Firm ownership and internal labour practices in a transition economy

One feature common to many post‐socialist transition economies is a relatively compressed wage structure in the state‐owned sector. We conjecture that this compressed wage structure creates weak incentives for work effort and worker skill acquisition and thus presents adverse consequences for the entire transition economy if a substantial portion of the labour force works in the state sector. We explore firm wage incentives and worker training, as well as other labour practices and outcomes, in a transition setting with matched firm and worker data collected in one of the largest provinces of Vietnam – Ho Chi Minh City. The Vietnamese state sector exhibits a compressed wage distribution in relation to privately owned firms with foreign ownership. State wage practices stress tenure over worker productivity and their wage policies result in flatter wage–experience profiles and lower returns to education. The state work force is in greater need of formal training, a need that is in part met through direct government financing. In spite of the opportunities for government financed training and at least partly due to inefficient worker incentives, state firms, by certain measures, exhibit lower levels of labour productivity. The private sector comparison group to state firms for all of these findings is foreign owned firms. The internal labour practices of foreign firms are more consistent with a view of profit‐maximizing firms operating with no political constraints. This is not the case for Vietnamese de novo private firms that exhibit much more idiosyncratic behaviour and whose labour practices are often indistinguishable from state firms. The exact reasons for this remain a topic of on‐going research yet we conjecture that various private sector constraints, including limited access to formal capital, play an important role.     

TARIFF POLICY AND WELFARE IN AN INTERNATIONAL DUOPOLY WITH CONSUMER‐FRIENDLY INITIATIVE

The purpose of this paper is to explore how strategic tariff policy and welfare are affected by the consumer‐friendly initiative of foreign exporting firms. We define a firm that is consumer‐friendly or non‐profit‐based if it considers both its own profit and consumer surplus. This paper extends Brander and Spencer by taking the consideration of consumer‐friendly firms into an international duopoly, and within such context examining the tariff policy and welfare. The consumer‐friendly initiative that leads to trade liberalization is a ‘Win‐Win‐Win’ solution in the sense that it is not only beneficial for foreign exporting firms, but also for the government and consumers of the importing country.     

Post‐conflict stabilization in Africa

Peace is fragile, about half of all peace episodes break down within the first eight post‐conflict years. In Sub‐Saharan Africa this risk is even higher. Using survival analysis this paper suggests that while it is difficult to find correlates of peace stabilization, there are some policy relevant results. How a conflict ends is important. Negotiated settlements are fragile but the chances of peace surviving can be significantly improved through the deployment of UN peacekeeping operations. This also appears to be the case for Sub‐Saharan Africa but case study evidence suggests that peacekeepers face particularly complex situations in the region and should therefore be well resourced in order to increase their chance of success     

ON THE EMERGENCE OF NON‐PROFIT FIRMS AS ALTERNATIVES TO THE GOVERNMENT*

It is well known that many non‐profit firms coexist with government firms in industries that provide collectively consumed goods and services, such as education, healthcare, social services, and art and culture. This paper explores the specific circumstances under which non‐profit firms can emerge as alternatives to the government. We show that a non‐profit firm emerges only when the residents’ median preference for a collective good is significantly low. This finding implies that, somewhat paradoxically, a non‐profit firm emerges to replace the government and provide a collective good only when the majority of residents consider the good non‐essential.     

Internal migration and youth entrepreneurship in the Democratic Republic of the Congo

This paper analyzes youth internal migration in the Democratic Republic of the Congo (DRC) and its impact on entrepreneurship startup in a fresh post‐conflict context. Building on a national representative survey conducted in 2005, a recursive bivariate probit specification is used to jointly estimate the decision models of both migration and entrepreneurship. To evaluate the robustness of results, the propensity score matching method is used to test the concordance of the results after eliminating the redundant impact of unobserved factors. The two main conclusions are that youth migration increases the probability of being an entrepreneur, but in the informal sector. In addition, like secondary and post‐secondary education, the duration of stay after migrating is an important factor to being an entrepreneur in the formal sector. These conclusions are expected to enlighten policy‐makers as to the importance of promoting secondary and post‐secondary education as well as inclusive growth investments that may absorb more youth labor in formal sectors. This is the first exercise in the case of the DRC and since it focuses on youth, the paper makes a unique contribution to the literature related to the link between migration and entrepreneurship in a post‐war context.     

