some Southern provinces with around 70 of the
  population employed by the government.
• Mining provinces usually have a larger Debt/GPP .
• Institutional heterogeneity differences in
  government stability and parliamentary
  institutions.

Gov. size
Debt/GPP
12
What do we know so far?
Methodology

• From Castro et. al (2007)
• Market size and regional market effects are
  key determinant for FDI location.
• Space matters for FDI location
• Substitution effects between neighbouring
  provinces.
• A 10 increase in FDI in neighbouring provinces
  reduces FDI into the host province 3.3.
• Presence of vertical or sales-platform strategies
  in FDI location.
• Good infrastructure increases FDI inflows.

Gross Provincial Product (2005)
13
Hypothesis to be tested
Methodology
GPP per capita

• Neighbouring effects in institutions and NNRR
  uncertain effects on FDI location.
• FDI into NNRR intensive sectors. Is there
  crowding out effects?
• Disentangle between Horizontal, Vertical and
  Complex FDI types.
• Interaction between institutional characteristics
  and NNRR endowment

14
Data
Methodology

• Detailed firm-level data on FDI not available in
  cross-country studies
• Type of FDI (MA, greenfield, etc.), province and
  industry/sector of destination, origin and firm.
• Consistent and large span natural resources data
  
• Energy (oil and gas) and agriculture (cropped
  surface, yield per hectare and production).
• Consistent and detailed institutional indicators
• Fiscal policy, stability, parliamentary strength,
  party alignment, social conflict among others.
• Other indicators

15
Spatial Econometrics
Methodology
Spatial Error Model SAR estimator
Spatial Lag Model GS2SLS estimator
16
Spatial Econometrics in one diagram
Methodology

• Inverse distance matrix and spatial lags
• Neighbouring effects
• Are there crowding out effects?
• Disentangle FDI types Horizontal, Vertical and
  Complex.
• Interaction between institutional characteristics
  and natural resource endowments.

Province B
Province C
Geo. Distance
Geo. Distance
Province A
17
Policy implications

• Input for improved FDI promotion policies.
• Impact of local institutions and natural
  resources on FDI location.
• Close cooperation with Argentinas National
  Investment Development Agency.
• Use of Federal Investment Network to propagate
  results and policy recommendations.
• Multipronged dissemination strategy.
• Policy recommendations matrix.

18
Research activities and proposed timeline

• Data Gathering and Database Construction (Feb
  2009-May 2009)
• Adapting Spatial Econometrics Estimators (Apr
  2009-Aug 2009)
• Econometric Analysis (Aug 2009-Dec 2009)
• Final Report Writing (Jan 2010-Apr 2010)
• Dissemination (Apr 2010-Jul 2010)

19
Conclusion

• Technically innovative
• Firm-level FDI and consistent regional economic
  data.
• Novel econometric techniques.
• Relevant for other developing countries
• Natural resource abundant and institutionally
  weak.
• Argentina as an excellent laboratory.
• Window of opportunity to promote policy changes
• CIPPEC machine to promote policy improving
  changes.
• Agreement with Prosperar and Federal Investment
  Net.

20
Presentation International Economics Programme
February 2009 Lucio Castro lcastro_at_cippec.org
Av. Callao 25, 1 C1022AAA Buenos Aires,
Argentina - Tel [phone] Fax (54 11)
4371-1221 infocippec_at_cippec.org www.cippec.org