Testing for horizontal and vertical foreign investment spillovers in China, 1998–2007

As with many developing countries, the Chinese government hopes that knowledge brought by multinationals will spill over to domestic industries and increase their productivity. In this paper, we show that foreign investment originating outside of Hong Kong, Macau, and Taiwan has positive effects on individual firm level productivity, while foreign investment from HKMT firms does not. We also test for both horizontal (within the same industry) and vertical (upstream or downstream) linkages from foreign investment. Using a manufacturing firm-level panel for 1998 through 2007, we find zero or weak positive horizontal externalities. However, our results show that foreign direct investment (FDI) has generated positive productivity spillovers to domestic firms via backward linkages (the contacts between foreign affiliates and their local suppliers in downstream sectors) as well as forward linkages (between foreign suppliers and their local buyers in the upstream sectors).     

Competitiveness and Subsidy or Tax Policy for New Technology Adoption in Duopoly

We consider a problem of subsidy or tax policy for new technology adoption by duopolistic firms. The technology is developed in and transferred by a foreign country to the domestic country. It is free but each firm must expend some fixed set-up cost for education of its staff to adopt and use it. Assuming that each firm maximizes the weighted average of absolute and relative profits, we examine the relationship between competitiveness and subsidy or tax policies for technology adoption, and show that when firm behavior is not competitive (the weight on the relative profit is small), the optimal policy of the government may be taxation; when firm behavior is competitive (the weight on the relative profit is large), the optimal policy is subsidization or inaction and not taxation. However, if firm behavior is extremely competitive (close to perfect competition), taxation case re-emerges.     

Privatization, Incentive Delegation and Foreign Direct Investment

Despite the empirical relevance, the privatization literature paid little attention to the effects of the owner-manager relationship and the implications of foreign direct investment (FDI). We focus on these aspects, and show the relationship between privatization and greenfield FDI when the owners design strategic managerial incentive contracts. We show that there is complementarity between privatization and greenfield FDI. Whether incentive delegation (compared to no incentive delegation) increases the degree of privatization in the presence of FDI is ambiguous; it depends on whether the degree of privatization that attracts FDI is higher or lower than the degree of privatization that maximizes domestic welfare under FDI.     

What role should public firms play in the upstream market?

We investigate the upstream public firm's desirable option of production timing in the vertically related upstream market. We find that multiple equilibria may exist, including the Cournot-type and Stackelberg-type, with different degrees of privatization in the presence of upstream firms' efficiency gap. These equilibrium outcomes are also influenced by the intensity of downstream market competition. We further show the corresponding optimal degree of privatization in different phases of gradual privatization.     

Technology spillovers from Chinese outward direct investment: The case of Ethiopia

The present study uses firm survey data of 1033 manufacturing firms operating in Ethiopia in 2011 to examine the impact of Chinese outbound direct investment on the productivity of domestic firms. Particularly, we attempt to answer two questions. Firstly, are Chinese-owned (henceforth foreign) firms more productive than local ones? Secondly, does the presence of foreign firms generate technology spillovers on domestic firms operating in the same industry? Our empirical results show that foreign firms are more productive and that their presence has different spillover effects on the productivity of domestic firms. In particular, we find that domestic firms with higher absorptive capacity experience positive spillovers, while those with low absorptive capacity witness negative spillover. We also find that small firms and non-exporting firms benefit more from spillovers than do other types of domestic firms. In this study, instrumental variables are used to address the potential endogeneity between foreign firm presence and domestic firm productivity.     

The Impact of Multinational Presence on Domestic Investment: Firm‐Level Evidence from South Korea

In order to analyze the effects of foreign multinationals' presence on domestic firms' investment, we use a detailed firm level data set from South Korea for the 2006–2014 period. We combine it with the input‐output tables provided by the Bank of Korea to construct industry level measures of multinational presence in sectors that are horizontally and vertically linked, and estimate dynamic investment equations that are augmented with these foreign presence measures. We find a positive and significant effect of foreign presence in both horizontally and vertically linked industries on domestic firm's investment rate, with larger effects arising from multinational presence in the supplying sectors. Quantitatively, a 2 percentage point increase in the presence of multinational suppliers increases the domestic firm's investment rate by 3.24 percentage points. We also find that this effect is larger for small and medium firms, private firms, nonexporters, firms that are not part of a chaebol, and for firms in external finance dependent industries. A similar 2 percentage point increase in the foreign presence in downstream sectors increases the investment rate of domestic suppliers by 0.55 percentage points. This effect is larger if the domestic firm is part of a chaebol, or is in a less external finance dependent industry. Investment increase by 0.53 percentage points following a 2 percentage point increase in horizontal linkages.     

