Monday, November 11, 2019
The elimination of market interventions and more liberalization has a positive effect on FDI inflows. According to Zhang &Yang (2016) the importance of WTO with regard to FDI has been overlooked by the previous researchers and until now its effect on FDI and that On Trade related investment measures (TRIMS) has not been examined. Sane (2015) study suggests that it is important for national governments and for those firms that are involved in formulating investment, business and trade policies to know the effect of TRIMS on the foreign investment. It is the responsibility of WTO member to remove tariffs and other barriers that can affect the foreign as well as local investors. In order to attract more FDI in various sectors, locations and activities the overseas investors are offered with incentives. These incentives can in the form of tax credits, concessions, holidays, export subsidies, export subsidies and accelerated depreciation on machinery and plants. (Shah & Khan, 2016). Milner (2014) states that the most common feature that have been affecting the maneuvers of multinational firms in the host country are the rewards and punishment approach. Furthermore, the main purpose of Trade related investment measures is to abolish such kind of approach. In case of any dispute between two-member countries the WTO has dispute settlement mechanism from one state to other. (Shah, 2010). The decisions related to settlement of dispute does not require harmony among the members. (Shah, 2011a).According to Barry et al. (2016) previous studies indicate that multinational overseas investment is affected by high tariff barriers.Shah(2017a) found that rapid reduction of tariff duties in the late eighties that in early nineties and eventually due to the agreement of WTO in1995 led to tariff jumping FDI. This kind of investment is not present in free market economies. (Medvedev, 2012) With The internationalization of multinational productions competition for FDI has become more business friendly economic atmosphere which is in accordance with the objectives of W TO. (Paul, 2015). By observing the Present & the likely future factors that can affect the FDI movements this will help to create a market that is free of any interventions which would in turn attract more investment (Sutyrin, Efinova & Trofimenko, 2016). This study aims to determine the effect of TRIMs on overseas investment in 38 Sub-Saharan African countries from years1988 to 2015 i.e. 28 years .The variables used are market size, economic development, infrastructure, macro-economic stability. The results indicate that TRIMS have positive impact on FDI inflows. The conventional determinants of FDI consists of Market size, Trade openness, Economic Development, Macroeconomic stability and Infrastructure ability and Quality. These are considered as the main factors that have major influence on inward FDI.Balasubramanyam ( 1991) defined TRIMS as both collection of incentives & restrictive measures that are designed by a developing country in order to influence of FDI.To control the use of performance requirements that are imposed on foreign investors by means of WTO TRIMS. (Collins,2016). These agreements are a combination of both new and existing investments and includes both native & foreign firms. (Shah,2011b).The member states of WTO are required to notify about the procedures that do not comply with the TRIM agreement in 3 months' time period. To eliminate all kind of distortions the members of developed countries are granted two years' time, the developing countries five years and the low developed countries up to seven years. The developing countries that are unable to implement TRIM within the given time frame can get more time by applying for extension within seven years for Pakistan and few months for Chile. (UNCTAD, 2012).The amount of trade agreements that are signed by a developing country are taken as proxy for TRIMS. Moreover, these agreements involve two or few partner economies they focus more to tariff and service liberalization. TRIMS is very crucial for FDI due to removal of non-tariff barriers in trade. It allows overseas investors to freely export, import goods and generate profits. It gives all the investors equal treatment irrespective of their nationality. Impartial investment policies are more favorable for enticing foreign investors and tend to have a positive relationship between TRIMS & FDI inflows. (Shah, 2012a).ESTIMATION METHODShah(2017) used equation one for determining the effect of TRIMs implementation under WTO on inward FDI in 38 Sub-Saharan African countries.FDI it=f(Market size, economic development, openness, Macroeconomic stability, Infrastructure, TRIMS) Ã¢â¬ ¦..Equation 1Ã¢â¬ ³In equation one subscript i represents a Sub-Saharan African country from 1 to 38. Subscript t denotes the time period from 1988 to 2015 varying from 1 to 28which is equal to a total of 1064 (28*38) observations per variable. FDIit is used for the dependent variable representing the yearly stock of FDI in each of the host economy i.Ã¢â¬ Equation two is derived from equation 1 by using log and by putting the proxies for dependent and independent variables. Where, ln is used for natural log, which also reduces the likely heteroscedasticity (Resmini, 2000). For market size Gross domestic product is used. The gross fixed capital formation proxy is used for development level, aggregate trade represents the extent of openness of the economy, exchange rate is used for macroeconomic stability and for infrastructure availability telephone density is used. The WTO membership and the trade agreements proxy represents TRIMs implementation.Empirical Estimation MethodShah, (2012b) used longitudinal panel for data from 38 countries for 28 years. Hausman (1978) specification test was carried out to select between fixed and random effect and the use of fixed effect model was found more appropriate. (Nonnenberg & Mendonca, 2004).RESULTS AND DISCUSSIONThe market size variable (GDP) is positive and was found to have significant effect on FDI. Shah (2016) found the results to be in accordance with the theory since economies of scale, opportunities for diversification and more possibilities of making an optimal use of the imported technology are usually offered by bigger markets. Economic development (GFCF) is positive but insignificant.Trade openness was positively significant which indicate that multinationals prefer open economies. Macroeconomic stability is found by the exchange rate. The result reveals that FDI in the Sub Saharan Africa is based more on exports due to depreciation of currency. Infrastructure and quality are positively significant as these are considered more important for the production and trade related activities. The proxy for TRIMS is the no of trade agreements and that of WTO membership is positive and significant which indicates that the amount of trade agreements signed by the host results in increase in inward FDI.CONCLUSIONThe main aim of this research is to determine the effect of TRIMs implementation on FDI inflows in Sub-Saharan African Developing countries. The technique used for data analysis was fixed estimation for the years 1988 to 2015 which shows that presence of larger domestic market attracts multinationals (Shah & Afridi, 2015). Trade liberalization enables the multinationals to sell their products in other countries.The important factors affecting FDI are Infrastructure, trade liberalisation and exchange rate. These factors tend to influence the overseas investors' investment decision because they empower the multinationals. Reduction in TRIMs related market distortions positively affects multinationals due to the resultant liberalisation of the trade and investment environment adding to a country's prospects of hosting additional FDI. Economy development was found to be insignificant due to the relative backwardness of the economies under investigation. These results are applicable to the 38 Sub-Saharan African countries only and shall not be widespread universally to other countries.