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Abstract
Export diversification has become a priority goal for the development of the Middle East and North African (MENA) countries. In this article, we aim at measuring both the effects of exports' diversification on growth in MENA countries and the way new exports and foreign direct investment (FDI) interact with each others in the process of growth. Although the effects of FDI on growth have been scrutinized by numerous studies up to now, the effects of diversification and discoveries in export have only very recently been assessed. But no one has made explicit the way FDI and export discoveries interact in the growth process. A model is estimated by the system-generalized method of moments and we provide robust evidence that export discovery and FDI stimulate gross domestic product (GDP) growth in our sample of countries, and that FDI does not necessarily have the same effect on growth according to the level of discovery of the country. We also show that the joint positive effect of new exports and of imports suggest that technological spillover from import but also from the integration to global value chains are likely to occur in our sample of countries.
Notes
1. De Gregorio (1992) and Blomström, Lipsey, and Zejan (1994) provided evidence that FDI is three times more ‘efficient’ than local investments, notably because of its ability to stimulate the domestic accumulation of capital (crowding-in effect) and via the externalities that are related to a higher content in terms of organization and technologies (spillover effect).
2. Hence, the empirical relationship that exists between economic growth and foreign direct investment is not entirely devoid of ambiguity. Studies based on aggregate data show that FDI can have aggregate effects on growth for a developing economy, but their results remain weak and contradictory since they are very sensitive to the choice of model and data on FDI as argued by UNCTAD (1999) and Ram and Zhang (2002).
3. Beyond the absorptive capacities, the spillover effects of FDI on productivity depend on many factors such as the degree of spatial concentration of the activities, the size and the export capacity of domestic firms and the characteristics of FDI. See Moran et al. (2005) or Crespo and Fontoura (2007) for recent surveys.
4. A recent exception is Prüfer and Tondl (2007) who show with Bayesian Averaging Methods that structural change measured by the shift in the sector structure of exports has no effect on growth in Latin America, alone or together with FDI. They also confirm ‘the importance of certain institutional and infrastructure factors for growth’ while they ‘have to reject the findings of other studies on the influence of macroeconomic factors and human capital in general in LA’ (Prüfer and Tondl 2007, 24). But they say nothing about export diversification and discoveries.
5. The other factors are the degree of training and skill of the local labour, or the technological and organizational capacities of the local firms. See Moran (1998) and Moran et al. (2005) for surveys.
6. They modernize the ideas of the pioneers and show that export diversification helps to limit the effects of the deterioration of exchange terms on the trade-generated incomes in the framework of the portfolio theory.
7. A small number of surveys have taken these difficulties into account. They propose to analyse these relations within the framework of a simultaneous equation model (Bende-Nabende et al. Citation2000; Li & Liu 2004) or through procedures of Bayesian Averaging (Prüfer & Tondl Citation2007).
8. Starting from two different models, Hermes and Lensink (2003) and Alfaro et al. (2004) end up with an equivalent econometric specification.
9. These strategies were reaffirmed during the nineties while an increasing number of empirical investigations showed that FDI could have beneficial effects on the growth of developing countries.
10. This concern has recently been expressed by some of these oil producing countries but it is too early to get significant trends in the past data.
11. Harrison (1996) even suggests that in Morocco, FDI effects on productivity might have been negative in the short term because of the consequences in terms of production scale of the loss of local market shares for domestic firms. More recently, Bouoiyour and Akhawayn (2005) have shown on a panel of Moroccan industries that FDI has significant spillover effects on the productivity of labour. Furthermore, they give evidence that these effects are proportional to the technological gap between foreign subsidiaries and local firms and increase together with the openness of the sector to exportations.
12. FDI does not give a significant explanation to the growth in Morocco, Oman and Saudi Arabia. Sadik and Botbol (2001) explain this result by the presence of internal factors that are not controlled for in regressions (for Morocco, influence of climatic hazards on harvests, for Oman and Saudi Arabia, influence of the oil prices).