Injury-Based Protection with Auditing under Imperfect Information

We analyze optimal protection when a benevolent government must maintain nonnegative domestic profits and when the domestic import-competing firm has private information about its costs. A costly audit mechanism can deter strategic manipulation of this private information. We show that a high penalty/low probability of investigation is optimal when the shadow price of the firm profit is low compared with the audit cost. A low penalty/high probability of investigation is optimal when there is a low investigation cost and a high shadow price of firm profit. In this latter case, the trade authority obtains truthful announcements by directly auditing the firm.     

Profit-enhancing competitive pressure in vertically related industries

Under a simple Cournot model with vertical relations, when downstream firms engage in process R&D, the profits of input suppliers for which upstream competition exists may be larger than those in which each input supplier has a bilateral monopoly relation with its buyer (downstream firm). This is because upstream competition leads to higher levels of investment by the downstream firms. Furthermore, we incorporate the decisions of downstream firms to acquire the ability to procure input from potential outside suppliers, which has the effect of placing competitive pressure on existing input suppliers. We show that no downstream firm acquires such an ability to procure its input from potential outside suppliers in some cases although the acquisition could benefit the input suppliers.     

Optimal commercial policy with imperfect foreign supply

Conclusion Maximizing social welfare when there is one foreign firm requires the imposition of fixed domestic price, which results in increased imports from the foreign firm until it engages in marginal cost pricing. A license fee captures (replaces) the foreign firm's economic profit (loss). Extension to the case where foreign supply consists of more than one firm differs from the one-firm analysis in that, while optimale policy consists of the setting of both a license fee and price level for the import, this may entail levying a tariff on imports from the foreign firms. The fee or tariff, but not both, may be negative.     

Protection versus Free Trade: Lobbying Competition between Domestic and Foreign Firms

This article considers how political interaction between policymakers and domestic and foreign firms endogenously determines tariff rates. We show that because of lobbying competition between foreign and domestic firms, even a less competitive foreign firm can successfully elicit a tariff reduction under reasonable conditions. Moreover, lobbying competition may also increase the level of aggregate domestic welfare when the market powers of the competing firms are sufficiently alike.     

The role of foreign direct investment in the host-country firm selection process: firm-level evidence from Slovenian manufacturing

This paper examines the role of inward foreign direct investment (FDI) in firm selection processes in the Slovenian manufacturing sector in the 1994–2003 period. It adopts the firm dynamics framework that allows testing of selection effects directly by assessing the impact of foreign firms’ activity on the probability of exiting of local firms (crowding out). The results show that intra-industry productivity spillover effects offset only a minor part of the competition pressure which results from foreign firm entry, hence incumbent firms experience a drop in their survival probability upon a foreign firm’s entry within a particular industry. This result is driven by foreign firm entry of the greenfield type, as entry through the acquisition of existing firms has no significant effect. The strength of the crowding-out effect decreases with the incumbent firm’s export propensity. There is no significant evidence that inward FDI would stimulate the selection process through backward linkages in the upstream supplying industries, whereas foreign firms’ activity reduces the exit probability of downstream local customers (through forward linkages).     

Local Content Requirements, Vertical Cooperation, and Foreign Direct Investment

Local content requirements (LCRs) have been observed empirically to 1) protect vertically integrated domestic industries and 2) induce inward foreign direct investment (FDI) in intermediate goods production. We examine the effects of an LCR in the context of potential FDI in upstream manufacturing by a foreign multinational and potential vertical cooperation between a host country's upstream and downstream producers. In case of vertical cooperation domestic producers have an incentive to set the price of the intermediate strategically to discourage FDI. Vertical cooperation is found to enhance the rent-shifting effect of the LCR, whereas the FDI response increases price competition and reduces domestic profits. In both cases, manufacturing efficiency and foreign welfare decrease, suggesting the need for multilateral agreement in the WTO to curb the continuing but disguised use of LCRs in industrialized countries.     

