FOREIGN DIRECT INVESTMENT IN A TWO‐TIER OLIGOPOLY: COORDINATION,VERTICAL INTEGRATION,AND WELFARE*

We study foreign direct investment (FDI) by two independent investors/entrants into a two‐tiered oligopolistic industry. An FDI subsidy at a single stage of production can be sufficient to resolve the coordination problem facing investors thereby inducing entry at both stages. However, due to linkage offsetting, FDI at both stages may yield lower domestic welfare than FDI at a single stage. Vertical integration not only solves the coordination problem, it also eliminates double marginalization. But since the integrated multinational does not sell the intermediate to local firms, its entry generates no vertical linkages and can yield lower welfare than FDI by independent firms.     

Market entry,privatization and bank performance in transition1

This paper examines how market entry and privatization have affected the margins and marginal costs of banks in the post‐communist transition. We estimate bank revenue and cost functions, allowing the estimated parameters to change over time. In the first sub‐period (1995–98), we find that privatized banks earned higher margins than other banks, while foreign start‐ups had lower marginal costs. In the third sub‐period (2002–2004), foreign banks remained low marginal cost service providers, while privatized domestic banks had the widest margins. Subtracting marginal costs from margins to calculate mark‐ups, an indication of demand for services, shows that initially privatized banks had the largest mark‐ups. However, by the third sub‐period, differences among private banks diminished. In comparison to private banks, state banks persistently under‐performed in controlling costs and attracting demand. Our evidence therefore indicates that foreign bank entry promoted lower costs and that privatization and market entry encouraged more demand for services.     

Location Choice of Multinational and Local Firms in Vietnam: Birds of a Feather Flock Together?

Vietnam enacted the Enterprises Act in 1999, leading to a sharp increase in the number of registered enterprises. Meanwhile, foreign direct investment (FDI) into the country continued to increase in the 2000s. Thus, this paper examines the location choice of multinational and local firms in Vietnam. We adopt the mixed logit model to conduct an empirical analysis of the possible interaction of neighbouring regions and attracting FDI. Using firm‐level data for the period 2000–2005, the results show that most provincial characteristics exert similar influences on foreign and domestic entrants, except for wage rates, which exhibit an opposing effect. The agglomeration of FDI entices foreign and domestic firms to locate in the same region, whereas the agglomeration of local firms is less relevant to the location choice of all firms. The spatial interdependence effect of attracting investment is particularly relevant to local entrants. Provinces with more foreign (domestic) firms reveal a complementary (competition) effect on the attractiveness of their neighbouring provinces.     

Export Spillovers of FDI on China's Domestic Firms

This paper examines the horizontal and vertical export spillovers of foreign direct investment (FDI) on China's manufacturing domestic firms by using firm‐level census data over the period of 2000–03. Based on a Heckman two‐step procedure combining first differencing and instrumental variable regression techniques, it is found that FDI has had a positive impact on the export value of domestic firms mainly through backward technology spillovers and a positive impact on the export‐to‐sales ratio of domestic firms through horizontal export‐related information spillovers. After decomposing FDI by different market orientation and domestic firms by different ownership, the paper finds that the positive impact on domestic firms' export values is mainly from the nonexporting and the exporting foreign‐invested enterprises while the positive impact on domestic firms' export‐to‐sales ratios is mainly from the high‐exporting foreign‐invested enterprises. Both types of export spillovers are mainly diffused to domestic non‐state‐owned enterprises.     

How firm capabilities affect who benefits from foreign technology

We explore how firm capabilities affect the diffusion of technology brought with foreign direct investment (FDI). Using a panel dataset on Indonesian manufacturers from 1988 to 1996, we measure how the productivity of differing domestic firms responds to the entry of multinational competitors. We find that firms with investments in research and development and firms with highly educated employees adopt more technology from foreign entrants than others. In contrast, firms that have a small “technology gap,” meaning that they are close to the international best-practice frontier, benefit less than firms with weak prior technical competency. This finding suggests that the marginal return to new knowledge is greater for firms that have more room to “catch up” than it is for already competitive firms.     