Block trades and the benefits of control in Slovenia1

Ownership and control have been concentrating in most transition countries. The consolidation of control introduces changes in the power distribution within privatized firms and, most importantly, redirects the corporate governance problem to a conflict between large and small shareholders. In this study, we evaluate the ownership changes in Slovenian privatized firms through an analysis of stock price reactions to the entrance of a new blockholder (the shared benefits of control) and through an estimation of the premiums paid for large blocks (the private benefits of control). We provide evidence of and discuss the reasons for the failures of the privatization investment funds in implementing control over firm managers and in promoting the restructuring of firms in the first post‐privatization years.     

INSUFFICIENT ENTRY OF EMPLOYEE‐CONTROLLED FIRMS IN A FREE‐ENTRY OLIGOPOLY

This study is a theoretical examination of whether employee‐controlled firms (ECFs) enter a free‐entry oligopolistic market excessively or insufficiently, from the viewpoint of welfare maximization. The excess entry theorem is well known in oligopoly theory. According to this theorem, a greater number of profit‐maximizing firms enter a free‐entry oligopolistic market than is optimal for welfare maximization. We demonstrate the possibility that insufficient entry arises when ECFs compete in a free‐entry market. In particular, we show that if both the demand and cost functions are convex, insufficient ECF entry necessarily occurs. Our results suggest that competition among firms seeking purposes other than profit might lead to insufficient entry because differences in competing firms’ objectives affect the intensity of market competition.     

Can Production Subsidies Explain China's Export Performance? Evidence from Firm‐level Data*

This paper analyses the relationship between production subsidies and firms’ export performance using a very comprehensive and recent firm‐level database and controlling for the endogeneity of subsidies. It documents robust evidence that production subsidies stimulate export activity at the intensive margin, although this effect is conditional on firm characteristics. In particular, the positive relationship between subsidies and the intensive margin of exports is strongest among profit‐making firms, firms in capital‐intensive industries, and those located in non‐coastal regions. Compared to firm characteristics, the extent of heterogeneity across ownership structure (SOEs, collectives, and privately owned firms) proves to be relatively less important.     

OWNERSHIP,CONTROL, AGENCY AND RESIDUAL CLAIMS IN HEALTHCARE: INSIGHTS ON COOPERATIVES AND NON‐PROFIT ORGANIZATIONS

Many issues surrounding healthcare entities’ performance can be traced to their governance and ownership. Increasingly, public services are being provided by non‐profit organizations and/or cooperatives, particularly in the healthcare sector. This is not unproblematic. We draw on the conceptual separation of ownership and control, and the notion of firm ownership to derive a taxonomy of dimensions along which a contractual‐ and property rights theory of the firm can be structured, in order to determine the nature of firms’ differences. We utilize the taxonomy to illustrate important distinctions between non‐profit and cooperative firms in the primary healthcare sector and propose testable hypotheses. Funders and regulators must recognise the differences between these firms, if public funding of healthcare is to achieve the expected outcomes.     

The Determinants of Firm Profitability in Australian Manufacturing

This study provides new evidence on the determinants of the profitability of Australian manufacturing firms by analyzing a unique firm-level data set of firm performance over the period 1984-93. The panel nature of the data permits the estimation of dynamic profitability models over the business cycle, to test both the persistence and cyclicality of firm profitability. Econometric results suggest that lagged profitability is a significant determinant of current profit margins, and that industry concentration is positively related to firm profit margins. Also, profit margins are found to be procyciical in concentrated industries but counter-cyclical in less concentrated industries.     

