The Effect of Economic Nationalism on the Level of Inward FDI Investment Entering a Host-Country

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MANAGEMENT (DUAL AWARD)

The Effect of Economic Nationalism

on the Level of Inward FDI

Investment Entering a Host-Country

Josephine Barker

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- 2 - Master Thesis:

The Effect of Economic Nationalism on the Level of Inward Foreign Direct Investment Entering a Host-Country (FDI).

Groningen, December 2019 Word Count: 13,630

Student Information

Name: Josephine Barker

Groningen Student Number: S3915824 Newcastle Student Number: B3025788

Groningen Email: j.barker@student.rug.nl Newcastle Email: j.barker@newcastle.ac.uk

MSc International Business and Management (University of Groningen) MSc Advanced International Business Management (Newcastle University)

Supervisors

Dr. Le Ge Professor McGovern University of Groningen Newcastle University gary.ge@rug.nl tom.mcgovern@ncl.ac.uk

Universities

University of Groningen

Faculty of Economics and Business Nettelbosje 2, 9747 AE

Groningen, Netherlands Newcastle University Business School (NUBS) 5 Barrack Road

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Economic Nationalism is a broad concept and has been at the center of economic debate for decades in attempts to provide a universal, coherent theory (Enderwick, 2011). The foundations of economic nationalism are centered on three key elements; a firm nationalistic standing, a laissez-faire attitude to domestic economic affairs and an opposition to free trade and isolationism (Colantone and Stanig, 2018). Globalization and the unprecedented economic openness that followed has been the dominating trend in business over the past decade. However, the popular understanding of globalization has shifted towards one that emphasizes the drawbacks to globalization and the unequal sharing of gains between individual nations. Of more concern is the subsequent opposition to globalization, broadly known as economic nationalism, which despite being a recent development, is quickly becoming very popular and acceptable (Cheah and Phau, 2015).

Advocates of economic nationalism seek to reclaim the economic and political sovereignty undermined by globalization. The revival of economic nationalism is primarily centered on a policy opposed to global trade in favor of protecting the domestic economy. In recent years, two leading manifestations of this tendency are evident with the U.K. Brexit referendum and the U.S. presidential election of Trump (Colantone and Stanig, 2018). Increasing support for protectionist policies by western democracies poses a threat to economic globalization and free trade cooperation. As a number of the world’s largest and most prosperous economies pursue protectionist measures, such actions will inevitably disrupt a number of global trade flows.

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rejection to a rising number of inward FDI measures is therefore a consequence of economic protectionist policies.

Most existing literature on motivations for FDI has concentrated on economic factors, most notably the host-country’s market size and level of economic development and growth (Büthe and Milner, 2008). Less attention has been paid to the host-country’s perceived outlook to FDI based on either the lenient or more restrictive nature of their trade policies. Equally there is adequate empirical evidence looking at the mixed effects of FDI at both the micro and macro-levels (Alfaro, 2016). This study aims to contribute to the less explored topic of how trends in the macro economic environment can have an impact to inward FDI flows. Following the structure of Alfaro and Chauvin’s (2016) paper, a predominantly host-country perspective will be used to discover how economic nationalism alters the attractiveness of an economy in receiving levels of inward FDI.

This study seeks to discover whether a nation’s economic ideology has an effect on its received levels of foreign investment. The interest lies in examining the recent revival of economic nationalism and how such a concept would appear from the perspective of a future investment decision. What impact does the economic climate of a host-country, specifically one endorsing the ideas of economic nationalism, have on current and future levels of FDI inflows. The motive of this research was triggered by the universal rise in support for nationalist and radical-right political parties (Colantone and Stanig, 2018). The policy bundle which such groups advocate can be referred to as economic nationalism. The task of current business scholars is to redefine the features of economic nationalism by discovering new concepts synonymic to such a doctrine (Reznikova et al., 2018). Considering the current economic climate and series of events, economic nationalism can be understood in a narrower sense as an ideology aimed at preserving national economic interests. As a result, economic nationalism today is more commonly known as a modern form of protectionism. One of the principle factors that such an ideology will threaten is the current and future international flows of trade.

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macroeconomic perspective will be used to explore such a relationship between a rise of economic nationalism in a host-country and the corresponding likelihood of receiving inward FDI. Despite a fundamental intention of using protectionism to limit imports, this paper focuses attention on whether foreign investors would want to contribute to such an economy as opposed to the likelihood of the host-country allowing such inward FDI flows.

The evolution of economic nationalism to a modern protectionist force clearly poses a growing threat, yet at the same time is considered to still be in infancy when compared to the inveterate theory of globalization. A body of research questions whether the forces of globalization are too substantial for anyone to overturn (Noland, 2019; Waugh, 2019). Equally, are the outcomes of protectionist regimes always detrimental to the global economy? A move towards freer trade for the U.S. in China would ultimately strengthen the dollar and increase manufactured imports. Such results would be a triumph for globalization, not economic nationalism (Sumner, 2018). What is perhaps of greater concern are the methods in which a number of the greatest economic powers are pursing such protectionist regimes.

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2. Theoretical Background and Hypotheses Development 2.1 Defining Economic Nationalism

A clear and coherent theoretical concept of economic nationalism has often proved difficult to develop by International Business scholars and economists. In the age globalization, economic nationalism took a subordinate role, only to reemerge as a potential threat in the past decade. Consequently, much of the scholarly research on the topic dates back to post World War Two and is yet to be taken seriously as a modern economic threat to global integration. Few efforts have been made in the past decade to develop a comprehensive theoretical analysis for the concept economic nationalism (Helleiner, 2002). The theory of Economic Nationalism was first coined by the German Economist Friedrich List, author of ‘The National System of Political Economy’ (1841), in order to identify a certain policy prescription imposed within government. However, it was not until the second half of the 19th_{century that research studying the origins of} economic nationalism began to be conducted (Cheah and Phau, 2015).

