Essays on the macro and micro effects of foreign direct investment

Abstract

This research explores the multifaceted impacts of foreign direct investment on both macro and microeconomic outcomes. At a macro level, the first essay examines the influence of China's foreign direct investment on the sectoral output of seven basic industries that make up the economy. Initial estimations from analysing a panel dataset of 47 African countries from the period 2004 to 2020 indicate that, China’s FDI has a significant and positive effect on overall GDP, on mining sector, construction sector, services sector, transport and communication sector, and other activities. Although by small magnitudes. To identify the moderating variable, the study interacts China’s FDI with Africa’s six institutional quality factors. Overall, the findings suggest that control of corruption is the most important factor as it increases the benefits of agriculture, manufacturing, mining, transport and communication and other activities sectors from China’s FDI. Following control of corruption is rule of law that increases the benefits of agriculture and manufacturing sectors from China’s FDI. Although political stability increases the benefit of the manufacturing sector, it decreases the benefits of services and transport and communication sectors from China’s FDI but increases these benefits in rich resource countries. Therefore, the implication of this study is for African countries to strengthen their institutional factors for their economies to benefit from China’s FDI. The study also highlights the importance of the source of FDI as previous studies have found different effects of foreign direct investment from the rest of the world on African economies.
At micro level, the second and third essays investigate the interplay between home environmental regulations and performance of host acquired firms. The second essay examines the impact of home environmental regulations on the sustainability practices of acquired firms in unregulated host countries. The primary hypothesis is that, home environmental regulations have spillover effects on host firms’ emission reduction commitments and on environmental, social, and governance (ESG) practices more so, on high carbon-intensive firms and of these acquired firms. Analysis on a firm-level unbalanced panel dataset for the period 2002 to 2023, indicate that foreign firms from regulated countries uphold home countries’ environmental norms in host countries as they increase the emission reduction commitment and ESG performance of their target firms. With the effects particularly in large high carbon sector firms. Further analysis reveals that these spillover effects are passed through when the host firm is acquired by foreign treated firms that are engaged in high R&D.
The third essay goes on to explore the impact of home environmental regulations on the total factor productivity, revenue, and profitability of foreign-acquired firms in environmentally unregulated countries. The research begins by constructing a firm-level unbalanced panel dataset across 68 countries covering host firms in unregulated countries acquired by foreign firms, along with their financial information for the period 2000-2023.Secondly, the study compares the post-outcomes between target firms acquired by foreign firms from regulated countries and host firms acquired by foreign firms from unregulated countries. The findings show that home environmental regulations exert positive spillover effects on TFP of small high carbon sector firms. While exerting positive and negative effects on revenue of small and large firms respectively, regardless of the sector. However, there is no evidence of average effects of these policies on profitability. Further analysis establishes that these effects are experienced because of the direct effect the policies have on tangible assets. That is, increasing those of small firms while decreasing those of the large firms after the acquisition. Furthermore, on one hand, being acquired by foreign treated firms with high levels of value based TFP increases host firm TFP. On the other hand, being acquired by foreign treated firms with high levels of R&D intensity increases the tangible assets of small firms while high levels of revenue based TFP decreases the tangible assets of large firms.
Overall, these essays provide valuable insights into the effects of foreign direct investment, where macro and microeconomic outcomes are impacted. They highlight the significance of the source of foreign direct investment and the roles of moderating and mediating absorptive capacities in maximising the potential benefits of host countries and firms while tackling urgent climate change issues.

Date of Award	15 Nov 2025
Original language	English
Awarding Institution	University of Nottingham
Supervisor	Yifei Cao (Supervisor), Xuyan Lou (Supervisor) & Xiaoyu Zhang (Supervisor)