The impact of local financial development on firm growth in Vietnam: Does the level of corruption matter?

We examine the effects of province-level financial development and corruption on the performance of Vietnamese firms in terms of the growth rates of sales, investment and sales per worker. Employing a large firm-level dataset of more than 40,000 firms for the period 2009–2013 and applying a heteroskedasticity-based identification strategy, we find that province-level financial development promotes firm growth, while corruption hinders it. Most importantly, the marginal effect of financial development on firm growth depends negatively on the level of corruption. Moreover, financial development exacerbates the growth-retarding effect of corruption.     

Gravity for FDI

Gravity equations explaining foreign affiliates' sales are ad hoc and hence estimated coefficients are hard to interpret. We therefore provide the theoretical underpinnings of the gravity equation applied to the analysis of sales of foreign affiliates of multinational firms. We argue that the success of the gravity equation results from the fact that it can be derived from various theoretical models. We illustrate this point by deriving a gravity equation from three different models of multinational firms. Using data on real affiliate sales, we show how the gravity equation can nevertheless be used to discriminate between the different theoretical models.     

Determinants of firms’ investment behaviour: a multilevel approach

This article investigates the determinants of firms’ investment behaviour using firm data from 101 developing and emerging economies. A substantial number of firms does not invest in fixed capital or invests little relative to sales revenue. Using a multilevel probit model we study what factors trigger investment, and using a multilevel Heckman selection model we study what factors influence a firm’s investment-to-sales ratio. We find that firms’ investment behaviour has relatively little dependency on a country’s macroeconomic setting. Additionally, we find that, on average, firms that are completely foreign-owned have a relatively lower investment-to-sales ratio. Finally, we find evidence which suggests that the probability of investing is higher for firms located in countries with more control of corruption and we find some evidence which suggests that partially foreign-owned firms located in countries with relatively less corruption have a relatively higher investment-to-sales ratio.     

Trajectories of Russian manufacturing firms’ growth after the global financial crisis of 2008–2009: the role of restructuring efforts and regional institutional environment

The aim of this article is to conduct an empirical investigation and reveal which types of modernisation strategies and characteristics of regional institutional environment are likely to be associated with patterns of the performance of Russian manufacturing firms in 2007–2012. In addition to estimating the impact of ex-ante behaviour on the rate of sales growth, we use hierarchical cluster analysis to reveal the typical trajectories of firms’ sales growth. We find that the dynamic of sales for more than 90% of firms can be described by just two types of performance curve: (a) crisis decline with recovery and growth; and (b) crisis decline with weak recovery and stagnation. Firms that invested more prior to the crisis and implemented active restructuring were more likely to have positive post-crisis dynamics of sales. We find evidence that firms in the regions with lower levels of corruption (both administrative and everyday) were more likely to recover successfully after the crisis.     

Interrelationship among foreign presence,domestic sales and export intensity in Chinese manufacturing industries

Using panel data on six Chinese manufacturing industries over the period 2005–2007, this article explores the interrelationship among foreign presence, domestic sales and export intensity of local firms. We find that the domestic sales and exports are complementary for local firms in China’s pharmaceutical industry, whereas in the case of the textile, transportation equipment, beverage, communication equipment and general equipment manufacturing industries, domestic sales and exports are substitutes. An increase in the average domestic sales increases foreign presence in all industries. The same applies to an increase in the average export intensity. An increase in the level of competition in China’s textile industry increases the export intensity as well as domestic sales of local textile firms. However, an increase in the level of competition in the pharmaceutical industry leads to a very large decrease in export intensity of local pharmaceutical firms. In the case of China’s transportation equipment manufacturing industry, an increase in the level of competition decreases domestic sales of local firms. Furthermore, an increase in the firm size increases domestic sales of Chinese firms in all six manufacturing industries.     

EU accession and foreign-owned firms in Bulgaria

Bulgaria signed the European Union accession treaty in 2005. Accession caused an increase in the volume of inward foreign direct investment flows (IFDI). We analyse World Bank BEEPS firm-level data for 2007 to understand the characteristics and performance of foreign firms in Bulgaria. Regression analysis reveals that foreign firms are larger, have lower capital-to-labour ratios, are more likely to export and are more likely to locate in Sofia. However, foreign firms have had limited success in Bulgaria. They do not exhibit higher sales growth and, in manufacturing, carried out lower capital investment in machinery than domestic firms. The numbers of visits from tax officials is the same for domestic and foreign firms in manufacturing, and lower for foreign firms in the service sector. However, firms with higher exports-to-sales ratios and higher absolute sales were subjected to a higher number of visits from tax officials. These findings suggest that a range of institutional challenges remain for foreign firms in Bulgaria.     