Whilst a handful of theorists held the belief that economic nationalism was primarily associated with a strict composition of economic regulations and policies, others were of the opinion that economic nationalism encompassed a wider matter, that it was an aggregated set of attitudes and beliefs rather than simply a systematic body of economic or political theory (Gilpin, 1987; Nakano, 2004). What can be articulated, however, as the common understanding amongst advocates of economic nationalism, is that the nation’s best-interests are at the forefront of its doctrine. Realist, Liberal and Marxist theorists all share an instrumentalist idea of economic nationalism, one that insists the nation state will pursue whichever course of action necessary to strengthening the country’s economy (Gilpin, 1987; Crane, 1998).

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conclusion of a general opposition to foreign goods and industries (Campbell, 1965; Tajfel, 1981; Turner and Tajfel, 1986). The preceding psychological theories of economic nationalism were based on an ‘us-first’ mentality when looking at companies, products and workers (Baughn and Yaprak, 1996; Cheah and Phau, 2015).

Theorists have long been divided on the emphasis of the ‘nationalist’ element to economic nationalism. Similar to all forms of nationalism, economic nationalism emphasizes the perceived conflict of interests between a singular country and the rest of the world (Andersen and Kheam, 1998). Even in the age of globalization, many economists are convinced that the nation remains at the forefront, followed by international political and economic procedure (Gilpin and Gilpin, 2001; Nakano, 2004). With strong assertion to the nation-state, economic nationalism can be interpreted as a protection of national interests and achieving economic independence from foreign influences (Hieronymi, 1980; D'Costa, 2009). Conversely, a number of scholars are quick to defend the ideology, steering away from the idea of economic nationalism as a purely isolationist approach. Since the 18th_{century, economic liberals have contested that integration of the world’s} economies is in the individual nation’s best interest (Hieronymi, 1980).

The concept of economic nationalism was overshadowed by the rapid acceleration in globalization and the drive for countries to unite in the creation of an integrated global economy. An abundance of theorists were quick to praise the phenomenon of economic globalization and its creation of benefits related to both national and global interests. Robert Reich (2010) contested that the twenty-first century brought a new world economy, one that held more weight on a collective and globalized economy as opposed to the once favored nationalist tendencies in regard to capital, corporations and technologies (Levi-Faur, 1997). A number of theorists arrived at the same conclusion, most notably Heronymi’s (1980) study titled The New Economic Nationalism, which emphasized the notion of a new economy, one in favor of globalization and less favorable towards nationalist tendencies (Pickel, 2003).

2.2 Economic Nationalism Today - Modern Protectionism

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(Cooper, 2007). The idea incorporates all government regulations and policies enacted to protect the domestic economy (Barone and Bendini, 2015). Protectionism is often referred to as a foreign trade policy as conventional protection means include tighter tariffs and customs duties. Foreign competition is seen as the main threat to a domestic economy and therefore the fundamental way of preventing such a case is to restrict the flow of foreign activity (Durusoy et al., 2015).

A number of scholars have suggested that protectionism has always been an underlying instinct of investors and governments. Policies and regulations are created in order to protect national interests and reduce the threat of competition, (Hieronymi, 1980). Economic nationalism can be linked to political, economic and security factors, with the economic strand based on a nation’s ambition to protect domestic companies’ interests (Akhter, 2007, Cheah and Phau, 2015). According to the study of Cheah and Phau (2015), four branches of interest are deemed responsible for the recent protectionist trends; resistance to foreign ownership, resistance to foreign goods, rejection of currency adjustment and the disruption to world trade talks. The rejection of foreign ownership appears to be the most common, promoting an era of ‘trade protectionism’ in the global economy. Formal protectionist measures include trade tariffs, quotas, the membership to global trade agreements and government regulatory standards on FDI (Baughn and Yaprak, 1996; Reich, 2010). Traditionally, such measures have been instrumental in shielding the domestic economy from certain trade flows.

Economic theory has also noted the effect on trade policy; during economic downturns there is evidence that trade procedures become more protectionist in nature (Grundke and Moser, 2019). This conclusion adds weight to the argument of Aggarwal (2016) who investigates the likelihood of a generalized protectionism resurfacing as an aftermath of global economic crisis, similar to that of October 2008. Unlike conventional protectionist measures, the latest economic climate has fostered the growth of “invisible barriers” to trade (Demir and Sepli, 2017). Such measures highlight that countries are pursuing protectionism in an increasingly aggressive manner.

2.3 Recent Motivations of Economic Nationalism

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by those who were left at a disadvantage, for example import competition causes the shutdown of local industries and ergo the loss of many jobs. The resurgence of economic nationalism is consequently viewed as a movement motivated by the so-called ‘losers’ of globalization (Chandan and Christiansen, 2019). Despite globalization inducing net welfare gains, such advantages are often unequally distributed, resulting in a widespread opposition to free trade and FDI (Colantone and Stanig, 2018). Economic nationalists believe that free trade and the breakdown of economic barriers between nations is responsible for causing many of the economic, political, social and cultural issues facing the nation (Chow et al., 2018).

