Entry in Foreign Markets under Asymmetric Information and Demand Uncertainty

This paper examines the mode of entry of a multinational firm that has less information about the host market stochastic demand than the local firm. The foreign firm can enter the market either through direct investment or exports. Each entry mode entails different costs and has different informational implications. Entry through foreign direct investment (FDI) is favored by greater variability in demand. Interestingly enough, strategic behavior by the incumbent firm, which deviates from its first period monopoly output, might be aimed at increasing the probability of foreign entry through FDI despite having to compete against an equally informed and efficient entrant; this never happens in a symmetric information environment. Such host firm behavior is aimed at reducing the strategic uncertainty derived from the foreign firm's beliefs. Compared with the symmetric information setting, entry via direct investment may occur in more cases.     

International Business Alliance under Asymmetric Information: Technology vis‐à‐vis Information Advantage

We study the relationship between a multinational corporation (MNC) and a domestic firm under demand uncertainty. The MNC possesses a superior production technology, but the domestic firm is better at predicting market demand. We examine the MNC's preference for, and the ownership structure of, an international alliance (IA) and find, inter alia, that binding borrowing constraints have serious implications for the results. Interestingly, a firm's preference for and profits in IA do not necessarily increase as its advantage in market information or production technology increases. We also consider a dynamic setting with technology spillover and show that whether technology spillover hinders or facilitates IA once again depends on the nature of the credit market.     

Multinationals, Hedging, and Capital Structure under Exchange Rate Uncertainty

This paper examines the interplay of the financing and hedging decisions of a risk-averse multinational firm having a wholly-owned foreign subsidiary. Exchange rate risk management of the multinational firm is shown to have direct impacts on its international capital structure decision and on its currency of denomination decision. If a currency forward market exists, the multinational firm will devise its international capital structure so as to minimize the global weighted average cost of capital. Or else the multinational firm has to rely on a money market hedge through issuing more foreign currency denominated debt and less domestic currency denominated debt, thereby resulting in a higher global weighted average cost of capital. JEL Classification Numbers: D81, F23, G32     

Foreign production and international hedging in a multinational firm

This paper presents a model of a risk-averse multinational firm under exchange rate risk. The firm, which owns and controls assets in two countries, is engaged in foreign production, sales, and foreign currency forward contracting. The implications of the existence of forward markets in global market decisions are discussed. It is shown that a separation theorem holds. The optimal hedging behavior is also discussed.     

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。     

The Impact of Industry Characteristics and IPR Policy on Foreign Direct Investment

This paper investigates the interaction of industry characteristics and intellectual property rights (IPRs) on multinational firm behavior. The results suggest that firms in industries with high capital costs are more likely to maintain control over production knowledge in countries with less intellectual property protection by engaging in foreign direct investment (FDI). Moreover, when IPRs are strong, firms in industries with high investment in research and development (R&D) are more likely to enter a market by licensing to an unaffiliated host firm. JEL no. F23, C25, O34     

Reverse imports, foreign direct investment and exchange rates

This paper investigates linkages among “reverse imports”, foreign direct investment and exchange rates. As an example, we have in mind the competition in the Japanese market of a Japanese multinational firm and a Chinese domestic firm. Products are differentiated based on Japanese consumers’ brand name recognition. The model shows that yen appreciation leads to an increase in Japanese production in China and “reverse imports” and a decrease in Japanese domestic production. Due to the barriers in brand name, the exports of the Chinese firm could fall, because the increase of reverse imports may erode the market share of the Chinese firm, even though total exports from China increase. Further, we find that yen appreciation may improve the profits of the Japanese firm and welfare in Japan under reverse imports, against conventional wisdom. The predictions of the model fit well with the actual numbers and shed light on the current debate on the Chinese currency.     

Market power,uncertainty, and the level of trade

We consider a set of home firms, each of which has a stochastic requirement for a particular input. High-cost home firms can produce the input themselves. Low-cost foreign firms produce the input to sell it to home firms through an international market. Efficiency requires the input to be produced by foreign firms and traded in the market. Yet, home firms will always engage in inefficient home production. By producing some of its own input needs, a home firm cuts down on aggregate input demand, thus depressing prices in the market.     

Production versus distribution-oriented FDI

The business literature has long recognized the importance of multinationals’ distribution networks. The empirical analysis of distribution-oriented FDI has, however, received little attention which is at least partly due to the lack of appropriate data. We present a slightly modified version of Helpman et al. (Am Econ Rev 94(1):300–316, 2004) that explicitly models the possibility for a multinational firm to export through its wholesale trade affiliate. We analyze the multinational firms’ choice between foreign production and foreign distribution. Our empirical analysis uses different discrete choice models and alternative specifications for several sub-samples of multinational firms. Our results show that the choice between distribution and production-oriented FDI is based on the trade-off between fixed and variable costs.     

Multinationals, skills, and wage elasticities

The increase in foreign direct investments raises concerns about labor market consequences in many countries. It is feared that multinational firms are inclined to shift jobs abroad and increase job volatility. We use firm-level data to examine if multinationality and foreign ownership affect the wage elasticity of labor demand. Unlike previous studies, we distinguish the effect on different skill groups of employees. We find no general difference in wage elasticity between foreign and domestic firms but the wage elasticity is higher in multinational firms than in national firms, in particular for medium-skilled workers.     

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.     