垂直产品差异、外国企业纵向控制与研发政策

在Spencer和Brander(1983)模型的基础上,本文引入产品纵向控制因素,考虑生产高质量产品的非一体化企业与另一国生产低质量产品的一体化企业进行市场竞争时,政府的最优研发政策。在企业进行Cournot竞争的情形下,若产品质量差异较大(小),非一体化企业所在国政府的最优研发政策为征税(补贴),而在企业进行Bertrand竞争的情形下,非一体化企业所在国政府的最优研发策略则是征税。     

跨国公司对东道国企业技术创新的影响

在下游企业顺序进入市场条件下,本文分析了跨国公司对于上游企业创新动机的影响。我们的研究表明:上游企业的创新投入既取决于其国有股的比重又取决于下游企业的国别属性以及市场势力。具体而言,如果上游企业是一个私营企业,那么下游企业的国别属性不影响其研发投入。相反,倘若上游企业是一个纯粹的国有企业,那么只有当下游企业均为国外企业时,其研发投入不足,在其他情况下,上游企业的研发投入相同。假如上游企业是一个部分国有企业,那么下游跨国公司的市场势力越大,其研发动力越低。     

Resistance to Trade Liberalization in Unionized Sector

This paper studies the lobbying against trade liberalization by both a firm and a union in the same industry. We find that the relationship between their political activities depends on the effect of political activity by one on the marginal effectiveness of political activity by the other. We also show that, when they are strongly risk-averse and their political activities are strategic complements, trade liberalization is likely to be successful if business is brisk, the foreign firm's production cost is high or the number of union members is small. However, when they are not strongly risk-averse, these results hold reversely.     

The effect of export tax rebates on export performance: Theory and evidence from China

This paper develops a Cournot quantity competition model to examine the effect of export tax rebate policy on export performance. The main conclusions drawn are as follows: (i) when a government raises the export rebate rate, the output of final goods for export by the domestic firm increases, while the output of the foreign competitor decreases; (ii) when a government raises the export rebate rate, the profit of the domestic firm increases, while that of the foreign competitor decreases; and (iii) the optimum export rebate rate is positive and greater than 1, indicating that the domestic government not only refunds fully the custom duties paid by the domestic firm on imported intermediate goods, but also offers export subsidies for its export of final goods.To corroborate the conclusions drawn based on the theoretical model, empirical analysis was carried out using the statistical data of China from 1985 to 2002. The test results of Spearman rank correlation coefficient show that China's export tax rebate policy has significant positive correlation with its exports, final domestic consumption, and foreign exchange reserve.     

Antidumping as Strategic Trade Policy under Asymmetric Information

Trade liberalization under GATT/World Trade Organization (WTO) has been partly offset by an increase in antidumping protection, possibly due to the inclusion of sales below cost in the definition of dumping. This article investigates the domestic government's antidumping duty choice in an asymmetric information framework, in which the foreign firm's cost is observed by the domestic firm, but not by the government. We show that by designing a tariff schedule contingent on firms' cost reports and accompanied by a threat to collect additional information for report verification, the domestic government may not only be able to extract the true cost information, but also succeed in implementing the full‐information, governmental welfare‐maximizing duty. The antidumping framework within GATT/WTO may thus not only offer the means to pursue strategic trade policy disguised as fair trade policy, but it also helps overcome informational problems with regard to correctly determining the optimal strategic trade policy.     

经济中最优私有比重——经济体制改革的模型描述

文章通过构建混合寡头竞争博弈模型,在封闭经济、具有外来竞争者的封闭经济和开放经济情形下,证明经济中最优私有比重的存在性。模型假定随着私有化的深入,国有企业的生产边际成本会降低。基本结论是:(1)在封闭经济、具有外来竞争者的封闭经济和开放经济情形下,最优私有比重都是存在的;(2)在任意固定的私有比重下,存在最优关税;(3)在具有外来竞争者的封闭经济或者开放经济下,本国关税对本国企业起到了保护作用,随着关税的增加,本国企业的产量会增加,进口和市场产品总量会减少;(4)随着我国私有经济在经济总量中比例的增大,我国企业将向国外市场出口更多的产品,而且国外市场中的产品总量也随着我国私有化水平的提高越来越大。我们的结论可为我国政府进行经济体制改革提供一定的理论依据。     

Exporting versus Direct Investment under Local Sourcing

This paper examines a setting where foreign direct investment (FDI) shifts demand for an intermediate good from the source to the host country. A domestic and a foreign firm choose between exports or FDI, always sourcing the intermediate locally. We show that by increasing the price of the intermediate, outward FDI can act as a cost-raising strategy for a firm and that attracting FDI can raise host country welfare. Two-way FDI is the equilibrium when the countries have similar market sizes. However, such FDI reduces global welfare relative to two-way exporting since it eliminates indirect competition between suppliers. JEL no. F12, F13, F23, L13     

Contingent trade policy and economic efficiency

Review of World Economics - This paper models the competition for a domestic market between one domestic and one foreign firm as a pricing game under incomplete cost information. As the foreign...