Lobbying and the international fight against tax havens

Despite a variety of measures taken by high‐tax countries, the international fight against tax havens so far remains rather ineffective. This paper introduces offshore lobbying as a possible explanation for this observation. The author analyzes the international fight against tax havens in a two‐country model, in which the onshore country exerts pressure on domestic profit‐shifting firms and the tax haven's government lobbies against this measure. In this framework, he finds that pressure and lobbying are strategic substitutes and that there is an extensive margin incentive for offshore lobbying. Furthermore, when starting at initially high costs for profit shifting, a reduction in these costs leads to fewer profit‐shifting firms. Finally, when allowing for a second low‐tax jurisdiction, the overall level of lobbying increases, but less than proportionally.     

THE SCOPE FOR NON‐PROFIT OBJECTIVES IN A MIXED OLIGOPOLY UNDER INTERNATIONAL COMPETITION

We ask how the scope for non‐profit objectives in a state‐owned enterprise (SOE) in a mixed oligopoly changes because of competition from firms in another country. There is no change if costs and demand are given, unless the trade partner is a low‐cost country. However, the scope for non‐profit objectives is limited by the country's relative size if wages are market‐clearing and if workers and firms are stationary, because of reduced competitiveness caused by higher real wage rates. The total surplus is then not affected by the actions of the SOE. International trade does not otherwise reduce the scope for its non‐profit objectives if workers and firms are mobile, but productivity differences might require restrictions in order to avoid a complete relocation of the workforce in either country.     

Diversification strategies and firm performance in Vietnam

This paper is based upon the assumption that a firm's profitability is determined by its degree of diversification which is, in turn, strongly related to the antecedent decision to carry out diversification activities. This calls for an empirical approach that permits the joint analysis of the three interrelated and consecutive stages of the overall diversification process: diversification decision, degree of diversification and outcome of diversification. We apply parametric and semi‐parametric approaches to control for sample selection and the endogeneity of the diversification decision in both static and dynamic models. For the analysis, we use the census dataset on the whole firm population in Vietnam, as a representative of transition countries. After controlling for industry fixed‐effects, the empirical evidence from the firm‐level data shows that diversification has a curvilinear effect on profitability: it improves firms’ profit up to a point, after which a further increase in diversification is associated with declining performance. This implies that firms should consider optimal levels of product diversification when they expand their product offerings beyond their core business. Other noteworthy findings include the following: (i) the factors that stimulate firms to diversify do not necessarily encourage them to extend their diversification strategy; (ii) firms that are endowed with highly technological resources and innovation investment are likely to successfully exploit diversification as an engine of growth; and (iii) while industry performance does not have a strong influence on the profitability of firms, it impacts their diversification decision as well as the degree of diversification.     

TIMING OF LUMPY INVESTMENT,PRICING AND TECHNICAL PROGRESS

In equipment‐intensive sectors – such as water utilities, power generation, and gas – billions of dollars are spent in capital equipment. The nature of the investment is often lumpy: at some point a plant has to be replaced and a large investment is required. We characterize the dynamic optimal investment policy of profit‐maximizing and welfare‐maximizing firms. We first show that, when there is no technical progress, the duration of the plant is longer for a profit‐maximizing firm. We then consider technical progress leading to either capacity expansion or to operating costs reduction. We show that duration tends to increase when the installed capacity increases over time, while it tends to decrease when technical progress reduces operating costs, both for profit‐maximizing and welfare‐maximizing firms. Under some conditions, when capacity expands over time the duration of the plant is longer for a profit‐maximizing firm than for a welfare‐maximizing firm.     

Watching out for regional separatism in the Russian far East: Ideological cueing of territorial security,economic incentives and cultural identity

Why has regional separatism failed to materialise in the post‐Soviet Russian Far East despite the region's remoteness from Russia's European heartland, its proximity to the Pacific Rim economies, the decline of economic support from Moscow, and a ‘frontier’ culture of resistance to Moscow's rule? Focusing on political developments in Primorskii Krai ‐ the key frontier province in the Russian Far East ‐ the study finds that territorial security, economic incentives, and cultural identity affect proclivities for regional separatism selectively, depending on ideological and institutional constraints in which centre‐periphery relations are embedded. In the absence of ideological commitments and enforceable institutional rales and norms, centre‐periphery conflicts devolve into economic bargaining and rule‐manipulation by elites for quick material gains. The changing ideological context amidst post‐Soviet institutional transition in Russia provide the most consistent explanation of conflict dynamic between Primorskii Krai's leaders and Moscow, of the non‐emergence of regional separatism, and of gross economic mismanagement of the province.     

