Foreign Market Entry Under Incomplete Contracts

This paper shows that incomplete contracts serve as a determinant of the mode of foreign market entry – that is exports versus foreign direct investment (FDI). When contracts between two agents within a firm are too costly to be written, the share of multinational firms may be higher or lower compared with a world without contractual frictions. The direction of change depends on the technologically required relative contribution of headquarter services in the joint production process. For example, in industries that use more inputs from the management unit as compared to inputs from a component supplier, the share of firms engaging in foreign direct investment is higher than under complete contracts. This effect may be so strong that the share of multinational firms increases in trade freeness.     

Developing countries in competition for foreign investment

This study analyzes the competition for foreign direct investment (FDI) among countries at different stages of development. It is assumed that domestic companies in a more-developed country use more capital in production and that wages in a less-developed country are lower. Countries can compete for FDI by increasing the supply of public inputs in the economy, in addition to (or instead of) offering subsidies or tax reliefs to foreign investors. The results reveal that if governments of competing countries are not allowed to discriminate between domestic and foreign firms, there may be situations in which a less-developed economy will attract FDI depending on the labor cost differential and the responsiveness of foreign investor's and domestic companies' output to changes in the supply of public inputs. If tax discrimination between domestic and foreign firms is permitted, both countries will optimally raise the supply of public inputs, but the more-developed country will always win the foreign investment despite higher labor costs. Thus, governments of less-developed countries may have an incentive to work on an international agreement to disallow tax discrimination.     

Benefitting from Chinese FDI? An assessment of vertical linkages with Vietnamese manufacturing firms

Previous studies have suggested that foreign direct investment between emerging economies can benefit domestic firms more than investments from industrialised countries because of a lower technology gap and more appropriate technology being transferred. Empirical evidence for this is scarce. Addressing this gap, we investigate the impact of Chinese direct investment on local firms through vertical linkages in manufacturing industries of Vietnam. We find that the share of local sourcing of Chinese firms is similar to other foreign investors while their forward linkages are more extensive. Although this supports assertions about the benefits of investment by emerging market firms, the overall potential gains seem limited. This is due to little value-adding interaction with local firms, the local sourcing of low-technology goods, and the sparse provision of training and financial support.     

The trade credit channel revisited: evidence from micro data of Japanese small firms

It is suggested that trade credit can be a substitute for bank loans for small- and medium-sized enterprises (SMEs) that have little access to external funding sources. Using unique cross-sectional survey data of Japanese SMEs, we conduct a deep investigation into the substitutability between bank loans and trade credit. This survey contains rich information on the suppliers of trade credit to SMEs, thus enabling the examination of the channel through which credit is provided from suppliers to customers. We find that SMEs with little access to bank credit depend more on large suppliers for trade credit. We also find that when a purchase is made from a large supplier, more credit is indeed provided in the form of trade credit. Furthermore, this channel of credit from large suppliers to SMEs is only observed for solvent customers, not for insolvent customers. Our findings suggest that trade credit plays an important role for entrepreneurial firms over the financial growth cycle. For young and small firms with little access to bank loans trade credit is an important funding source.     

Product market competition and access to credit

In this paper, we unveil a disregarded benefit of product market competition for firms. We introduce the probability of bankruptcy in a simple model where firms compete à la Cournot and apply for collateralized bank loans to undertake productive investments. We show that the number of competitors and the existence of outsiders willing to acquire the productive assets of distressed incumbents affect the equilibrium share of investment financed by bank credit. Using a sample of Italian manufacturing firms, mostly small- and medium-sized enterprises (SMEs), we found evidence showing that the degree of product market competition is positively correlated with the share of investment financed by bank credit only when outsiders are absent.     

Legal and Institutional Determinants of Factoring in SMEs: Empirical Analysis across 25 European Countries

Weak protection of the rights of financiers intensifies agency problems in SME financing, inhibiting the optimal provision of credit necessary to grow and innovate. We use a survey data set of 4,348 SMEs from 25 European countries to analyze whether the use of factoring as a form of SME financing is less dependent on low quality of laws and institutions. We do so analyzing whether the use of factoring by SMEs differs across countries due to differences in the legal protection of creditors. Our findings indicate that firms operating in countries with legal environments that weakly protect the rights of creditors, with political instability or high enforcement costs, are more likely to use factoring. Managers of riskier and opaque companies operating in such inefficient environments can use the results of this study to better understand that there are suitable options to complement bank financing. Managers who seek loans can use the results to diversify their financing structure through the use of factoring. Since factoring can be used as a complement to bank loans or as a substitute for bank financing, it is important that policy makers take our results into account when revising policies concerning access to external financing.     

