The STEG PhD Research Grants of the Structural Transformation and Economic Growth (STEG) programme support PhD researchers worldwide in their work in addressing economic growth of low and middle income countries (LMIC).
EUI Economics researcher, Daniel Prosi, has received a grant for his project, 'The Indirect Effects of Foreign Direct Investment on the Rwandan Production Network'.
Foreign Direct Investment (FDI) is generally seen as a driver of economic development.
The mechanisms through which FDI affects domestic firms' development are however less well understood. Whereas firms that integrate into the supply-chain of foreign entrants will likely experience efficiency gains from FDI entry, other firms may lose market-share to foreign entrants.
Since profits made by foreign investors are often exempted from taxes through investment promotion schemes and can be repatriated, this can generate domestic losses from FDI.
This project therefore investigates how FDI entry in different locations of the supply-chain has a differential impact on domestic firms in a developing economy. It highlights not only the direct effects foreign entrants have on domestic firms they interact with, but also models the indirect channels of interaction with firms further upstream and downstream in the domestic supply-chain.
The project combines a production network model of firms' supply-chains with micro-data at the firm-level. This way, it evaluates interactions through demand-creation and the provision of new intermediate inputs by foreign firms while accounting for investors' market power in the economy.
Policy implications of the research will be shared and discussed with local stakeholders.