Foreign direct investment, competition and industrial development in the host country

This paper analyses the impact of foreign direct investment (FDI) on the development of local firms. We focus on two likely effects of FDI: A competition effect which deters entry of domestic firms and positive market externalities which foster the development of local industry. Using a simple theoretical model to illustrate how these forces work we show that the number of domestic firms follows a u-shaped curve, where the competition effect first dominates but is gradually outweighed by positive externalities. Evidence for Ireland tends to support this result. Specifically, applying semi-parametric regression techniques on plant level panel data for the manufacturing sector we find that while the competition effect may have initially deterred local firms’ entry, this initial effect has been outpaced by positive externalities making the overall impact of FDI largely positive for the domestic industry.     

Does FDI Facilitate Domestic Entry? Evidence from the Czech Republic

This paper analyzes the impact of FDI on domestic firm entry and firm size distributions in the Czech Republic during 1994–2000. We find that larger foreign presence stimulates the entry of domestic firms within the same industry, indicating the existence of positive horizontal spillovers from FDI. We also find evidence of significant vertical entry spillovers—FDI in downstream (upstream) industries initiates entry in upstream (downstream) sectors. Our results also show that entry spillovers through vertical linkages are stronger than horizontal spillovers and that while service industries benefit from both horizontal and vertical spillovers, manufacturing industries do not experience significant positive entry spillovers of any kind. We also find that country of origin of FDI matters—horizontal spillovers are driven by FDI from the EU countries. The right skewness of the firm size distributions in industries without FDI further emphasizes an important role of FDI presence for overall industry dynamics.     

How firm capabilities affect who benefits from foreign technology

We explore how firm capabilities affect the diffusion of technology brought with foreign direct investment (FDI). Using a panel dataset on Indonesian manufacturers from 1988 to 1996, we measure how the productivity of differing domestic firms responds to the entry of multinational competitors. We find that firms with investments in research and development and firms with highly educated employees adopt more technology from foreign entrants than others. In contrast, firms that have a small “technology gap,” meaning that they are close to the international best-practice frontier, benefit less than firms with weak prior technical competency. This finding suggests that the marginal return to new knowledge is greater for firms that have more room to “catch up” than it is for already competitive firms.     

FDI spillovers in new EU member states

Using an unbalanced panel of firm‐level data in Bulgaria, Poland and Romania, we examine the impact of foreign firms on domestic firms’ productivity. In particular, we try to answer the following research questions: (1) Are there any spillover effects of foreign direct investments (FDI), and if so, are they positive or negative? (2) Are spillover effects more likely to occur within or across sectors? (3) Are the existence, the direction and the magnitude of spillovers conditioned by sector and firm‐specific characteristics? Our findings show that FDI spillovers exist both within and across sectors. The former arise when foreign firms operate in labour‐intensive sectors, while the latter occur when foreign firms operate in high‐tech sectors. Moreover, we find that domestic firm size conditions the exploitation of FDI spillovers even after controlling for absorptive capacity. We also detect a great deal of heterogeneity across countries consistent with the technology gap hypothesis.     

Entry Policy and Entry Subsidies

Optimal entry policy is considered in markets served by both domestic and foreign firms. Compared with the prior entry literature, introducing foreign producers as market participants reduces incentives for entry deterrence and enhances incentives for entry subsidization. Incentives are changed because entry produces "terms-of-trade" gains. The optimal entry subsidy is analyzed under complete and incomplete information regarding the entrant's costs. Incomplete cost information creates differences in the optimal subsidy for domestic and foreign entrants, with foreign entrants relatively less subsidized. Domestic entrants with low marginal costs are oversubsidized and those with high marginal costs are undersubsidized.     