National levels of corruption and foreign direct investment

We model the relationship between bilateral foreign direct investment (FDI) and the level of corruption in multinational firms’ (MCNs’) home and host countries. We construct and test a model of bilateral FDI between countries that differ in their levels of corruption. FDI is affected negatively both by the level of corruption in the host country and by differences in home- and host-country corruption. Our model emphasizes that MNCs develop skills for dealing with home-country corruption, and these skills become a competitive advantage in similarly corrupt host countries. We test the model using data on bilateral FDI stocks among a large number of home and host countries, using a variety of specifications and estimation strategies to provide robustness. Our results show that the effects of host-country corruption and of differences in corruption levels between home and host countries are statistically and economically significant.     

The Determinants of Firm Performance and Bribery: Evidence from Manufacturing Firms in Nigeria

This paper uses ordinary least squares with firm effects and Probit regression models to investigate the determinants of firm performance and the likelihood of firms to pay bribes. Results for the manufacturing firms in Nigeria show that skilled workforce, exports, foreign ownership and capital investment influence firm performance. Conversely, poor electricity delivery and difficulty obtaining finance impede firm performance. Total sales and time spent dealing with government regulations increase the likelihood of firms to pay bribes. Surprisingly, foreign firms are as much likely to pay bribes as domestic firms. Policy implications from the findings are important considering that the manufacturing sector assumes an important role in the Lewis theory of economic development.     

Does policy reform promote FDI in developing economies? a firm-level simulation approach

How do policy reforms for foreign investors in developing economies affect inward foreign direct investment? Using a firm heterogeneity model calibrated to match data on Japanese multinational firms, we simulate how multinationals respond to a decline in investment procedure days. We find that such policy reforms in investment procedures significantly increase the aggregate entries and sales of multinational firms in developing economies, with the more pronounced impact at the extensive margin than at the intensive margin. At the firm level, declining entry costs encourage more productive firms to invest in a wider range of markets although such impacts are modest for the most productive firms that already penetrate many markets. The impacts on foreign sales per multinational firm are less clear-cut in magnitude across productivity levels in part because falling entry costs directly increase multinational entry to developing economies, but only indirectly encourage their existing production in these markets.     

The OECD Anti-Bribery Convention: Changing the currents of trade

This paper examines how criminalizing the act of bribing a foreign public official affects international trade flows using a watershed global anti-corruption initiative — the 1997 OECD Anti-Bribery Convention. I exploit variation in the timing of implementation by exporting countries and in the level of corruption of importing countries to quantify the Convention's effects on bilateral exports. I use a large panel of country pairs to control for confounding global and national trends and shocks. I find that, on average, the Convention caused a reduction in exports from signatory countries to high corruption importers relative to low corruption importers. In particular, we observe a 5.7% relative decline in bilateral exports to importers that lie one standard deviation lower on the Worldwide Governance Indicators corruption index. This suggests that by creating large penalties for foreign bribery, the Convention indirectly increased transaction costs between signatory countries and high corruption importers. The Convention may have induced OECD firms to divert their exports to less corrupt countries; while non-OECD firms not bound by the Convention may have increased their exports to corrupt countries. I also find evidence that the Convention's effects differed across product categories.     

National Border Effects: Location, Not Nationality, Matters

A recent literature documents the downward impact of national borders on trade. This paper probes the relative importance of two potential sources of border effects: (1) pure locational factors, such as transport costs and tariffs; and (2) an inherent disadvantage for a firm selling in a foreign market. I am able to make this decomposition by using data on the local sales of foreign affiliates of US multinational enterprises, on US bilateral exports, and on domestic sales by host‐country firms. The “border effect” arises almost entirely from locational factors. If a firm establishes and sells from a subsidiary located in the foreign country, its local sales are about on a par with those of domestic firms in that market.     

Corruption and cross-border investment by multinational firms

Motivated by previous studies on the effect of corruption on foreign direct investment, we examine the impact of a distance measure of corruption between host and source countries on cross-border direct investment and find that corruption distance deters cross-border investment. The evidence indicates that corruption distance is not as serious a deterrent of outward direct investment from more-corrupt countries as it is from less-corrupt countries. We conclude that multinational firms with the capacity to engage in bribery can disregard this activity in transparent environments, whereas multinational firms accustomed to operating in transparent environments find it difficult to overcome the administrative complexities in corrupt environments. Journal of Comparative Economics 34 (4) (2006) 839–856.     

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.     

The role of institutions and immigrant networks in firms’ offshoring decisions

The offshoring of production by firms has expanded dramatically in recent decades, increasing their potential for economic growth. What determines the location of offshore production? How do countries’ policies and characteristics affect a firm's decision about where to offshore? Do firms choose specific countries because of the countries’ policies or because they know them better? In this paper, we use a rich dataset on Danish firms to analyze how decisions to offshore production depend on the institutional characteristics of the country and firm-specific bilateral networks. We find that institutions that reduce credit risk and corruption increase the probability that firms will offshore there, while those that increase regulation in the labour market decrease this probability. We also show that a firm's probability of offshoring increases with the share of its employees who are immigrants from that country of origin. Finally, our analysis reveals that the negative impact of institutions that hinder offshoring is attenuated by a strong bilateral network of foreign workers.     