It could be suggested that economic nationalism and globalization were once complementary forces; developed countries with more resources and capital invested in poorer economies which, in turn, worked to provide a better and more prosperous world economy, even though it still included country-specific economic gains. However, emphasis now seems to reside on how large developed countries, such as the US, exploited the resources of developing countries for their own benefits. Scholars have emphasized how today’s advanced capitalist economies were only able to develop economically the way they did by pursuing economic nationalist policies (Chang, 2008; Ausserladscheider, 2019) What appeared to be a ‘helping hand’ to emerging economies was intrinsically motivated, based on own country gains. As developing economies have grown and are more self-sufficient, it appears they are more inclined to reduce foreign influence and protect their own economic interests, thus having a detrimental effect on the concept of globalization.

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Despite this conclusion drawn by theorists that both the forces of economic nationalism and globalization can coexist in a beneficial manner, recent international events paint a different picture. The suggestion that economic nationalism pursued in a mild manner will not disrupt the international environment is understandable, albeit the current climate appears to promote a great deal of hostility towards global cooperation. The growing trend of non-traditional, behind-the-border protectionist measures pose the greatest threat (Sally, 2010). This includes technical, taxation and localization measures established within national borders in an effort to regulate domestic markets (Barone and Bendini, 2015). The choice between globalization and nationalism is not necessarily twofold, but once protectionism develops, countries are quick to retaliate which heightens aversion towards globalization. Effectively the benefits of a global economy diminish and the expenses of isolationist regimes emanate (Karalis Isaac, 2007).

One of the most fundamental elements for containing protectionism is with the preservation of world trade agreements and key bilateral relationships between the world’s most powerful economy leaders (Erixon and Sally, 2010). The rise of economic nationalism threatens the effectiveness and future survival of multilateral agreements. In December 2015 the Doha round of negotiations at the World Trade Organization were ceased without an established agreement between the trade ministers (Kobrin, 2017). The vow to countervail all forms of protectionism by members of the G20 was excluded from the meeting’s report for the first time since the global financial crisis (Monetary Policy Report). By March 2018 over 80% of G20 exports were in direct opposition to currently active agreements against trade distortions; evidence of the disregard towards the “no protectionism” promise (Berger et al., 2018). Such events highlight the challenges of maintaining such agreements during a climate of distrust and increasing isolationist actions. Furthermore, the obvious disregard of procedures established by such institutions, such as the General Agreement on Tariffs and Trade (GATT), undermines their effectiveness. The established practices become less clear and thus weaken the strength of international agreements to counteract global economic discourse (Kobrin, 2017).

2.4 The United States – Trump’s Revival of Economic Nationalism

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Underlying conditions of economic nationalism can be seen with the Obama administration; Obama was equally eager to renegotiate the terms of NAFTA and take greater steps to protect the US economy (Schott, 2009). However, the year 2016 brought a highly aggressive and controversial pursuit of the same economic ideology, one that forebodes a likely breakdown of the global economy.

“Every decision on trade, on taxes, on immigration, on foreign affairs, will be made to benefit

American workers and American families. We must protect our borders from the ravages of other countries making our products, stealing our companies, and destroying our jobs. Protection will lead to great prosperity and strength” (Trump, 2017).

The principal strategy Trump advocates is a return of US business investment to within domestic borders or to prevent it from leaving (Kingsolver and Devi Pandey, 2019). Such measures are to be implemented through re-negotiating or withdrawal from international treaties, heightened trade barriers and increasing the number of tariffs imposed. Trump’s overt hostility towards multilateral trade agreements is evident through the ongoing endeavor to renegotiate NAFTA and the swift withdrawal from the Trans-Pacific Partnership (TPP) initiative (Ben-Ami, 2017; Noland, 2019). Such opposition explains the greater desire to form bilateral trade deals by the US; smaller negotiations between two countries works in blocking the development of multilateral trade agreements and is created more aligned to specific domestic concerns (Chow et al., 2018). Equally, it is a clear provision of an economic nationalist approach, to view multilateral agreements as beneficial to corporations at the expense of single nations (Colantone and Stanig, 2018). Such skepticism of international agreements is a key element of recent protectionism, not necessarily evidence of a deterrence from free trade (Ben-Ami, 2017).

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tariff war between two of the world’s leading economies. Most recent figures show a total of US$550 billion tariffs applied solely to Chinese goods and a total of US$185 billion tariffs exclusively applied to US goods (Wong and Chipman Koty, 2019).

From the US perspective, China is considered the greatest threat to economic prosperity because of the extensive growing trade deficit present between the two countries. Since China entered the WTO in 2001, trade deficits with the US grew from $83 billion to $370 billion (Cozzolino, 2018). Figure 1 illustrates the extent of the trade deficit between the two nations. The record high of 419,527 million U.S. dollars in 2018 is positively correlated with the peak of trade tensions between U.S. and China.

Figure 1: US trade in goods with China between 2009-2019, figures in millions of U.S. Dollars (Bureau, 2019) – see appendix A for original data.

2.5 Inward FDI – Effect on the Host-Country Economy

Foreign direct investment (FDI) refers to the capital inflows from foreign sources which are invested in the production capacity of a domestic economy (Jagdish and Devnarayan, 2019). Such investments can be made towards the structures, equipment and organizations needed to facilitate a successful economy. Inward FDI to developing countries usually takes the form of a greenfield investment, such as the construction of production facilities, whereas FDI to developed countries is often through a merger or acquisition to an existing domestic firm (Alfaro and Chauvin, 2016; Linsi, 2017). Economic literature looking at motivations for FDI classify two different types, horizontal and vertical FDI. Horizontal FDI often aids in increasing country income levels without

-600 -400 -200 0 200 400 600 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009

US Trade in Goods with China

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alterations to distribution. Vertical FDI works across borders, for example foreign investment may decrease absolute wage variations among countries. Since the mid-1980’s the investment climate has been more favorable towards FDI; inflows of FDI have grown both in developed and developing countries (Jean and Reshef, 2017). The rise in economic globalization is a key driver for the escalation in international investing activity (Sauvant, 2009; Sally, 2010).

