by Aaditya Mattoo, The World Bank
and Arvind Subramanian, Peterson Institute for International Economics
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The phenomenon of uphill flows of capital (from poorer to richer countries) has been heavily scrutinized in recent years. Much of the literature has focused on financial flows, with the assumption that finance is the only gravity-defying flow between countries. However, recent high-profile developments like Tata Motors' takeover of the United Kingdom's Jaguar and China's Lenovo acquiring IBM raise the possibility of uphill flows spreading to new dimensions. These developments run counter to standard trade model assumptions that developing countries primarily export unskilled labor-intensive products and receive foreign direct investment (FDI). The fact that skills, embodied in goods, services, or capital (in the form of entrepreneurial and managerial skills associated with FDI), are flowing from poorer to richer countries is making the phenomenon of uphill flows noteworthy from the trade perspective.
Mattoo and Subramanian show that the propensity of several developing countries, such as China, Mexico, and South Africa, to export sophisticated goods to rich trading partners has been increasing. Also, FDI flows to developed countries from developing countries like Brazil and India as a share of their GDP are as large as FDI flows from rich countries like Japan and the United States. The authors posit that it is not just the composition of exports but also their destination that matters. In both cross-sectional and panel regressions, with a range of controls, they find that a measure of uphill flows of sophisticated goods is significantly associated with better growth performance. While a large part of the benefits of trade has traditionally been seen as access to imports and inward FDI, there is a growing recognition that exporting and outward FDI may also confer important benefits. These results suggest the need for a deeper analysis of whether development benefits might derive not from deifying comparative advantage but from defying it.
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