 How can be FDI attracted?: two traded intermediate and four-region frameworkKazuhiko Oyamada and Yoko Uchida No 3499, EcoMod2011 from EcoMod Abstract: One of the key factors behind global trade growth in recent decades is increase in intermediate input as a result of the development of vertical production networks (Feensta, 1998). Manufacturing goods are no longer produced in a single country. Production processes are subdivided into several stages, in which respective countries specialize in producing parts and components. Many countries are involved in vertical production networks of producing just a single final good to consumers. In particular, as Pitigala (2009) points out, emerging economies are considerably benefited from the development of vertical production networks since the network enabled them to install an appropriate portion of the production stages according to their levels of production technology. These countries, especially East and Southeast Asia, enjoyed rapid trade growth through extensive participation in global production networks. It is widely recognized that the formation of the production networks is due to the expansion of multinational enterprises’ (MNEs) activities. Multinational enterprises have been differentiated into two types, horizontal FDI and vertical FDI. However, the new type of FDI which diverge from vertical one, are proposed in the context of recent expansion of more complex multinational activities. It is called as export-plat form FDI. Horizontal FDI maintains affiliates in home and host countries with headquarters located in home country, while vertical and export-platform FDI install affiliates in host countries with headquarters located in home country. The difference between vertical and export-platform is where to sale their products: vertical FDI seek sales of its product for home and host country, while export-platform FDI aim to serve third market with exports of final goods from the affiliate in the host country. According to the definition of the types of FDI, it is vertical and export-platform multinationals that support recent development of vertical production networks in emerging countries. There have been series of theoretical researches on FDI since early 1960’s (Hymer, 1976; Helpman, 1984; Markusen, 1984, 1997, 1999) under two-region setting. In recent years, the theories on FDI are reconstructed under three-region frameworks so as to include activities on export-platform FDI (Yeaple, 2003; Ekholm et al., 2007; Grossman et al., 2006 for example). Those models assume that intermediate goods are produced only in North, that is large, high-cost economies and South, a small, low-cost economy, imports intermediate products and assembles final goods combining intermediate products and unskilled labor in the country. However those models do not adequately explain observed facts where some kinds of intermediate goods are produced in South. Production networks of Hard Disk Drive (HDD) is a good example to understand present production networks among North and South, such as Asian region. We can observe clear division of production in HDD, with relatively skilled labor intensive country, such as Japan and Taiwan, producing parts and components and unskilled labor intensive, such as China, assemble of components. Also, even within the parts and components production in HDD, sophisticated division of production has occurred. There are several key parts and components which greatly impact on the final goods quality and require lots of R&D investment, such as “GMR head”, “media”, and “spindle motor” in HDD production. “Media”, for example, requires high technology as a whole, but the levels of technology required in each stage are slightly different from each other. As the first stage to produce media, “blank” is produced by cutting from the material, and then, “substrates” is obtained by grinding “blank”. Finally “media” is produced by spraying magnetic layer to “substrates”. In Asian region, the first step is done mainly in Japan, then second stage in Malaysia and final stage in China. Hummels and Uchida (2010) calculate this phenomenon quantitatively by vertical specialization index and they show that most of the countries in Asian region except China engage more in parts and components production than in assembly in vertical specialization chain. Ozeki (2010) also shows that Japan’s affiliates procure intermediate inputs more than 50 percent from local followed by home (Japan) at 30 percent using Surveys on Overseas’ Business Activities of Japanese multinational firms. This paper extends Ekholm et al. (2007) to treat procurement of intermediate goods from local so as to make the theory more concrete in the present economic circumstance. We adopt four-region model, with two identical large, high-cost economies, and two small, low-cost economies: the one produces intermediates including raw material and the other does not produce them. There are two-final good sectors and two intermediate good sectors. The one final goods is produced with constant returns to scale and used as numeraire, while the other final goods is produced with increasing returns to scale by imperfectly competitive Cournot firm. Also, the one intermediate goods is produced using skilled labor such as blue print, while the other intermediate goods is unskilled labor intensive and obtained in every region. Unskilled labor intensive intermediate goods can be procured at the cheaper price in South. When the goods cross borders, trade costs are occurred. By changing the trade costs, we conduct numerical general equilibrium simulation in order to observe which FDI type among four such as domestic, horizontal, vertical and export-platform arises as a function of countries’ characteristics. Note that numerical general equilibrium analysis is different from applied general equilibrium analysis. We use artificial data set and parameters in order to get intuition from the model. From the results of the simulation, we examine policy implication to attract FDI in emerging countries. Keywords: Asian Region; Trade and regional integration; General equilibrium modeling (CGE) (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:ekd:002625:3499 Access Statistics for this paper More papers in EcoMod2011 from EcoMod Contact information at EDIRC. |
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