Doctor of Philosophy

dissertationDuring the last decade, the growth rate of outward foreign direct investment (FDI) from developing and transition economies has been outpacing that from developed economies. Their investment in other developing countries represents a burgeoning instance of South-South cooperation. The three essays in this dissertation examine the key issues and potential challenges of South-South FDI. The first chapter observes the growing importance of South-South FDI flows. With the drying up of outward FDI flows from developed countries since the financial crisis, the importance of investment from other developing countries increased and accounted for an estimated 34% of the world's outward FDI in 2010, compared with 25% in 2007. A large share of outward FDI stock from developing and transition economies is concentrated in the services sector. The nature of multinational companies (MNCs) is also changing with an increasing number of countries in developing and transition economies hosting such companies. When Southern MNCs invest abroad, they rarely have access to proprietary assets such as technology, financial capital, brands, and technical know-how. They are able to catch up with Northern MNCs through strategic and organizational innovations. They have greater access to network capital suitable for developing country markets. This network capital might include information on supply lines, local financing, local tastes, bureaucratic procedures, minimizing transaction costs, and other local idiosyncracies. The establishment size of Southern MNCs tends to be on average much smaller than the establishment size of Northern MNCs. Southern establishments are also comparatively less productive and tend to pay lower wages than Northern establishments. Until recently, the parsimonious explanation for the scarcity of capital flows to developing countries ranged from human capital to institutional risk. Although the expected return on investment might be high in many developing countries, it does not flow there because of the high level of uncertainty associated with those expected returns. The second chapter sheds light on the question to what extent the alternative explanations of Lucas paradox holds particularly for South-South FDI. Using a bilateral panel data set, I estimate an augmented gravity model using the Poisson pseudo-likelihood estimator. The empirical evidence suggests that per capita income, human capital, and average institutional quality are not important variables explaining South-South FDI. Asymmetric information as proxied by the weighted distance variable is highly significant. Southern MNCs underinvest in markets that are remote and where access to network capital and accurate and timely local information is difficult. Southern MNCs require network capital and local host country information to overcome their disadvantage in proprietary assets. Therefore, information asymmetry may be a greater concern to Southern MNCs than human capital or institutional risk. Lastly, South-South FDI is also more sensitive to natural resource endowments and regional free trade agreements than North-South FDI. Recently policymakers in developing countries have encouraged South FDI as a means to encourage productivity growth and technology transfer. However, Southern MNCs seldom have proprietary assets that foster positive externalities and contribute to productivity spillovers. Chapter 3 investigates the contribution of Southern FDI in enhancing efficiency in Rwanda. Based on a sample of 6,707 private sector firms, the quantile regression technique is employed. By estimating quantile regressions, I am able to test for differences in productivity and productivity spillovers by North and South FDI across the productivity conditional distribution. The results suggest that productivity in Rwanda is improved with the entry of both North and South FDI. However, the effect North FDI on productivity is stronger than that of South FDI. Moreover, productivity spillovers stemming from South FDI are limited to low productivity local firms, which suggests that any efforts to attract South FDI should take into account the policy objectives of an economy as well as the firm productivity distribution involved