Date of Award

2020

Degree Type

Restricted to Claremont Colleges Dissertation

Degree Name

Political Science and Economics, PhD interfield

Program

School of Social Science, Politics, and Evaluation

Advisor/Supervisor/Committee Chair

Yi Feng

Dissertation or Thesis Committee Member

Robert Klitgaard

Dissertation or Thesis Committee Member

Thomas Willett

Terms of Use & License Information

Terms of Use for work posted in Scholarship@Claremont.

Rights Information

© 2020 Zhijun Gao

Keywords

Africa, Banking Crisis, Capital Flows, Economic Freedom, Foreign Direct Investment, Happiness

Subject Categories

Political Science

Abstract

Essay I: Logic of Foreign Direct Investment, Convergence or Divergence? A Comparative Study of US and China's Outgoing FDI to Africa Research question: We study the determinants of US and Chinese foreign direct investment in African countries, with a particular focus on examining if the determinants are becoming more convergent or divergent. Research motivation: As the first and second largest economies of the world, both the United States and China have broad and deep engagement with Africa. Apart from trade and foreign aid, FDI has become one of the most essential forms of economic cooperation between the two great powers and many African countries. However, most existing studies claim that there exist large variations regarding the determinants of the two countries’ FDI in Africa. A majority of scholars argue that US firms select their destinations of investment based on the market factors and tend to avoid targeting on the countries with autocratic regime or poor governance; meanwhile, the Chinese counterparts usually choose to make investments in resource-rich countries who implement autocratic regimes or have low levels of governance. The scholars attribute the above differences to the state-owned characteristics of many Chinese firms whose investment in Africa might stem from the national interests. Since most of the existing studies focus on the period before 2012, their theories and empirical analyses might not capture the recent trend of diversification of Chinese FDI. Therefore, we conduct this empirical study to investigate the determinants between US and Chinese FDI in Africa based on the most recent dataset covering the period of 2007-2017. Methodology: The data for US and Chinese FDI stock comes from Bureau of Economic Analysis and Ministry of Commerce of China, respectively. Given the scarce data of US FDI flows in African countries, we choose to use FDI stock as our dependent variable. Based on the consistency of FDI coverage, the time span of our sample is between 2007-2017 for both countries. Our independent variables consist of three categories: macroeconomic conditions, political and institutional quality, and legal traditions. We used the fixed-effect regression models as the major estimation technique. Main findings: Our empirical results demonstrate that both countries’ FDI in Africa are mainly influenced by macroeconomic factors such as GDP per capita and openness to FDI; while most political and intuitional factors are not statistically significant. Regarding the natural resources, it only shows a marginal significance for attracting FDI from both countries. With respect to the legal traditions, we found that if the common law system blended with local customary law would attract more US FDI; meanwhile, the pure common law demonstrates a negative association with US FDI. For Chinese enterprises, they seem to be attracted to countries as long as the common law system is in place; the composition of the common law does not show a differential effect on receiving Chinese FDI. Overall, our empirical results indicate a convergence rather than divergence of the determinants between US and China’s FDI in Africa. Contributions: This empirical research found that both US and Chinese FDI are more significantly attracted by macroeconomic conditions, rather than political and institutional factors. This finding would enrich the discussion on the recent trends of US and Chinese FDI. It also raises the importance of looking into the field diversification of Chinese investment and the increasing presence of Chinese private firms in the continent. In addition, we found interesting and nuanced results regarding how legal traditions of the host country would affect US and Chinese FDI, which offers another angle to examine the determinants of inward FDI in Africa. Essay II: An Empirical Exploration of the Impact of Economic Freedom on Nations’ Happiness: General Patterns and Exceptions Research question: How and how much does economic freedom contribute to the self-reported happiness of citizens? Using national-level data from around the world, and regional data from China, this dissertation addresses this question with a range of methods. Conceptual framework: Economic freedom refers to individuals’ freedom of choice in acquiring resources and engaging in economic activities. In principle, it might affect citizens’ happiness in contrary ways. On one hand, increasing economic freedom would help unlocking individuals’ potential and enhance their incentives to improve output. This would create a “prosperity “of national wealth and promote citizens’ happiness. On the other hand, economic freedom might bring about more competition, which would lead to an “inequality effect” and undermine happiness. Moreover, these effects might vary with the level of a country’s development and with “cultural variables” and “ethnicity”. Data and methodologies: The sample of this study covers 139 countries between 2005-2017 based on data availability. The data for economic freedom comes from the Heritage Foundation. It constructs each country’s overall Index of Economic Freedom based on four sub-indicators: rule of law, government size, regulatory efficiency, and open markets. Given the multifaceted concept of economic freedom, the decomposed analysis in this paper would generate policy implications on the linkages between specific areas of economic reform and people’s happiness. The happiness data is obtained from the national average life evaluations in the Gallup World Poll. I first construct a structural equation model (SEM) and use path analysis to explore how economic freedom would affect happiness. This SEM consists of two types of effects: (1) economic freedom would direct affect happiness; and (2) economic freedom would indirectly affect happiness through influencing log GDPpc (“prosperity” effect) and Gini index (“inequality” effect). In addition, given the heterogeneity of the 139 countries in the sample, I run disaggregated regressions based on developing and developed countries. Second, it is technically difficult to control for unobserved (or latent) variables using the path analysis, so I employ the fixed-effect regression models to control for those variables and test the robustness of the findings. Finally, in order to investigate if the cultural factors might moderate the effects of economic freedom on happiness, I conduct a post-estimation analysis to