13. Sadik and Bolbol (2001) point for example that the progress in efficiency recorded in Tunisia during the eighties is rather linked to the intensification of competition associated with the presence of foreign firms than to real transfers of an advanced technology.
14. The first ones refer to the stiffness of the work regulations and its high cost, a too heavy taxation that burdens the firms' profits and the income of skilled workers, and the non-adaptability of both the commercial system (anti-export bias joint to a very high level of protection against importations) and the exchange rate system (fixed rate and risk of over-valuation).
15. This ability was arguably at the very heart of the strategies of export incentives applied by Asian economies. The examples of Taiwan, South Korea or Chile are invoked to underline the strategic importance of ‘fundamentals’: a stable macroeconomic environment, pro-market policies and an active industrial policy for the sector-based incitement of exportations and the mobilization of savings and investments towards these sectors. The difference is that it does not necessary mean industrialization today. On that point, see Hausmann et al. (2007).
16. The effect of diversification on growth has been recently examined by a few empirical works. De Pineres and Ferrantino (2000), Al-Marhubi (2000), De Ferranti et al. (2002), Lederman and Mahoney (2007) or Hesse (2007) give evidence that, generally speaking, the diversification of exports has a robust positive effect on the increase of GDP per capita. Herzer et al. (2006) reach the same result for the Chile case.
17. This volatility in export prices and volumes has been aggravated by the attendance of China to the world markets, producing in the same time more competition in terms of prices and volumes on the textile markets, and huge price movements on the market of raw materials, creating instability for income from trade and for growth in several developing countries (Kaplinsky Citation2006).
18. They argue that consequently, the poorest countries with low savings and investment should specialize in a small number of low-risk sectors in order to stand at their optimum.
19. They also have lower costs because they take advantage of the scale effects of the global market.
20. For Hausmann et al. (2007), the higher productivity goods are those that are produced and exported by the countries with a higher income per capita.
21. Ultimately, Hausmann et al. (2007) point that the existence of externalities associated with the process of export discovery draws paths of cumulative comparative advantage that are not entirely determined by endowments.
22. They define ‘discoveries’ as products whose export value progressed from less than 10,000 USD in 1993 to over 1 million USD between 2000 and 2002.
23. Hausmann and Klinger (2007) have argued the thickening of the product space creates new opportunities for discoveries or changes of specialization by shifting from one activity to another one, i.e. by moving the factors of production towards the new activities that are close to the ones that were already produced by the economy in terms of complementary factors. It also helps to reduce the cost of export discoveries since close assets need similar combinations of the private and public capital that are available in the economy (Hausmann and Klinger Citation2006). As it provides the developing economy with new skills and other production factors that enable the product space to be denser near its productive capacities, FDI might enhance the ability of the host economy to innovate and diversify its structure of production and export so as to sustain growth in the long run (Hausmann and Klinger Citation2007).
24. See An and Iyigun (2004) and Hausmann et al. (2007) for recent empirical evidence.
25. It has been evidenced by Borensztein et al. (1998) and Hermes and Lensink (2003) who show that in a model of endogenous growth derived from Romer (1990), FDI introduces new varieties of intermediate goods in an economy and consequently increases growth if human capital (Borensztein et al. Citation1998) or financial development (Hermes and Lensink Citation2003) are sufficient to reduce the introduction costs of new technologies and increase the yields of the new equipments.
26. Public spending, black market premium, political instability, political rights, financial development, inflation rate, quality of the institutions. See Barro and Sala-I-Martin (1995, Ch. 12).
27. Starting from two different models, Hermes and Lensink (2003) and Alfaro et al. (2004) end up with an equivalent econometric specification.
28. The term ΔX denotes the first-order difference of X
29. These instruments are valid only under the assumption of a non correlation between exogenous variables and non observed individual effects E(xit ,fi ) = 0.
30. Data sources and descriptive statistics are reported in Appendix 1.
31. The data on the number of years at high school from Barro and Lee (2000) are not available on an annual basis and are incomplete for several countries of our sample.