PROFIT TAX AND FIRM MOBILITY IN A THREE‐COUNTRY MODEL

We construct a three‐country model that incorporates international relocation by imperfectly competitive firms and examine both the effects of each country's profit tax reduction on the consumption and welfare of all countries, and the incentive for the countries to decrease the profit tax. In such a model, both the terms of trade and international relocation of firms offer the key to understanding the impacts of one country's profit tax policy. In particular, we note that the relocation of firms from the other two countries is positively related to the wage incomes of the third country through a shift in labour demand, and the terms‐of‐trade improvement is not only positively related to the wage incomes, but also negatively related to profit incomes through a shift in world consumption demand. We show that (i) in a three‐country world economy, regardless of the reduction's source, the profit tax reduction of each country leads to relocation of firms away from foreign countries toward its own economy and deteriorates the terms of trade of its economy and (ii) this becomes a ‘beggar‐thy‐neighbour’ policy in the sense that it lowers the welfare of the other foreign countries.     

Multinationals’ profit response to tax differentials: Effect size and shifting channels

This paper provides a quantitative review of the empirical literature on profit‐shifting behaviour of multinational firms. We synthesize the evidence from 27 studies and find a substantial response of profit measures to international tax rate differentials. Accounting for confounding factors by means of meta‐regressions, we predict a tax semi‐elasticity of subsidiary pre‐tax profits of about 0.8. Moreover, we disentangle the tax response by means of financial planning from the transfer pricing and licensing channel. Back‐of‐the‐envelope calculations suggest that transfer pricing and licensing are the dominant profit‐shifting channels.     

COST‐SAVING PRODUCTION TECHNOLOGIES AND STRATEGIC DELEGATION*

This work analyses a managerial delegation model in which firms choose between two production technologies: a low marginal cost technology and a high marginal cost technology. For the former to be adopted more investment is needed than for the later. By giving managers of firms an incentive scheme based on a linear combination of profit and sales revenue, we find that Bertrand competition provides a stronger incentive to adopt the cost‐saving technology than the strict profit maximisation case. However, the results may be reversed under Cournot competition. If the degree of product substitutability is sufficiently low (high), the incentive to adopt the cost‐saving technology is larger under strict profit maximisation (strategic delegation).     

ACTIVITY CHOICES OF INTERNALLY DISPLACED PERSONS AND RETURNEES: QUANTITATIVE SURVEY EVIDENCE FROM POST‐WAR NORTHERN UGANDA

We investigate post‐war economic activity choices of displaced and just‐returned individuals. In particular, the effect of living in an internally displaced persons camp on the choice of economic activities is analysed. Because individuals relocating away from camps may be different from those staying in them, a recursive bivariate probit procedure is used to control for selection on unobservables. The empirical procedure also relies on merging survey data with the micro‐level dataset on conflict events. This allows us to incorporate conflict in the framework, but also to use a bivariate probit procedure to control for endogeneity (selection of households out of camps). This work contributes to literature on household labour allocation and economics of conflict. Results show that residing in a camp has varied effects on the choice of economic activities. Individuals in camps may be more inclined than those who choose to return home, to engage in certain economic activities. One of the key lessons that could be drawn from this paper is that internally displaced persons may possess important livelihood skills that post‐conflict development interventions need to take advantage of, in order to fast‐track recovery.     

Re‐entering Europe: Does European Union candidacy boost foreign direct investment?

This study examines the ability of the Central and Eastern European countries to attract foreign direct investment during the first decade of transition. After considering a model of profit maximizing firms, we undertake an empirical investigation of the factors that determine multinational firms’ location decisions within Europe. We find empirical support for the traditional market size and cost factors. In addition, we examine the effect of key European Union announcements regarding the accession process. Results indicate that the announcements had statistically significant and quantitatively important effects on foreign direct investment in the Central and Eastern European candidate countries.