Traditionally, FDI has been a key ingredient for developing countries in shaping their economy (Büthe and Milner, 2008; Kurtishi-Kastrati, 2013). FDI can provide developing nations with capital, new technology and advanced knowledge, all tangible and intangible assets crucial to promoting economic growth and development (Sauvant, 2009). Such assistance can also help developing nations enter the global market. Many developing nations are reliant on the FDI support, often from developed countries with high amounts of capital and an abundance of resources, to help with economic growth and provide the opportunity to compete in the global market. FDI helps with the spread of economic globalization by improving a nation’s economy and helping to integrate them with other economies around the world (Oecd, 2008; Al-Shawaf and Almsafir, 2016). Key developments brought about by inward FDI, such as market expansion and the creation of international trade flows, can help transform levels of productivity and effectively liberalize an economy (Kurtishi-Kastrati, 2013; Al-Shawaf and Almsafir, 2016).

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Previous empirical studies investigating the relationship between FDI and host-country performance and growth have provided mixed results. Some studies have shown there to be a negative correlation between FDI and the level of host-country risk and found FDI inflows to have a positive effect on national economic growth (Büthe and Milner, 2008; Sanjo, 2012). Other results have found there to be little evidence proving FDI can cause host-country economic growth; Levine and Carkovic (2002) conducted an experiment using a panel dataset involving seventy-two developed and developing countries, in order to evaluate the potential link between FDI inflows and economic growth. The results failed in providing any concrete evidence to support such theory (Choe, 2003; Johnson, 2006). A general consensus among academics is that although FDI cannot be proven to guarantee economic growth, depending on the nature of the source and the way that it is received, FDI can be successful in promoting national economic development (Trakman, 2009).

The impact of foreign MNCs in the host-country has yielded mixed responses from international business scholars and economists. Markusen and Venables (1999) study concluded that FDI from MNCs has two effects in the host country; competition effect and linkage effect (Wang, 2010). One of the most prominent debates among researchers is whether MNCs contribution of FDI generates positive or negative spillovers in the external economy (Yamin and Sinkovics, 2009). Whilst a handful of theories emphasis the important role MNCs play as being agents of spreading free trade, others have criticized FDI from MNCs as increasing, rather than reducing, domestic demand for trade protection. From an industrial-organization approach, FDI depicts a type of strategic rivalry and the main motivation for MNCs expanding into different foreign markets is to capitalize on their ownership-specific, internalization and location-specific advantages (Zeng and Sherman, 2009). Studies have found that the presence of MNCs in a foreign market may negatively impact the success of host-country firms.

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(Kurtishi-Kastrati, 2013). Resistance to FDI was first brought to attention by developing countries who believed investments from foreign sources, particularly MNCs from developed states, were intrinsically motivated and therefore hindered the domestic economy. Such nations were exploiting the economic environment, for example through gaining access to cheap labor and resources (Trakman, 2009). Especially in developing countries, the economy is often not strong enough to outperform or even compete with foreign firms. This causes a threat to local investors and a loss of domestic power when large MNCs enter the market and develop a controlling stake (Trakman, 2009; Kurtishi-Kastrati, 2013).

Critics of inward FDI argue that such involvement has detrimental economic and political effects on the host country. Such concerns address the threat of foreign competition to domestic industries and excessive foreign control resulting in a threat to national security (Kurtishi-Kastrati, 2013). The late 1990s witnessed a U.S. resentment towards the inward FDI of Japanese MNCs who were sweeping the market and outperforming many of the U.S. firms (Szkorupová, 2015). Many studies examining the crowding in and crowding out effects of inward FDI have returned negative results. The research of Mutenyo and Asmah (2010) analyzed 34 countries in the Sub-Saharan region between 1990-2003 and verified the adverse effects of FDI on domestic investment. Inward FDI was shown to crowd out the domestic environment; rising foreign investments were driving down domestic spending. The same conclusions were drawn by preceding studies, such as the investigation of the Baltic States in the time period 1993-2009 which showed the detrimental impact of FDI on domestic investment (Szkorupová, 2015).

2.6 Impact of the Global Economic Crisis on Inward FDI

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capitalism which had spread globally over the past 30 years, was evidently coming to an end (Altman, 2009).

The post 2008 period witnessed a sharp deceleration in global growth, caused by the revival of restrictive trade measures and an unwelcoming attitude towards FDI (Erixon and Sally, 2010; Barone and Bendini, 2015). The aftermath of the global recession proved to have a crippling effect on future economic development and cooperation between nations. The results of Wajda-Lichy’s study investigating the scale and scope of protectionist measures enacted after the crisis revealed that both developing and developed countries have executed new regulations promoting protectionism since 2008 (Wajda-Lichy, 2014).

2.7 Rise of FDI Protectionism

Although only emerging as a recent threat to the global economy, there is an empirical grounding providing evidence that a rise in protectionism was looming. Between 1992-2002, only six percent from a total of 1550 FDI regulation changes were concerned with unfavorable conditions to the investment environment. This however doubled to twelve percent of all regulatory adjustments between 2003-2204 and again to almost accounted for twenty one percent of all administrative changes during 2005-2007 (Sauvant, 2009). The growing unfavorable investment climate, referred to as ‘investment nationalism’ by a handful of scholars, has become an integral concern for the leading world organizations (Erixon and Sally, 2010).

