Literature review WP6

Natalya Tourdyeva (CEFIR)

WP6 in the DOW

The aim of WP6 is to develop the international module of the SUST-RUS assessment model which includes the representation of the flows of goods, capital and labour between Russia and several major foreign geographic areas.

Literature review in DOW

Literature review applied model + relevant theoretical approaches

Developing the methodological approach Armington approach to international trade

Major trade links between Russia, EU and ROWThe depletion of Russia’s natural resources The FDI flows between Russia, EU and ROW

Decision making mechanisms about the delocalization of the economic activitiesChannels via which the FDI flows influence the economic development of Russia

FDI in DOW

FDI is explicitly described, with a developed methodological approach both theoretically consistent

agents' behaviour, domestic investment settingconsistent with the results of the empirical econometric studies about the FDI’s determinants

Two types of FDI are looked at: Purchase of foreign firms by investors (Brownfield investment), Building of new firms (Greenfield investment).

Set of decisions: dynamics

Nature of model dynamics: Recursive dynamic Vs. perfect foresight model

Depletion of natural resources? Nature of Investment decision?

Set of decisions: capital Physical (producing) capital or financial flows? Nature of capital mobility:

Sector-specific fixed capital Interpretation: short-run constrains on capital mobility Sector and region-specific return on capital

Capital is mobile across industries but fixed regionally Interpretation: capital/investment controls prevent cross-

regional capital flows inside the country Regional return on capital

Capital is mobile across industries and regions in the country but is immobile internationally Country-level return on capital

Perfect capital mobility – global capital market

Set of decisions: investment

Nature of cross-boarder capital flows: Capital flows due to the investment demand

Nickell 1978, Lemelin and Decaluwe 2007 Firm maximizes the present value of its cash flows subject to

the capital accumulation constrains Perfect foresight on the firm’s side “The main disadvantage of the investment demand

specification lies in the high volatility of results and in the fact that it allows for negative investment (disinvestment) - a feature that could generate strange welfare results.” (Lakatos and Walmsley, 2009)

Set of decisions: investment

Nature of cross-boarder capital flows: Capital flows due to the investment supply

Petri 1997 Portfolio diversification problem: household’s wealth is

allocated at the beginning of each period subject to a diversification constraint (CES-type supply function)

Investment decisions are differentiated by the country of origin and characterized by an imperfect substitution

Investments are driven by the relative rates of return There is a possibility of recursive dynamics

Set of decisions: investment

Nature of cross-boarder capital flows: Capital flows due to the investment supply

“The model is calibrated on bilateral/sectoral investment stocks data and it could be considered as less volatile than the investment demand specification calibrated on investment flows. As a critique to this method, we can argue that rates of return, especially in real asset CGE models, cannot be interpreted as a “price”, but more like the ratio of two prices that are driven by other mechanisms in the model.” (Lakatos and Walmsley, 2009)

Set of decisions: investment

Nature of cross-boarder capital flows: Capital flows due to the investment supply

Data for calibration of bilateral FDI flows and stocks CEPII, (Boumellassa, Gouel, and Laborde 2007) “…this database is fully consistent, balanced and suitable

for use in a CGE work.” (Lakatos and Walmsley, 2009)

Set of decisions: investment

Nature of cross-boarder capital flows: Capital flows due to the multi-national enterprises’

operations Markusen, Rutherford and Tarr (2000), Markusen and Maskus

(2001) Scale effects of industry-specific factor trade within the

multinationals Product variety assumption in MNE sectors No constraints on the nature of dynamics Data: ownership share

Beyond the DOW

Literature on Trade and environment FDI and environment

References Lakatos, Csilla, and Terrie Walmsley (2009) Modeling cross-border investment in CGE:

some alternatives and mechanism, GTAP Boumellassa, H. and Gouel, C. and Laborde, D. (2007). A Multisector, Multi- country FDI

database for GTAP. 10th Annual GTAP Conference, Purdue University, USA Lemelin, A. and Decaluwe, B. (2007). Issues in Recursive Dynamic CGE Modeling:

Investment by Destination, Savings and Public Debt A Survey . CIRPEE working paper. Nickell, SJ. (1978). The Investment Decisions of Firms. James Nisbet & Co Ltd. Petri, P.A. (1997). Foreign Direct Investment in a Computable General Equilibrium

Framework. Conference, Making APEC Work: Economic Challenges and Policy Alternatives.

Markusen, James R, Thomas Rutherford and David Tarr (2000), Foreign Direct Investment in Services and the Domestic Market for Expertise,” Policy and Research Working Paper 2413, Washington D.C.: The World Bank.

Markusen, James R. and Keith E. Maskus (2001) General-Equilibrium Approaches to the Multinational Firm: A review of theory and Evidence, NBER Working paper 8334