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Bridging the Gap: the Role of Trade and FDI in the Mediterranean

Bridging the Gap: the Role of Trade and FDI in the Mediterranean. Effect of FDI on the Productivity of the Egyptian Industrial Sector Nada Massoud Naples, June 2006. Effect of FDI on the Productivity of the Egyptian Industrial Sector. 1. Can Egypt Benefit from FDI Productivity Spillovers?

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Bridging the Gap: the Role of Trade and FDI in the Mediterranean

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  1. Bridging the Gap: the Role of Trade and FDI in the Mediterranean Effect of FDI on the Productivity of the Egyptian Industrial Sector Nada Massoud Naples, June 2006

  2. Effect of FDI on the Productivity of the Egyptian Industrial Sector 1. Can Egypt Benefit from FDI Productivity Spillovers? 2. Are there any Productivity Spillovers? 3. What Factors affect the Direction of Spillovers?

  3. Effect of FDI on the Productivity of the Egyptian Industrial Sector 1. Can Egypt Benefit from FDI Productivity Spillovers? A- Comparative Productivity of Foreign and Domestic firms B- Egypt’s Absorptive Capacity

  4. Can Egypt Benefit from FDI Productivity Spillovers? • Productivity Comparison between Foreign and Domestic Firms • Average Productivity per Worker: Real output per worker • Total Factor Productivity: A residual from regressing the real value added of the each industry on the capital stock and the number of employees of the industry

  5. Productivity Comparison between Foreign and Domestic Firms Source: CAPMAS, GOFI, and GAFI unpublished data

  6. Productivity Comparison between Foreign and Domestic Firms • In general, based on the Average Productivity per Worker and TFP Foreign firms are more productive

  7. Can Egypt Benefit from FDI Productivity Spillovers • Egypt’s Absorptive Capacity • Technology Gap (Controversial) • Human Capital • Financial Development • Institutional Quality

  8. 30.00 25.00 20.00 Gap 15.00 10.00 5.00 - 1984 1987 1990 1993 1995 196 1997 1998 1999 2000 2001 2003 2004 2005 Years Egypt's Technology Gap Technology Threshold Egypt’s Absorptive Capacity • Technology Gap: Threshold by Li and Liu 2005: 12.6% (US GDP per Capita - Egypt GDP per Capita)/Egypt GDP Per Capita (1984-2005) Source: Calculated from the WDI, World Bank website, www.worldbank.org

  9. Yrs of schooling 6.00 4.00 2.00 0.00 1980 1985 1990 1995 2000 years Average Years of Schooling Borensztein Educational Threshold Egypt’s Absorptive Capacity • Human Capital Quality: Threshold by Borensztein 0.52 Average Years of Secondary Schooling of the Male Population above 25 years (1980-2000) Source: Barro and Lee 2000

  10. Egypt’s Absorptive Capacity • Financial Development: Threshold by SB: 13%, by HL: 12% Source: World Bank website, www.worldbank.org

  11. Egypt’s Absorptive Capacity • Institutional Quality: Threshold by Kaufmann: -0.84 Egypt’s Institutional Quality Assessment, (1996-2004) Source: World Bank Governance and Anti-Corruption, http://info.worldbank.org/governance/kkz2004/country_report.asp?countryid=67

  12. Egypt’s Absorptive Capacity

  13. Can Egypt Benefit from FDI Productivity Spillovers? • Higher productivity for foreign firms • Sufficient absorptive capacity There is room for Egypt to benefit from FDI productivity spillovers

  14. Are there Any Productivity Spillovers? • Horizontal Spillovers: Intra-Industry • Vertical Spillovers: Inter-Industry Through regressing a linear function for the period 1984-2005 based on an unbalanced panel data set of industrial production that includes 12 industries at the 12-digit ISIC classification

  15. Are there Any Productivity Spillovers?

  16. Horizontal Spillovers • All sectors had no significant spillovers, except three sectors: • Two had positive productivity spillovers to domestic firms: Oil and Natural Gas – Machinery and Equipment • One had negative effect on the productivity of domestic firms: Textiles, Garments and Leather

  17. Vertical Spillovers • Backward Linkages • Forward Linkages Used a cut-off point that the industry i must demand/supply at least 5% of gross output in industry j, based on Egypt’s Input-Output tables.

  18. Vertical Spillovers • Backward Linkages • No backward spillovers in all sectors which implies: • TNCs depend on importing their inputs (consistent with FDI effect on imports from other studies and surveys)

  19. Vertical Spillovers • Forward Linkages: • Negative Spillovers from three sectors: Oil and Gas, Manufacturing Industries, and Building Material • Positive Spillovers from one sector: Machinery and Equipment

  20. Are There Any Productivity Spillovers? • Intra-industry spillovers in less than 20% of the examined sectors • No Backward inter-industry spillovers • Forward inter-industry spillovers in 20% of the studied sectors, and negative in the rest Spillovers are not on a large scale despite Egypt’s sufficient absorptive capacity and the higher productivity of foreign firms

  21. What are the Factors Affecting the Direction of Spillovers? • Size of Technology Gap • Industry Characteristics • Foreign Market Share in the Industry

  22. Average Capital Intensity in Manufacturing and Extraction Industries (1984-2005) Size of Technology Gap within a specific industry Gross Value Added per Worker in Foreign Firms to that of Egyptian Firms (1984-2005) No Pattern Observed Source: GOFI 2005, unpublished data

  23. Industry Characteristics • Average Capital Intensity • Average Productivity

  24. Industry Characteristics Average Capital Intensity in Manufacturing and Extraction Industries (1984-2005) No pattern observed Source: CAPMAS 2005, unpublished data

  25. Industry Characteristics 30 Productivity 25 20 15 10 5 0 22 29 31 32 33 34 35 36 37 38 39 Industries Average Productivity of Manufacturing and Extraction Industries (1984-2005) No pattern observed Source: CAMPAS 2005, unpublished data

  26. 0.35 0.3 0.25 % 0.2 0.15 0.1 0.05 0 38 23 29 31 32 33 34 35 36 36 39 22 Industries Foreign Market Share in the Industry Average Foreign Participation in the Manufacturing and Extraction Industries (1984-2005) Industries with foreign participation of 5% or more witnessed horizontal productivity spillovers

  27. What is the absorptive capacity of Egypt? 2. Are Foreign Companies more productive than Domestic Companies? 3. Are there horizontal productivity spillovers from foreign to domestic companies? 4. Are there vertical productivity spillovers from foreign to domestic companies? 5. What are the overall productivity effects of TNCs on the Egyptian manufacturing sector? 6. What are the factors affecting the magnitude and direction of spillovers? Conclusion 1. Are Foreign Companies more productive than Domestic Companies? Yes 2. What is the absorptive capacity of Egypt? Above thresholds 3. Are there horizontal productivity spillovers from foreign to domestic companies? Mixed Effects 4. Are there vertical productivity spillovers from foreign to domestic companies? Mixed Effects 5. What are the factors affecting the direction of spillovers? Foreign market share more than 5%

  28. Conclusion • Further investigation is needed to test the effect of: • FDI mode of entry • Nationality of the existing affiliates • Institutional/individual nature of FDI

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