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The rise in protectionist measures has consistently been linked to developing countries however in recent years we have witnessed many developed counties heading in the same direction. Equally, a number of the world’s largest emerging markets, most notably China, Russia and India, are moving towards a more protectionist regime (Sauvant, 2009)Developed nations are becoming concerned with their own national interests, shown by the regulations being put in place to have stricter screening on the flow of FDI across domestic borders (Sauvant, 2009; Viju and Kerr, 2011). Equally, industrialized countries are increasingly sensitive to the effects of imports on the domestic economy. The U.S. has witnessed a $51 billion annual loss to US consumers and firms as a response to higher import prices (Fajgelbaum et al., 2019). Pressures from domestic industries who face rising competition from imported goods persuades governments to adopt protectionist measures (Demir and Sepli, 2017).

The goals of the Trump administration since taking office in January 2017, signal that protectionism is currently a key doctrine in the US, with a strong focus on creating domestic jobs and raising barriers of entry for foreign investors by placing high tariffs on imported goods (Park, 2018). Factors such as rising trade tensions and administration uncertainty have a rippling effect on inward FDI levels. Countries exhibiting a more hostile economic environment is likely to cause MNCs to postpone or deter capital investment. On a national level, such actions will negatively impact levels of growth and demand. Globally, a reduction of inward FDI would weaken trade growth as foreign investments account for a substantial percentage of global trade (IMF, 2018).

2.8 The Case of India

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Research has found inward FDI to have a substantial impact on the level of economic growth in India. Such investments are shown to strengthen the country’s financial position as well as the level of GDP and foreign exchange reserves (Patil, 2017). Prime Minister Narendra Modi’s “make in India” campaign was launched with the intention to heighten incoming levels of FDI. Such a strategy has been executed through the creation of free trade zones and the promotion of certain tax exemptions. The offering of a bountiful skilled work force, developed through free domestic initiatives such as the National Skill Development Corporation (NSDC), is an additional effort to entice FDI (Kingsolver and Devi Pandey, 2019). Equally, recent support from the government signals institutional stability and therefore less risky for future inward investment.

India’s recent actions could be viewed as a way of promoting economic nationalism without unsettling global trade and consequently, discouraging inward FDI. The country is demonstrating a softer form of economic nationalism, using different methods to the U.S. According to D'Costa (2009) and subtler forms of economic nationalism can still be practiced in today’s global economic environment. India demonstrates this theory of economic nationalism as a dynamic concept. Equally, some of India’s decisions were made by exploiting current economic disputes and leveraging to their own advantage. An element of the “make in India” campaign was offering incentives to foreign investors that were lacking in such offerings from other countries. For example, using the current disputes against China, India encourages FDI by promising more ownership rights with regards to intellectual property (Kingsolver and Devi Pandey, 2019). India is currently demonstrating a balance between developing a strong domestic economy whilst not opposing economic cooperation and foreign investment.

2.9 Rise of Economic Nationalism and its effect on Inward FDI

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decisions not only depend on the current trade agreements in place but also on impending trade policies (Dizioli and Bjorn, 2018). As a result, rising levels of uncertainty and confidence effects can have a negative impact on global economic investment.

The nature of bilateral and multilateral agreements has a great impact on FDI decisions. Regardless of the advantages, it is evident that an unwillingness to invest in such a foreign country often boils down to hostile relationships between nations. The animosity witnessed between the U.S. and China clearly plays a large role in future trade policies and restrictions. Similarly, the U.K.’s decision to leave the European Union (EU) has been controversial and resulted in an unwillingness to cooperate by many of the EU countries. The study of Li and Zeng (2017) verified that the country of origin is one of the most influential factors underlying preferences for FDI. Looking at China, findings suggest FDI from Asian countries is less desirable due to historical animosity between the nations. In today’s world, rising levels of economic nationalism has induced aversion towards global agreements. A breakdown of these agreements may reduce the inward FDI climate. Such organizations foster fair and equally beneficial trade arrangements for all parties involved. A collapse in global agreements may posit a greater risk when looking to invest in a foreign economy.

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Based on the preceding arguments, the resurfacing of economic nationalism will affect the attractiveness of a host nation in receiving FDI. The fundamental objective of modern protectionism can be considered flawed; such economies wish to limit their imports whilst simultaneously increasing exports. However, both factors are interlocked, a decrease in one is more than likely to cause a decrease in the other, and vice versa. Evidence of the latest U.S. protectionist measures stress the un-avoidance of such effects. Imports of varieties hit by U.S. tariffs fell on average 31.7% whilst imports of targeted products dropped by 2.5%. Despite seemingly protecting the economy from foreign forces, retaliatory tariffs led to a 9.9% decline in U.S. exports (Fajgelbaum et al., 2019). Raising imports tariffs as part of pursuing a protectionist policy, stimulates two obverse responses; high import tariffs may reduce an individual’s purchasing power and lower real disposable income levels, consequently deterring domestic consumption and investment, and reducing GDP. Conversely, higher prices for imported goods may encourage customers and firms to purchase domestic goods, thus increasing domestic demand and lowering the need for imports (Dizioli and Bjorn, 2018).