32. The infrastructure indicator is measured by the size of the roads network (measured by the number of tarred roads in percentage of the total) and the quality of the electricity network (given by the losses on the electrical network). The more the indicator's value is close to 1, the more the infrastructures are developed. The communication indicator is measured by the number of telephones per 1000 inhabitants, the number of personal computers per 1000 inhabitants and the number of persons equipped with Internet. Data are from the World Bank.
33. As in Romer (1986, 1990) and Lucas (1988), endogenous growth models show that firms can benefit from technological externalities produced by the diffusion of knowledge between firms and activities. From this perspective, anything allowing a better circulation of the information (infrastructure, financial development) and easing technological transfers (trade openness, FDI) can be considered as deciding factors for growth and for discoveries and diversification as well.
34. For a discussion of that point and on the statistical accuracy of the notion of discoveries, see Carrère et al. (2007).
35. Hausmann and Rodrik (2003) show that economic development eases export discoveries up to the low levels of average incomes (income per capita between 4200 and 5500 USD), before the relationship becomes adverse between discoveries and further development. The empirical findings of Carrère et al. (2007) support this hump-shaped pattern. Using both a standard Herfindhal diversification index and a ‘discovery’ measurement of the changes in the export structure, they confirm that pattern.
36. This difference probably explains why the variance in discoveries contributes to explain significantly the variance in growth rates, whereas the variance of the diversification or the concentration of export fails to do it in the results of the forthcoming section.
37. The Fisher Fk, N(t−1)−k, statistics reported at the head of the column (1) rejects the null hypothesis that all the β coefficients estimated equal zero.
38. Endogenous variables were determined through the following test: each variable (FDI, investment then export) is regressed against all other explanatory variables, the residues are retrieved and the growth equation is regressed by adding each of the estimated residual terms separately. If the residues are significant, then the variables are considered as endogenous.
39. Under the null hypothesis that all instruments are exogenous, J is distributed as a chi-square with m-r degrees of liberty is the number of instruments minus the number of endogenous variables. The χ 2(46) = 57.25 and χ 2(51) = 39.6 statistics are in both models inferior to the fractile of the χ 2 law at respectively 46 and 51 degrees of freedom.
40. The z statistic is asymptotically normally distributed and the null hypothesis of no second-order autocorrelation is rejected if this statistic is superior to 1.64 in absolute value. Otherwise, we accept the hypothesis.
41. As a general rule, econometric surveys conclude that this variable is not significant when it is measured by the high school enrolment rate. It is however difficult to obtain better data on a yearly basis.
42. In the four models, it is possible to conclude on the existence of a global convergence between countries. In order to do this, it is necessary to recalculate (θ−1) = α, as well as the student-test associated with the coefficient (t θ = (θ−1)/(θ' standard error)). Then we observed the coefficients are in all cases significant and negative. It indicates a global convergence for the countries. For the FE model, tα = (0.1876325−1)/0.10009879 = −8.11, the RE model tα = (0.9401736−1)/0.0254982 = −2.35, the GMM model tα = (0.1322084−1)/0.0971758 = −10.15, and for the GMM-system model tα = (0.0981537−1)/0.0440606 = −2.27.
43. We only report results for discoveries in the . The results of the estimations for the concentration and diversifications indexes are reported in Appendix 3.
44. When the model is only estimated with the FDI and discovery variables, the FDI coefficient happen to be significant but negative, indicating a negative role of FDI in the growth process. As soon as the FDI variable is combined with the interactive variable (decofdi), the FDI coefficient becomes positive again while the coefficient of the interactive variables is negative.
45. Prüfer and Tondl (2007) have recently shown that vertical FDI does not produce any gain in productivity growth in Latin America whereas horizontal investment has more beneficial effects on host economies.
46. Even if Export is not significant in the estimations, the discoveries are positive and significant factors of growth.
47. Around 65% of the imports of the eight countries of our sample came from the USA, Canada, UE and Japan in 1995 (Author's calculation from the Chelem trade database, CEPII).