SMEs,foreign direct investment and financial constraints: The case of Belgium

This paper explores the problems experienced by small and medium-sized enterprises (SMEs) with international ambitions in gaining access to debt and equity finance for foreign direct investment (FDI) projects. We develop several arguments for why such small businesses are expected to face severe financing constraints for foreign investments and provide an explorative empirical study with both the demand and supply side of FDI finance. We have interviewed thirty-two Belgian SMEs that carry out FDI, five banks and five venture capitalists. Based on the SME discussions, we have composed a questionnaire that was sent to the interviewed SMEs. The information problems and lack of collateral that often characterize international investment, the home bias of financiers and the capital gearing method used by banks to evaluate small firms’ foreign projects give rise to financial constraints for SMEs’ FDI projects. The reported finance gap hinders small firms’ (international) development and leads to suboptimal home and FDI host country development.     

Cash holdings in SMEs: speed of adjustment,growth and financing

This paper studies the effect of growth opportunities, financial constraints and financial distress on the speed of adjustment of small and medium-sized enterprises (SMEs) to their target cash holdings. We use a sample of Spanish SMEs from the period of 1998 to 2012. The results support the existence of a target cash holding level to which small firms attempt to converge. Additionally, consistent with the precautionary motive for cash holdings, the results show that SMEs with greater growth opportunities adjust more quickly to their target cash holding level to preserve their financial flexibility and to be able to take advantage of profitable investment opportunities when they arise. Moreover, for SMEs in financial difficulties, the adjustment speed of cash is higher to avoid financial distress costs. Finally, we observe a faster speed of adjustment for cash holding in the crisis period for all firms, as a possible response to the credit restrictions faced by SMEs.     

Spillovers from foreign direct investment and firm growth: technological,financial and market structure effects

This article examines spillover effects from inward investment on domestic firm growth in the case of a developed host country. The emphasis is placed on the role of the technological gap between domestic and foreign firms in identifying the importance of technology diffusion from the presence of multinationals. An augmented production function is employed to account for technological, financial and market structure effects. Based on a sample of 2589 manufacturing firms operating in Greece between 1992 and 1997, the analysis provides evidence that the significance of spillovers varies with the relative technological position of domestic firms and is higher in the middle and upper quantiles of the growth distribution. It was estimated that a unit increase in the foreign presence in Greek industry raises output growth by 7% on average, in a five‐year period, after controlling for technological differences among firms. This result is consistent with the ‘absorptive capacity’ hypothesis that the technological capability of the host country relates positively to FDI spillover benefits.     

Foreign institutional investors and dividend policy: Evidence from China

This study examines whether foreign institutional investment influences firms’ dividend policies. Using data from all domestically listed nonfinancial firms in China during the period of 2003–2013, we find that foreign shareholding influences dividend decisions and vice versa.Furthermore, changes in dividend payments over time positively affect subsequent changes in foreign shareholding, but the opposite is not true. Our study indicates that foreign institutional investors do not change firms’ future dividend payments once they have made their investment choices in China. Moreover, they self-select into Chinese firms that pay high dividends. Our evidence suggests that in an institutional setting where foreign investors have tightly restricted access to local securities markets and a relatively high risk of expropriation by controlling shareholders exists, firms can use dividends to signal good investment opportunities to foreign investors.     

我国国际投资税收政策的评价及调整思路

我国现行的国际投资税收政策,实行引进外资的税收优惠政策和中性的对外投资税收政策。应该说这些税收优惠政策较好地促进了我国外商投资企业的发展,但同时也反映出一系列负面效应。而对内资企业,无论从事跨国经营与否,适用统一的无差异的税收政策,几乎没有税收激励措施,制约了我国对外投资的发展。因此,应遵循税收平等原则,对我国国际投资税收政策加以调整:统一内外资企业所得税;实现税收优惠向产业导向和科技导向的转化;加强税收优惠地区结构的调整;实行多样化的税收优惠方式;增强国际投资税收政策的国际协调性。     

Does direct foreign investment affect domestic credit constraints?

Firms in developing countries cite credit constraints as one of their primary obstacles to investment. Direct foreign investment may ease credit constraints by bringing in scarce capital. Alternatively, if foreign firms borrow heavily from domestic banks, they may crowd local firms out of domestic capital markets. Using firm data from the Ivory Coast, we test whether: (1) domestic firms are more credit constrained than foreign firms, and (2) whether borrowing by foreign firms exacerbates domestic firm credit constraints. Results provide support for both hypotheses. We also find that state-owned enterprises (SOEs) are less financially constrained than other domestic enterprises.     

Foreign Direct Investment in China: Reward or Remedy?

This paper tests the significance of FDI as a way to alleviate credit constraints. Incoming foreign investment provides additional sources of capital. Specifically in the Chinese case, enterprises may look for foreign investors, being constrained in their activity due to distortions in the state‐dominated system. First, the Chinese financial system allocates resources to the least efficient firms – state‐owned enterprises – while denying the same resources to Chinese private enterprises, forcing them to look for a foreign investor. Second, the inefficient system of state investment planning leads to mismanagement of public enterprises, increasing ‘insolvency‐induced FDI’. We propose to analyse determinants of FDI in Chinese provinces to test the above hypotheses. We control for traditional determinants of FDI such as market access, labour costs, productivity, infrastructure, reform advances and banking sector size in order to assess the impact of inter‐provincial heterogeneity in terms of the access that private enterprises have to credit and the distortive management in state‐owned firms.     

