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Effect of Automation on FDI flows (World Bank Study)

Posted on : 09 Jan 2020

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  • Across the world, the rise of automation has raised concerns over its impact on employment, especially in poor countries.
  • New research, however, suggests that these fears may be overblown. While automation will disrupt the flow of capital from rich to poorer countries, the poorest countries could actually gain from automation.
  • In a World Bank study, Mary Hallward-Driemeier and Gaurav Nayyar use data sets on Greenfield foreign direct investments (FDI) and industrial robot usage between 2004 and 2015 to investigate the relationship between automation and FDI flows.
  • During the period, because of outsourcing, high-income countries (HICs) such as the European nations and the US, witnessed the largest FDI outflows, measured in terms of project announcements, into low- and middle-income countries (LMICs).
  • Besides, leading sectors in HICs witnessed a huge rise in automation. The authors measure automation in terms of the intensity of robot use (robots per 1,000 employees).
  • They find that electronic and automobile sectors were the most automated while textiles were the least automated. The study finds that as automation increases, FDI flows from HICs to LMICs fall.
  • However, encouragingly, this relationship is non-linear. A 10% increase in the intensity of robots in HICs is associated with a 5.5% increase in the growth rate of FDI flows to LMICs. But above a certain threshold of automation in HICs, FDI inflows into LMICs grow at a diminishing rate and lead to reshoring with HICs investing in their own countries.

Article Related Questions

  1. With reference to Effect of Automation on FDI flows consider the following statements
    1.Automation hits especially poor countries.
    2.The study finds that as automation increases FDI flows from high-income countries (HICs) to low and middle income countries (LMICs) also increases.
    Which of the following statement is/are correct?

  2. 1.1 only

    2.2 only

    3.Both 1 and 2

    4.Neither 1 nor 2

    Right Ans : 1 only


  3. The 1857 Uprising was the culmination of the recurrent big and small local rebellions that occured in the preceding hundred years of British Rule. Elucidate (Answer in 150 words) - 2019 Mains


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