A key criterion for receiving FDI is stability. The most recent examples of countries pursuing an economic nationalist ideology have shown that such strategies are highly volatile and unpredictable in nature. Instability at the macro-economic level appears to be unfavorable to capital investment and economic growth (Alguacil et al. 2010). Past studies provide significant evidence that high levels of FDI inflow are found in The emergence of ‘modern protectionism’ After a comprehensive review of literature and past studies, it is valid to suggest that a broader scope or a deeper commitment to economic nationalism will have growing ramifications on the levels of FDI countries are willing to commit. Taking this into consideration, the first hypothesis proposed is as follows:

H1: A rise in economic nationalism will have a negative effect on the level of inward FDI investment received by the host-country.

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pursued mainly though formal channels, for instance through increased tariffs and import quotas. Additionally, a rise in ‘invisible barriers’ to trade, for example through the use of quality standards and regulations on certain imported products, has assisted in restricting or restraining levels of international trade. These barriers are very diverse and often concealed. The methods used by protectionist economies thus make it increasingly difficult for FDI to cross their national borders. In an open economy there are only low levels of constraints placed on foreign investment, if any restrictions at all. Conversely, economies diverting from an open market towards a highly defensive policy would be expected to have greater levels of restrictions in order to obstruct the inward flow of investment. Based on this exposition, the second hypothesis states:

H2: A rise in economic nationalism will have a negative effect on the investment freedom of the host-country.

Conceptual Model

3. Empirical Analysis

3.1 Research Design and Data Sample

The empirical analysis is conducted using measures of data at the macro level, due to the main objective centered on discovering whether a switch in economic ideology affects FDI flows in the macro-environment. A collection of variables are used to represent the independent variable economic nationalism. The objective of the study is to interpret each of the parameters for economic nationalism at the individual variable level and determine how each variable effects the outcome of the two dependent variables. Linear regression analysis is used to test each dependent variable with the four individual parameters representing the independent variable economic nationalism. In the case of

IV: Economic Nationalism

Number of RTA’s Taxes on International

Trade

Economic Freedom Score Customs and other Import

Duties

DV: Investment Freedom

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this study, the objective is to analyze how different indications used to quantify the concept of economic nationalism, affect the levels of FDI net inflows and score of investment freedom. The aim is to support prior inferences made in the study regarding to the observation of a growing change to the dynamics of the modern economic climate. Through a focus on the analysis of individual level variables composed from macro data indicators, greater levels of economic nationalism, as well as lower levels of FDI flows and trade openness, are expected to be observed.

Each of the three variables will be analyzed through a number of varying indicators. Such measurements were deemed to be the most relevant and effective for assessing a country’s level of global economic integration. In order to analyze the independent variable, economic nationalism, predictors were chosen that were considered to be in opposition to foreign trade. Taxes on international trade and total value of customs and other import duties are considered direct measures of trade restrictions. According to Rodrik and Rodriguez (2000), predictors such as import duty and taxes on foreign trade are a good indication in analyzing the restrictiveness of trade regimes, as there is little evidence to suggest the existence of major biases in such measurements.

The data sample is composed of 38 countries analyzed across the previously mentioned variable indicators, between the years 2010-2017. The list of countries selected were chosen based on their high levels of gross domestic product (GDP). GDP is one of the most widely used indicators in signaling the strength of a nation’s economy. As a result, the sample is primarily composed of developed economies. Previous literature stresses the fact that both developed and developing nations have expressed protectionist stances. However, the most recent acts of protectionism have emerged from a number of the world’s largest economies. Such actions of global powers, such as the U.S, China and the U.K., are currently of most significance as they pose the greatest threat to an international disruption to trade and FDI flows. By analyzing such countries, the hope is to derive a significant relationship between the two variables and multiple indicators.

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discourse was prevalent and there was a heightened sense of uncertainty among governments regarding what course of action pursue. Equally, the year 2010 saw many national economies become aware of uneven economic recovery levels and as a consequence, prompted a rise in exploratory economic policies (Outlook, 2014). An objective of this study is to present a growing tendency towards measures of economic nationalism across a period of years. Using the year 2010 for the start of the data range is expected to distinguish a time marking a change in economic policy tendencies. Through the subsequent years, a growing trend in certain economic ideologies would become increasingly apparent.

The required data for analysis is primarily obtained from the World Bank Database and its partnered databases. The Regional Trade Agreements (RTA) Database is used to aggregate data regarding the annual number of RTAs in force. Trade-specific data indicators are sourced from the World Integrated Trade Solution (WITS) Database. The two measures, economic freedom and investment freedom, are collected from the 2019 Index of Economic Freedom (The Heritage Foundation). Both indicators are accumulated and ranked on a scale from 0-100. The appropriate statistical tests to analyze the data is performed using the statistical analysis software, SPSS Statistics.

The empirical analysis of the data set will result in a significance level for each of the indicators included in the measurement of the independent variable, economic nationalism. This is achieved through of a fitted linear model using least squares. Analysis to determine which moderator variables are significant, will be conducted using a stepwise regression analysis. With the final result tables for both dependent variables, significance tests of the separate independent variable indicators are carried out using the t-test for linear regression parameters.

3.2 Variables

Economic Nationalism – Independent Variable Indicators

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score and total trade as a percentage of GDP. Each measurement will be collected from annual data sets covering the years 2010-2017. The multiple measures chosen are primarily indicators of trade protectionism, as modern concepts of economic nationalism are concerned with the unrestricted flows of foreign trade. To ensure robustness of results, three direct measures of trade policy will be used. Two indirect measures of trade protectionism, number of RTAs and economic freedom score, will also be included. This is based on prior literature covered, which emphasizes the primary role of global trade agreements in combating the growth of economic nationalism (Cooper, 2007).

