Welfens, P.J.J.; Celebi, K.: FDI Globalization and the New Phillips Curve: Role of Multinational Companies and Institutional Changes

Welfens, P.J.J.; Celebi, K.: FDI Globalization and the New Phillips Curve: Role of Multinational Companies and Institutional Changes

JEL classification: F62, F68, E31, F21, F23, O43

Key words: Globalization, Phillips curve, Foreign Direct Investment, Institutional Changes, New Phillips curve

Summary:

There has been some recent debate about changes in the Phillips curve in the context of economic globalization and a flattening of the curve, respectively. Little evidence has been found in support of such links so far. However, our analysis shows that both inward FDI stock variables and outward FDI stock variables significantly affect the Phillips curve and the inflation-unemployment trade-off in the medium term. In the Euro Area, the inward FDI stock variable raises the slope of the Phillips curve, while the outward FDI stock variable brings a flattening of the Phillips curve; the latter effect is not observed in the case of the UK and in the case of the US there are no clear FDI effects. Furthermore, we consider – also for the first time in the literature – the impact of product innovations and process innovations. For the UK and the Euro Area, we find significant parameters for the variables mentioned. The analysis clearly suggests that foreign direct investment is crucial for understanding key macroeconomic variables; thus the findings could reinforce new DSGE research perspectives by ROEGER/WELFENS (2021) who have developed a new macro model with FDI. The OECD should urgently consider providing more data on FDI – for example, sector FDI stock data – and on product innovations and process innovations.

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