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CESifo Economic Studies Advance Access originally published online on July 17, 2008
CESifo Economic Studies 2008 54(3):451-470; doi:10.1093/cesifo/ifn025
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© The Author 2008. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org

Bilateral FDI Flows: Threshold Barriers and Productivity Shocks

Assaf Razin*, Efraim Sadka{dagger} and Hui Tong{ddagger}

*Eitan Berglas School of Economics, Tel-Aviv University and Cornell University, CEPR, NBER and CESifo, e-mail: razin{at}post.tau.ac.il
{dagger}Eitan Berglas School of Economics, Tel-Aviv University, CESifo and IZA, e-mail: sadka{at}post.tau.ac.il
{ddagger}Research Department, International Monetary Fund, e-mail: htong{at}imf.org This article was presented at the CESifo Economic Studies Conference on Productivity and Growth on 22–23 June 2007 in Munich, Germany. The authors are grateful to the participants and three anonymous referees for their helpful comments and discussions. This article represents the views of the authors and should not be thought to represent those of the International Monetary Fund.

A positive productivity shock in the host country tends typically to increase the volume of the desired foreign direct investment (FDI) flows to the host country, through the standard marginal profitability effect. But, at the same time, such a shock may lower the likelihood of making any new FDI flows by the source country, through a total profitability effect, derived from the a general-equilibrium increase in domestic input prices. This is the gist of the theory that we develop in the article. For a sample of 62 OECD and non-OECD countries over the period 1987–2000, we provide supporting evidence for the existence of such conflicting effects of productivity changes on bilateral FDI flows. We also uncover sizeable threshold barriers in our data set. (JEL codes: F2, F3)

Key Words: FDI • productivity • threshold barriers


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