The variable, cumulative regional trade agreements in force, consists of numerous categories regarding the trade policies between two countries or geographical areas. The most common division is the Free Trade Agreement (FTA), which accounts for almost 84 per cent of all Regional Trade Agreements in force (Crawford and Fiorentino, 2005). Although most trade agreements do not incorporate specific provisions relating to the administration of FDI, they imply commitment to a liberal trade policy and a more receptive environment to potential investors (Büthe and Milner, 2008). An additional motive to comply with trade agreements, once established by such an organization, is that policies are closely monitored and a breach of commitment by a country can lead to negative sanctions being placed. This upholds a country’s liability to a formally constructed agreement. Such a variable is used in the aggregated measurement of economic nationalism as it further implies a willingness to engage in the global economic market.

A country’s economic freedom score ranges from 0 – 100, scores of 80 or above are designated as ‘free’ economies whilst scores falling below 50 are categorized as ‘repressed’ economies. The economy freedom score of a country is an indirect measurement of economic nationalism. Such a parameter was chosen based on the prediction that protectionist economies will be lower on the scale due to a rejection of global trade flows. A ‘repressed’ economic climate is equally unlikely to attract new FDI sources due to the perceived risk and uncertainty associated with entering such a market. Countries with a high economic freedom score will be considered to be very open to foreign flows of trade. A higher score is a greater incentive for future inward FDI transactions.

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The measure of a country’s level of inward FDI investment will be used as the dependent variable in this study. Such data will be collected from the World Bank database, looking at the FDI net inflows (BoP, current US$) of each country in the study between the years 2010 – 2017. FDI net inflows are the total value of inward direct investment made by foreign investors in the reporting host-country’s economy (World Bank, 2019). If the country in question is promoting a more nationalist economy, it is likely that foreign stakeholders will be weary of investing in such a volatile environment. Therefore, a reduction of FDI net inflows in a country can be used to suggest either the country’s economic climate is too big of a risk for foreign investment, or conversely, such country’s lack of commitment to global economic growth implies an unwillingness to welcome outside investment.

Investment Freedom – Dependent Variable Indicators

The second dependent variable tested is the investment freedom score of a country. The openness to trade and investments is generally considered to be a positive and significant determinant of FDI (Vijayakumar et al., 2010). The Index of Economic Freedom reviews the economic policy developments of 186 countries, ranking each country on a scale of 1-100 based on their degree of economic freedom. One of the measures assess the investment freedom of a country’s economy. The index evaluates a number of investment restrictions, including foreign exchange controls, security issues, governmental regulations and a lack of necessary investment infrastructure (Heritage Foundation, 2019). This variable will be included as part of the analysis on whether a country is welcoming of foreign investment sources. Similar to the economic freedom index, lower scores signify a general opposition to inward foreign investment.

Use of Moderating and Control Variables

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4. Results

The following two tables of results (see figures 3 and 4), show the first models reported, using a linear model analysis. In the first two tables of analysis, the effect of economic nationalism variables are tested against only the dependent variables. No moderator variables are included in this step. The result tables produced are preliminary steps taken to determine the significance level of the variables being tested. Results from the first models of analysis show that some of the independent variables of economic nationalism are significant and others are not considered to be significant.

FDI Net Inflows

Model Unstandardized Coefficients t Sig. B Std. Error 1 (Constant) -35156463395 23.241 36828694401 33.856 -.955 .341 Year 1753470836. 596 1839588766. 942 .953 .342 Population 33.063 10.793 3.063 .003 GDP .019 .001 18.193 .000 Customs_Other_Import_ Duties -.002 .002 -1.207 .230 Economic_Freedom -122309774.9 73 520477805.5 04 -.235 .815 Taxes_On_Int_Trade .002 .001 1.289 .200 Regional_Trade_Agreeme nts -339870885.5 79 116070401.0 71 -2.928 .004 Tariff_Agreements 519985019.3 37 280672099.2 92 1.853 .066 Trade_GDP 108672807.3 49 96717054.09 4 1.124 .263

Table 1: Results table of a linear model analysis of the independent and dependent variables

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inflows decrease in FDI in response to an increase in regional trade agreements. The two control variables, population and GDP, are also significant and therefore remain in the model for the further steps of analyses.

Investment Freedom Model Unstandardized Coefficients t Sig. B Std. Error 1 (Constant) 988.798 790.484 1.251 .213 Year -.526 .395 -1.332 .185 Population -6.814E-9 .000 -2.941 .004 GDP -7.710E-13 .000 -3.385 .001 Customs_Other_Import_D uties -5.075E-13 .000 -1.174 .242 Economic_Freedom 1.953 .112 17.482 .000 Taxes_On_Int_Trade -1.723E-14 .000 -.057 .955 Regional_Trade_Agreeme nts .131 .025 5.256 .000 Tariff_Agreements .109 .060 1.810 .072 Trade_GDP -.197 .021 -9.502 .000

Table 2: Results table of a linear model analysis of the independent and dependent variables

Looking at the primary results of model one, Investment Freedom level, the indicator economic freedom has a significant positive effect on investment freedom. Investment freedom therefore increases with an increase in economic freedom. Regional trade agreements have a positive significant effect on investment freedom and subsequently investment freedom increases with increases in regional trade agreements. Population and GDP are also significant control variables in the results of analysis for the dependent variable investment freedom.

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possible multicollinearity problems in the reported results and the opportunity of altering the statistical significance of the independent variable measures.