Two-dimensional analysis of the impact of outward FDI on performance at home: Evidence from Japanese manufacturing firms

This paper empirically investigates two dimensions of changes in firm behavior and performance before and after foreign direct investment (FDI). The first dimension is the difference between vertical and horizontal FDI. The second dimension is the effect of outward FDI on firms’ production and non-production activities in the home country. In our careful empirical analysis we use the propensity score matching method to show that the impact of outward FDI differs by dimension, that is, by FDI type and firms’ production and non-production activities. In particular, while horizontal FDI increases demand for non-production workers, vertical FDI increases demand for skilled production workers.     

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 Responsive Talent Management for Foreign Multinational Enterprises in China

China evolves with amazing speed to be a leading player in the world economy. However, the transformation from isolated centrally planned to internationally open market economy during the past 25 years has occurred so fast that the change in the mindset and the adaptation of new modern business practice is still in progress. Foreign multinational enterprises in the mainland of China responded to the resulting shortcomings of Chinese professionals and managers by covering the key position in the organization by their own resources or managers from neighbor Asian countries. In this qualitative study, a new local responsive talent management concept for foreign multinational enterprises with expatriated managers was proposed under special consideration of the cultural business environment in China. The establishment of a learning firm culture with advanced training system to compensate the drawbacks of Chinese professionals was outlined. The coverage of the key positions in the organization by Chinese professionals with established social network and optionally supported by temporary foreign advisors was proposed to improve the firm climax, domestic customer and stakeholder relations.     

反倾销政策与研发竞争

借助异质产品的Bertrand双寡头模型,本文分析了一国反倾销政策对该国企业和外国企业的研发、产品价格及社会福利的影响。研究结论表明:与自由贸易相比,当产品的差异度较小时,受反倾销政策保护的企业会策略性地利用反倾销政策而退出国外市场,减少研发投入,进而提高产品价格,而遭受反倾销政策约束的外国企业由于其研发投入的边际收入增加,因而会增加研发投入,降低产品价格。此外,反倾销政策的存在还有可能促进各国社会福利的提升。     

我国跨国公司汇率风险管理研究

随着经济全球化和国际资本双向流动的迅猛发展,我国跨国公司与世界各国的贸易联系日益频繁,外汇业务迅猛增长。尤其自2005年7月21日起,我国开始实行以市场供求为基础、参考一篮子货币进行调节、有管理的浮动汇率制度,我国跨国公司所面临的外汇风险日益突出。加之当前国际金融市场上汇率变动频繁,外汇风险给我国跨国公司的稳定发展带来了巨大的冲击,并引发了一系列值得我们关注的问题本文分析了我国跨国公司面临的外汇风险,以及现阶段我国跨国公司外汇风险管理存在的问题,并在此基础上从三个方面提出了积极的对策。     

Exports versus FDI: do firms use FDI as a mechanism to smooth demand volatility?

In this paper, we first develop a simple two-period model of oligopoly to show that, under demand uncertainty, whether a firm chooses to serve foreign markets by exports or via foreign direct investment (FDI) may depend on demand volatility along with other well-known determinants such as size of market demand and trade costs. Although fast transport such as air shipment is an option for exporting firms to smooth volatile demand in foreign markets, market volatility may systematically trigger the firms to undertake FDI. We then use a rich panel of US firms’ sales to 56 countries between 1999 and 2004 to confront this theoretical prediction and show strong evidence in support of the prediction     

On technical efficiency of China's insurance industry after WTO accession

China joined the WTO in 2001 and has to fully open up its insurance market to foreign competitors by 2006. However, the domestic insurance market is overwhelmingly dominated by a few large state-owned or state-controlled firms. As the market is still underdeveloped and the demand for insurance is rising exponentially, there exists huge potential, opportunities as well as challenges for non-state, foreign and joint-venture insurance companies. Efficiency is a key concern of policy makers to encourage further development of the insurance industry. This paper focuses on this important issue. It uses a panel data set of 22 firms over the period 1999–2004 to evaluate their efficiency scores by applying a DEA approach and decompose the productivity growth into technical efficiency improvement and technological progress by constructing a Malmquist Index. It then employs an econometric model to identify the key determinants of efficiency. The empirical results suggest the direction of how to improve firm efficiency. It is found that firm size, ownership structure, mode of business and human capital are important factors affecting firm performance. The results shed important light on policy design and implementations on future development of the insurance industry with WTO obligations.     

Does Foreign Direct Investment Induce Domestic Mergers?

This paper examines the impact of foreign firm entry on the industry consolidation process in a host country that operates through mergers and exits of incumbent firms. Using a three-stage oligopolistic model, the paper shows that foreign direct investment (FDI) may trigger consolidation via a merger since the approval of a domestic merger by the antitrust authority is more likely in the case a foreign firm enters via FDI and a firm’s incentive for a domestic merger is greater and that, in turn, the possibility to merge and become more efficient modifies the outcome of the game by making FDI compared to exports less likely.     

Export and Strategic Currency Hedging

This paper examines an international Cournot duopoly wherein a home firm and a foreign firm compete in the home market under exchange rate uncertainty. The foreign exporting firm, being risk averse, has incentives to hedge its exchange rate risk exposure. In a two-stage setting, we show that hedging via an unbiased currency futures market acts as a strategic device. In particular, under either constant or decreasing absolute risk aversion, an increase in the hedging volume of the foreign firm promotes its exports and deters the home firm’s output. In contrast to the well-known full-hedging result in a perfectly competitive environment, we find that the foreign firm over-hedges for strategic reasons. Furthermore, the separation result from the hedging literature under perfect competition no longer holds in our duopoly framework, i.e., equilibrium output levels depend on the risk attitude of the foreign firm as well as the probability distribution of the spot exchange rate.