identify the countries whose levels of happiness are distant from the model’s prediction. Main findings: (1) Average effects For the whole sample, both the path analysis and fixed-effect regressions show that the overall Index of Economic Freedom does not have a direct effect on happiness. It would promote happiness through the channel of increasing average income. However, improving rule of law is found to be directly associated with higher levels of happiness and it would also contribute to national prosperity. It is interesting that more economic freedom is not associated with larger Gini index. Instead, the overall Index of Economic Freedom and most sub-indicators demonstrate that it would reduce income inequality. In the subsample of 103 developing countries, it appears that economic freedom affects happiness mainly through the “prosperity effect”. Neither the overall Index of Economic Freedom nor its sub-indicators demonstrate a significant association with Gini Index. Regarding the 36 developed countries, both the direct effect and indirect effect of economic freedom on happiness are found to be significant. It seems that increasing economic freedom would directly contribute to people’s higher levels of happiness in affluent countries. Although higher Gini index would undermine happiness, the results suggest that the larger income inequality is not caused by more economic freedom. (2) Exceptions Regarding the influence of cultural factors, the post-estimation analysis shows that people in Latin American and Caribbean countries are much happier than predicted given their average income and large inequality. The panel regression based on subnational data in China indicates that residents living near the minority regions are also happier than their affluent counterparts in the coast regions. Therefore, it would be interesting to explore the causes for their different-than-expected levels of happiness in future research. Contributions: This paper systematically explores the complexity of effects of economic freedom on happiness. I investigate not only the direct effects of economic freedom on happiness but also the indirect channels through average income and income inequality. The empirical results demonstrate the heterogeneity between developing and developed countries. Moreover, this study suggests the role of cultural factors in influencing people’s happiness in certain societies. Delving into those exceptions would be helpful to deepen our understanding of how cultural factors would affect people’s emotions and cognitions when facing different external environments. Essay III: The Patterns, Effects, and Importance of Capital Flows to Emerging Markets Research Question: In this paper, I investigate how US capital flows would affect the occurrence of banking crises in emerging markets and compare the effects with total foreign flows. Research Motivation: The focus of this research on US capital flows stems from the Structuralism approach in International Political Economy. This theory argues that there exists an asymmetric degree of interdependency between countries in the global system. The core countries, such as the U.S., have a more substantial influence on periphery countries than the other way around. The global finance literature has examined the degree of US influence on emerging markets in the areas of capital bonanzas and banking crises. For example, Danzman, Winecoff, and Oatley (2017) measured the distribution of capital flows between the core and periphery by constructing a Gini index for the ten largest capital account surplus countries that exist each year. They argued and found evidence that when the capitals are concentrated in the U.S. (or a high Gini index), this reduces the likelihood of capital bonanzas and banking crisis in the periphery. However, it raises several concerns since their Gini index approach does not measure the capital flows directly and does not distinguish between US and total capital flows. Moreover, their argument lacks empirical evidence for the linkage from capital bonanzas to banking crisis. Hence, I examine how the US capital flows would affect the banking crises in emerging markets through constructing different measures for US capital flows. In addition, I disaggregate the US capital flows into three types of special waves: surges, sudden stops, and reversals. Methodology: Based on data availability, the sample in my study covers 46 emerging markets between 1980Q1 and 2018Q4 (quarterly data). I construct the variable of US flows/GDP in each emerging market. Additionally, I use the variable of total foreign flows/GDP to compare the potential differential effects between US flows and foreign flows on banking crises in emerging markets. As previous studies found non-negligible differences between FDI, portfolio, and other investment (mainly consists of bank flows) on banking crises, I conduct disaggregated analysis for those three flow types. For robustness, I construct three alternative measures for each special wave (surges, sudden stops, and reversals). The surges and stops are in gross terms, while the reversals are measured by the US capital net inflows to each emerging market. The estimation is based on the logit random-effect regression. Main findings: The special waves of US FDI and other investment are not significantly associated with banking crises in emerging markets at the conventional confidence levels. However, the reversals of US portfolio investment appear to significantly increase the likelihood of banking crises by 2 percent. This magnitude of this effect is not large but it is found to be robust using different measures of reversals. In contrast, the reversals of total portfolio net inflows and other flow types are not significantly associated with banking crises. The empirical results also showed that faster GDP growth, more stringent capital controls, and higher degrees of democracy would significantly reduce the probability of banking crisis. Contributions: The Structuralism approach in IPE literature argues that the core countries (e.g., the U.S.) play an essential and asymmetric role in the global monetary system. However, few articles offer specific measures for US capital flows to the periphery at the country level. This paper provides a straightforward measure for US capital flows and empirically test its effects on banking crisis in emerging markets and compare this with the effects of total capital flows. In addition, I offer a constructive critique to Danzman et al. (2017)’s approach of using capital Gini index to proxy the capital distribution between the US and periphery. The main findings in this research cast doubts on the strength of asymmetric interdependence and the dominant role of US flows in total investment in emerging markets. This analysis should enrich discussion on how to effectively assess US influence in the global monetary system. We might also draw policy implications from the heterogenous effects of US flows and total foreign flows on banking crisis.

ISBN

9798672150574

Download

Share

COinS