Origin of FDI and Intra‐Industry Domestic Spillovers: The Case of Greek and European FDI in Bulgaria

This paper uses firm‐level data to assess the horizontal impact of foreign firm ownership on domestic productivity in Bulgaria. We identify a theoretical tradeoff between technological distance (of domestic versus foreign firms) and internalization capacity (of spillovers) and examine the extent to which this is reflected in the impact on the domestic economy of different types and origins of FDI. Emphasis is placed upon the effects of Greek FDI, which is known to be of a distinctively “regional” character. We find that Greek FDI produces significantly larger positive spillovers, which appear more suitable for the Bulgarian context of transition and economic restructuring. We also unveil some notable “hysteresis” and “technology bias” effects for FDI spillovers of all origins, as well as some country‐specific ownership‐structure and threshold effects.     

THE IMPACT OF FOREIGN CAPITAL ON MACROECONOMIC PERFORMANCE IN CENTRAL ASIA

This paper investigates the short‐run impact of shocks in international capital flows channeled through foreign direct investment (FDI) and foreign aid on national output and export performance in five Central Asian economies under a dynamic multivariate structural vector autoregressive (SVAR) framework. The identification of structural shocks is implemented by AB model based on IS‐LM‐BP postulates. The main message is that external capital shocks are persistent and small open economies are weak to absorb them. Overall, the aid shocks reduce national outputs, while FDI increase it, on average. The expansion of global demand (G20) leads to an increase in domestic GDPs, notably in Kazakhstan, Kyrgyzstan and Uzbekistan. The impact is augmented by a positive effect of FDI on export channel (and net exports) that shift the IS curve upwards. We cannot find any significant aid‐FDI nexus in the region, except in Kazakhstan. The structural variance decomposition (SFEVD) results suggest that external flows and foreign demand together explain the bigger part of variability in domestic GDP and exports. Finally, variations in foreign capital, aid and FDI, are mainly explained by series themselves. The role of domestic activities is found to be weaker for aid and greater for FDI. The results could be attributed to rigid exchange rates, high trade dependence, and necessity for foreign capital to explore natural resources in Central Asian region. Our results provide some valuable suggestions to improve an investment climate for boosting economic growth.     

Mixed oligopoly, optimal privatization, and foreign penetration

This paper examines the impact of foreign penetration on privatization in a mixed oligopolistic market. In contrast to the simple framework of single domestic market with foreign entry by entry mode of foreign direct investment (FDI) or exports, our result shows that government should increase the degree of privatization along with increasing proportion of domestic ownership of multinational firms. Furthermore, we show that an increase in domestic ownership of multinational firms raises all domestic private firms' profit and social welfare, while it may either increase or decrease public firm's profit. With the aid of numerical example, intensive competition from private firms in general will enhance the degree of privatization gradually; in particular, the degree of privatization is lower in the presence of multinational firms.     

Foreign direct investment in R&D and domestic entrepreneurship in China’s manufacturing industries

This paper argues that internationalization of innovation and the related spillovers can also affect the likelihood of firm entry and exit into an industry. By making use of firm-level panel data from China over the period 2005 to 2007, this paper examines the impact of foreign direct investment (FDI) in research and development (R&D) and the related linkages on entry and exit likelihoods of domestic firms in (i) transport equipment and (ii) electrical machinery and equipment manufacturing industries. In order to evaluate the region-of-origin effect, this paper also separately examines the impact of FDI in R&D originating from (i) all countries except Hong Kong, Macau and Taiwan and (ii) Hong Kong, Macau and Taiwan. Furthermore, the impact of FDI in R&D on entry and exit of Chinese firms in the two industries is examined by splitting the data into large and small firms within the two industries. The results of the pooled probit regression reveal that FDI in R&D and the related spillovers can have a significant impact on the likelihood of entry and exit of domestic firms in transport equipment and electric machinery and equipment industries. The empirical analysis also suggests that the impact of changes in FDI in R&D and the related spillovers varies across firm size.     