The final analysis leaves two models of results that present the significance of each independent variable indicator. What is important to note is the significance level and Beta value of each of the variables tested. A significance level of p <0.05 shows that the relationship between the two variables is significant. The Beta level illustrates how strongly each predictor variable influences the dependent (criterion) variable. In a multiple regression analysis, it is also important to note the direction of the relationship between the two variables of interest. Positive Beta values signify a positive relationship, negative values show a negative relationship, and if the Beta value is 0, no relationship is proven to exist between the two variables.

Investment Freedom Model Unstandardized Coefficients t Sig. B Std. Error 7 (Constant) -9.346 9.586 -.975 .332 Economic Freedom 1.743 .094 18.458 .000 Number_Products_Exported -.022 .004 -6.299 .000 FDI_Restrictiveness -42.371 8.972 -4.723 .000 Tariff_Agreements .122 .051 2.398 .018 Number_Import_Partners .221 .073 3.019 .003 Customs_Other_Import_Duties - 2.361E-13 .000 -2.189 .031

Table 3: Results of linear regression analysis for dependent variable investment freedom

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has a significant positive effect (p < .003,  = .221), and customs and other import duties have a significant negative effect (p > 0.05,  = -2.361). There is a positive significant relationship between level of investment freedom and economic freedom, level of investment freedom and number of tariff agreements, and level of investment freedom and number of import partners. The relationship between investment freedom and number of products exported shows a negative Beta value, displaying that a negative relationship exists between the variables. This result signals that an increase in investment freedom will cause a decrease in number of products exported. Likewise, results show a negative relationship is present between level of investment freedom and customs and other import duties.

FDI Net Inflows

Model Unstandardized Coefficients t Sig. B Std. Error 1 1 (Constant) -14373111756 4.741 34200095258 .469 -4.203 .000 GDP .025 .001 19.427 .000 Tariff_Agreements 742946081.1 28 181637387.7 64 4.090 .000 Population -173.412 27.123 -6.394 .000 FDI_Restrictiveness 15998238979 0.561 38877689269 .425 4.115 .000 Number_Import_Partners 567541999.0 97 166127902.3 79 3.416 .001

Table 4: Results of linear regression analysis for dependent variable FDI net inflows

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moderator variables, number of products exported and number of import partners, level of economic freedom has a significant positive effect on the level of economic freedom. The independent variable economic nationalism was analyzed along four different indicators (number of RTA’s, taxes on international trade, economic freedom score, customs and other import duties). The individual parameters were then tested for significance effect on the two dependent variables, FDI net inflows and Investment freedom.

5. Discussion

The results derived from the empirical analysis yield sufficient evidence that higher levels of economic protectionism are resulting in a greater disinclination to engage with such countries through inward FDI measures. A higher score of investment freedom is determined to correspondingly increase economic freedom levels, number of tariff agreements, and number of import partners. Such results are consistent with the predictions discussed.

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The findings from this study highlight the need for further analysis on the topic of economic nationalism and its growing threat to a cooperative international economic climate. Although this analysis only covered a handful of variables, positive significant relationships were proven to exist between the variables. Despite not providing a large number of results, the resurgence of economic nationalism remains relatively unexplored and therefore there is a lack of studies emphasizing a growing trend. This study would be more effective if conducted in 5-10 years’ time when there is a clear definition to the concept of modern protectionism and a larger amount of data to analyze causes and effects.

5.1 Limitations and Future Research

Choosing the appropriate measures for each of the variables was a challenge with this study. The concept of economic nationalism is dynamic and can be interpreted through the analysis of a vast number of different factors. The paper of (Reznikova et al., (2018) calls attention to this issue by expressing that today’s task is to rediscover ‘economic nationalism’ and identify the new theory synonymic to the concept. A distinction needs to be made as to which actions can be interpreted as ideologically connected to economic nationalism. In this experiment, a mixture of direct and indirect measures were chosen in an attempt to cover a broader range of potential indicators to rising levels of economic nationalism. Such measures were also chosen as they suggested a close relation to the recent interpretation of economic nationalism, modern protectionism

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Future research analyzing the impact of economic nationalism on FDI inflows and investment freedom is likely to generate more significant results. There is currently a lack of contemporary studies analyzing the most recent effects of rising economic nationalism on the global economy. As an emerging threat, the future progression of economic nationalism is ambiguous, and as a result has not been fully explored. This further means that there is no solid empirical evidence suggesting one way or the other.

Another direction for future study on the concept of economic nationalism is a deeper investigation and analysis into the invisible protectionist barriers growing in prevalence. Recent studies investigating the effects of protectionist measures on international trade have touched on the topic, however the increasingly diverse number of invisible barriers is difficult to quantify (Demir and Sepli, 2017). The growth of ‘murky protectionism’ poses a growing threat to global cooperation as such methods often include the undermining of multilateral trade agreements and thus foster a climate of distrust among nations.

6. Conclusion

This paper seeks to empirically assess the impact of economic nationalism on levels of inward FDI and investment freedom. Taking into consideration the literature covered, four parameters were chosen that could be interpreted as a demonstration of increased protectionism. Results from the study provide a number of valuable insights whilst equally highlighting the need for a more extensive exploration on the topic of modern protectionism. The long standing prominence of globalization cannot to be downplayed by the recent revival of economic nationalism, however it also can no longer be neglected in light of increasing indicators advocating a focus on self-interests and national economic prosperity. As the most discussed growing threat to the end, if not reversal to globalization, it is undeniable that such a concept needs to be understood in order to react to future movements threatening to cause a breakdown in global economic cooperation.

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The Effect of Economic Nationalism on the Level of Inward FDI Investment Entering a Host-Country

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