So far we presented onomastics as a technique that could help monitor cross-border investments, especially as originating from or directed towards (re-) emerging countries : Chinese FDI, Russian FDI, Japanese FDI, Indian FDI, FDI in Africa, etc. As we prepare to launch by the end of the month a consulting offer dedicated to Investment Promotion Agencies, we share an interesting academic theory about the concept of FDI Magnet.
On the Magnet Effect of Foreign Direct Investment
by Pao-Li Chang and Chia-Hui Lu
No 21-2006, Working Papers from Singapore Management University, School of Economics
Abstract: We extend Antras and Helpman (2004) on firm heterogeneity and organizational choice to a dynamic setting with FDI uncertainty, in which the probability of investment failure decreases with the host country’s infrastructure level and increases with the technological complexity facing each firm. Moreover, it decreases over time as the accumulated mass of firms succeeding in FDI increases. We show that a minimum level of infrastructure is required to trigger a first wave of industrial migration. We then formalize the often noted “magnet effect” of FDI-the first wave of industrial migration generates positive externality (information spillover) for subsequent investors, which stimulates a second wave of industrial migration. The process continues until the power of the “magnet” reaches its steady-state level. In contrast with the predictions in Antras and Helpman (2004), we show that firms with intermediate productivity levels are the ones migrate first, while the most productive and the least productive firms tend to stay behind. This non-monotonic relationship between firms’ productivity and their FDI propensities is consistent with the patterns of Taiwanese firms undertaking FDI in China.
Published in SMU Economics and Statistics Working Paper Series
Link to the original document
According to the authors, the first wave of inwards FDIs makes it easier to attract further investments. How can IPAs create the initial momentum? Soon we will demonstrate that onomastics can also proactively help originate new cross-border investments deals.
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FDIMagnet is NamSor™ offering for Investment Promotion. We use our unique data mining software to offer differentiated Foreign Direct Investment (FDI) services:
– Diaspora Direct Investments (DDI)
– Smart Investors Targeting & CRM
– FDI Targeted Communication