Foreign Direct Investment,Economic Growth,and the Human Capital Threshold: Evidence from US States*

The United States has experienced a dramatic increase in foreign direct investment (FDI) in recent years. While foreign firms bring immediate benefits of high‐paying jobs, data limitations have prevented detailed study on FDI's long‐term effects on the states receiving it. By creating a new stock measure of FDI based on employment, we are able to capture these long‐term effects. Results demonstrate that FDI has a greater impact on per capita output growth than domestic investment for US states that meet a minimum human capital threshold. Ironically, the most active states in the recruitment of FDI tend to fall below this threshold.     

FDI Policy,Greenfield Investment and Cross‐border Mergers

This paper examines a multinational's choice between greenfield investment and cross‐border merger when it enters another country via foreign direct investment (FDI) and faces the host country's FDI policy. Greenfield investment incurs a fixed plant setup cost, whereas the foreign firm obtains only a share of the joint profit from a cross‐border merger under the restriction of the FDI policy. This trade‐off is affected by market demand, cost differential, and market competition, among other things. The host country's government chooses its FDI policy to affect (or alter) the multinational's entry mode to achieve the maximum social welfare for the domestic country. We characterize the conditions shaping the optimal FDI policy and offer intuitions on FDI patterns in developing and developed countries.     

Foreign bank entry,bank efficiency and market power in Central and Eastern European Countries1

This article analyses the implications of the recently observed sharp expansion of foreign banks in the Central and Eastern European Countries (CEECs) as measured by equity ownership. We show that the mode of foreign entry has a pivotal impact on the post‐entry performance of banks in CEECs. Foreign greenfield banks are characterized by superior cost efficiency, compared with domestic and foreign‐acquired banks. The efficiency of foreign‐acquired banks deteriorates in the initial year of acquisition, but improves thereafter. Banks acquired by foreigners have less market power relative to domestic and foreign greenfield banks. Overall, the CEEC banking sectors have benefited from the increased foreign bank participation, both in terms of higher efficiency and more competition.     

风险投资背景、持股比例对初创企业技术创新产出的影响

为研究风险投资对初创企业技术创新产出的影响，基于中介效应模型，结合数据包络分析方法和静态面板回归分析方法，对创业板上市公司样本进行了实证分析。研究发现：有风险投资参与的初创企业技术创新产出高于无风险投资参与的初创企业，且风险投资持股比例越高，对初创企业创新的促进作用越显著。不同背景的风险投资对初创企业技术创新产出的影响不同：政府风险投资和外资风险投资持股比例越高的初创企业全要素生产率越高，且政府背景风险投资最为有效，外资背景风险投资次之；研发投入在风险投资与技术创新之间发挥部分中介作用，即风险投资通过直接作用和间接作用共同影响初创企业技术创新产出。     

Is the effect really so large? Firm‐level evidence on the role of FDI in a transition economy1

Foreign subsidiaries usually perform better than domestic enterprises, but selection effects have been acknowledged in the literature. This article contributes by quantitatively evaluating the size of the selection effects and direct effects of FDI entry. We use a large panel of firm‐level data from Poland and match foreign‐owned firms to a control group of non‐foreign‐owned companies and analyse various performance indicators. In terms of efficiency measures, between 50 and 70 percent of the foreign affiliates advantage may be attributed to direct ownership effects. However, in the case of export intensity, the majority of the differential between the domestic companies and foreign subsidiaries is attributable to selection effects: MNEs choose export‐oriented companies and sectors.     

Local Institutions,Foreign Direct Investment and Productivity of Domestic Firms

This paper examines the linkage between foreign direct investment (FDI) and the productivity of domestic firms, paying particular attention to local institutions. Using Chinese manufactures from 1998 to 2007, we find strong evidence that FDI negatively affects the productivity of domestic firms. Firm in regions with better institutions suffers more from foreign presence owing to production contraction, labor cost increases and innovation deterrence.