Optimal trade,industrial, and privatization policies in a mixed duopoly with strategic managerial incentives

Abstract

This paper examines optimal trade, industrial, and privatization policies in a home-market model of mixed international duopoly with strategic managerial incentives. Under linear demand and constant marginal costs, the optimal degree of privatization is shown to depend crucially on cost and demand parameters and on the availability of strategic trade and industrial policies. If both firms are equally efficient, optimal trade and industrial policies drive out the foreign firm and the privatization policy loses its effect on national welfare; however, if the home firm is less efficient, then full privatization combined with an import tariff and a production subsidy is optimal for the home country, while an export subsidy is optimal for the foreign country. If trade and industrial policies are unavailable and if both firms are equally efficient, full state-ownership, which drives out the foreign firm, becomes optimal; however, if the home firm is less efficient, only partial privatization is optimal, The state-ownership share is increased if either the market size grows, the home firm's efficiency increases, or the foreign firm's efficiency decreases. Further, the paper demonstrates the potential conflict between privatization and trade liberalization policies.     

吸引外资与产业扶持政策的动态博弈分析

本文运用博弈论的方法,构造一个三阶段的完美动态博弈模型,利用该模型在引进外资与扶持产业之间找到一个纳什均衡,研究结果表明:我国应该加大市场整治力度,进一步改善投资整体环境,如市场准入、公平竞争、法制与产权保护、基础设施等,既适用于外资,也适用于内资。有了良好的投资环境,政府根本无须对外资实行减免税等特殊优惠政策。在这种环境下,中国可以同时刺激外资的流入与国内投资的增长。     

Partial credit guarantees and firm performance: evidence from Colombia

This paper studies the effect of government-backed partial credit guarantees on firms’ performance in Colombia. These guarantees are automatically granted by the National Guarantee Fund (NGF) to firms without enough collateral to lift their credit constraints. We put together a panel of firms covering the period 1997–2007 that allows us to control for observed and unobserved firm characteristics potentially affecting both the selection of firms into the program and firms’ performance. We find that firms that gain access to credit backed by the NGF were able to grow in terms of both output and employment. However, we do not find any effect on productivity, wages, or investment.     

Picking cherries or lemons: A unified theory of cross‐border mergers and acquisitions

This article provides a theoretical framework that enhances understanding of empirical evidence suggesting that international mergers and acquisitions, a key source of foreign direct investment, seemingly target in‐country firms that are at the extremes of the productivity spectrum—either high‐productivity firms, so‐called cherries, or low‐productivity firms, the “lemons.” The framework demonstrates that foreign firms with intermediate inputs seek high‐productivity domestic firms, while foreign firms with managerial expertise seek low‐productivity domestic firms. We also show that because of the difference in available outside options, high‐productivity domestic firms can demand a significantly higher portion of profits in the partnership than low‐productivity domestic firms.     

A Comparative Study of Web-Based Technology Applications in Corporations

Due to the complexity of international trade and intense global competition, businesses today are facing challenges that were unthinkable a decade ago. To effectively respond to these challenges, companies continue to explore new ways to measure and extend value to their existing and new customer base. In the past, business practices have used expensive and time consuming tools to manage day-to-day operations. However, with technology advancing at a rapid speed, companies are forced to incorporate new technologies into their organizational decision processes to remain competitive and to maintain or expand market share. One technological tool that has become increasingly valuable to business firms is the internet. The evolution of the internet has resulted in numerous web-based tools that have proven to be flexible and data rich enhancements in a wide variety of business applications. This research examines how corporations utilize the internet in their internal and external business decision processes. The study highlights the benefits, similarities, and differences between SMEs and large firms with regard to the applications of these technologies.     

“Lending by example”: Direct and indirect effects of foreign banks in emerging markets

Using a novel dataset that allows us to trace the bank relationships of a sample of mostly unlisted firms, we explore which borrowers are able to benefit from foreign bank presence in emerging markets. Our results suggest that the limits to financial integration are less tight than the static picture of firm-bank relationships implies. Even though foreign banks are more likely to engage large and foreign-owned firms, after an acquisition, a bank is 20% less likely to terminate a relationship with a firm if the acquirer is foreign rather than domestic. Most importantly, within a credit market, firms appear to have the same access to financial loans and ability to invest whether they borrow from a foreign bank or not, while foreign banks benefit all firms by indirectly enhancing credit access.     

Trade credit and SME profitability

Financial literature discusses the motives for trade credit provision by suppliers in depth. However, there is no empirical evidence of the effect of granting trade credit on the profitability of small and medium-sized firms. We examine the profitability implications of providing financing to customers for a sample of 11,337 Spanish manufacturing SMEs during the 2000–2007 period. This article also examines the differences in the profitability of trade credit according to financial, operational, and commercial motives. The findings suggest that managers can improve firm profitability by increasing their investment in receivables and that the effect is greater for financially unconstrained firms (larger and more liquid firms), for firms with volatile demand, and for firms with bigger market shares.