Country governance,corruption, and the likelihood of firms’ innovation

Using a sample of firms from the World Bank Enterprise Survey for the period 2006–2016 in emerging and developing countries, we find that corruption has a negative impact on the likelihood of innovations, thus supporting the “sanding-the-wheels” hypothesis. Our empirical results also show that corruption at the firm level, in the manufacturing industry, and in regions with the worst governance or that are more corrupt has a significant negative effect on innovation. In addition, country governance plays a particularly important role in innovative activity for corrupt firms. The policy implication is that the government or authority should strengthen the positive role of government effectiveness, rule of law, regulatory quality, and control of corruption in order to improve firms’ innovation within an environment of corruption.     

When does FDI have positive spillovers? Evidence from 17 transition market economies

We use rich firm-level data and national input–output tables from 17 countries over the 2002–2005 period to test new and existing hypotheses about the impact of foreign direct investment (FDI) on the efficiency of domestic firms in the host country (i.e., spillovers). We document that backward linkages have a consistently positive effect on productivity of domestic firms while horizontal and forward linkages show no consistent effect. We also examine how the strength of spillovers varies by sector, FDI source, institutional environment (corruption, red tape, level of development), firm’s distance to the technological frontier, and other firm- and country-specific characteristics.     

Macroeconomic Interdependence with Trade and Multinational Activities

This paper examines how differences in the integration strategies followed by firms active in foreign markets affect the way productivity and policy shocks spread their effects worldwide. The analysis incorporates costly trade and local sales by multinational firms in a general-equilibrium open economy macroeconomic model. The mode of foreign market access is found to play a major role in the international business cycle, affecting the dimension of consumption and output spillovers worldwide. We show that despite financial markets being effectively complete, consumption risks may not be fully insured in the world economy as long as multinational firms discriminate prices across markets. Furthermore, cross-country differences in firms' integration strategies can account for extensive asymmetries in the way country-specific and global shocks are transmitted in the world economy. We argue that this may have relevant consequences for the welfare implications of monetary and trade policies.     

Effects of regulatory burden and corruption on firm performance: Evidence from Moldova

Firms in Moldova face a high level of regulatory burden, as proxied by the number of inspections by public authorities. At the same time, they face high levels of corruption. We examine the effect of frequent inspections on four measures of firm performance: labour and total factor productivity, and levels of tangible and intangible assets. We also investigate how corruption affects the relationship between inspections and firm performance. We perform panel data analysis using firm-level administrative data and survey data from Moldova in 2005–2015. The results show that inspections and corruption each affect firm productivity negatively, but corruption moderates the negative effect of inspections. We also find that inspections and intangible assets are positively correlated, but this correlation is weaker for higher levels of corruption. Finally we examine whether these results differ by industry, firm size and ownership types. Inspections and corruption affect medium and large firms, and state-owned enterprises differently from micro and small firms and private firms respectively.     

Corruption,competition and democracy

This paper presents a model of the interaction between corrupt government officials and industrial firms to show that corruption is antithetical to competition. It is hypothesized that a government agent that controls access to a formal market has a self-interest in demanding a bribe payment that serves to limit the number of firms. This corrupt official will also be subject to a detection technology that is a function of the amount of the bribe payment and the number of firms that pay it. Under quite normal assumptions about the shape of the graph of the detection function, multiple equilibria can arise where one equilibrium is characterized by high corruption and low competition, and another is characterized by low corruption and high competition. Some suggestive empirical evidence is presented that supports the main hypothesis that competition and corruption are negatively related.     

The demand for tax haven operations

What types of firms establish tax haven operations, and what purposes do these operations serve? Analysis of affiliate-level data for American firms indicates that larger, more international firms, and those with extensive intrafirm trade and high R and D intensities, are the most likely to use tax havens. Tax haven operations facilitate tax avoidance both by permitting firms to allocate taxable income away from high-tax jurisdictions and by reducing the burden of home country taxation of foreign income. The evidence suggests that the primary use of affiliates in larger tax haven countries is to reallocate taxable income, whereas the primary use of affiliates in smaller tax haven countries is to facilitate deferral of U.S. taxation of foreign income. Firms with sizeable foreign operations benefit the most from using tax havens, an effect that can be evaluated by using foreign economic growth rates as instruments for firm-level growth of foreign investment outside of tax havens. One percent greater sales and investment growth in nearby non-haven countries is associated with a 1.5 to 2% greater likelihood of establishing a tax haven operation.