Business economics

QUESTIONS OVER THE YEARS – BUSINESS ECONOMICS

Discuss the heterogeneity of productivity hypothesis.

The heterogeneity of productivity hypothesis is an analysis that explains the one of the FDI (foreign

financial investment) determinants at the firm level. The most of FDI determinants assume that all firms

are homogeneous and use the same strategy but they are different in productivity and size even if the

operate in the same industry. Some studies, such as the paper of Helpman et all (2003), analyze these

differences and they state that there is a positive relationship between their productivity and the

internalization strategy adopted. The paper focus on the relationships between exports and horizontal

FDI:

1. The least productive firm: it will exit to the market

2. The less productive firm: it will remain domestic

3. The remaining firms:

a. The more productive: it will make foreign direct investment

b. The others one: it will make only export

This occur because FDI needs fixed sunk costs such as: gathering information, create distribution

networks, adapt product to foreign market and so on. Firms will invest in FDI only when the gains in

higher that the cost.

The paper states also that FDI sales relative to exports are higher in sectors with greater firm

heterogeneity in productivity.

Discuss the aggregate effects of FDI on the economic growth of a host country.

The aggregate effects of FDI on the economic growth of a host country is quite mixed, in fact there are

no empirical evidence that there is a positive correlation between inward FDI and economic growth

because FDI contribute only if there are specific host country conduction, host countries should be

sufficiently developed to interact with foreign activities.

Blomstrom et al. found that there is a positive correlation only in higher-income countries. Whereas

Borensztein found that FDI are important for the transfer of technology and for the economic growth

but only in countries that have a minimum level of human capital, a develop financial market and a

propensity to export. In conclusion some papers find a positive link between FDI and growth but only

FDI in not enough.

For the periods 1970-1989 and 1975-1994, empirical results show no significant correlation between

FDI inflow and growth but with the interaction between FDI and local conditions the relationship

became stronger. However, for the periods 1990-2009 and 1995-2014 FDI remain not correlated with

growth even with the consideration of local conditions.

Explain self-selection learning effects.

Self-selection and learning effect are two effect that are studied with the analysis of home countries

effect of FDI. In this studies there is the comparison between the productivity of MNE and firms that

decide to remain domestic, in a more specific way this type of study put in comparison three type of

firms:

1. MNEs

2. Domestic firms

3. Switching firms: domestic firms that decide to become MNE

To describe the analysis is used a graph in which there in in the x-axis the time and in the y-axis, there

is the average performance. In the graph, the domestic firm is represented with low performance that

has a little grown, during the time. The MNE is represented with a high performance that has a little

grown too. In the middle there is the switching firm that has a significant grown when there is the

switch from domestic to MNE.

The self-selection effect is represented as the better performance of domestic firm before the switching

whereas the learning effect is represented as the increase of performance, after the switching.

Explain the sourced based e residence principle about

Source based and residence based are two principle that explain how investments are taxed.

Source based principle is a system in which the taxation is based on where the investments are made,

this principle is the most used, but it creates distortion on where firm make investments. In fact, firm

will invest in countries that has a