Tariff‐jumping FDI and domestic firms' profits

Abstract.  Studies of trade policy welfare effects often ignore the potential for tariff‐jumping foreign direct investment (FDI) to mitigate positive gains to domestic producers. Using event study methodology we find that affirmative U.S. antidumping decisions are associated with average abnormal gains of over 3% to a firm in the petitioning industry in the absence of tariff‐jumping FDI, but much smaller and statistically insignificant abnormal gains if there is tariff‐jumping FDI. We also find evidence that tariff jumping in the form of new plants or plant expansion has significantly larger negative effects on U.S. domestic firms' profits than other types of tariff‐jumping FDI. JEL Classification: F13, F23, L11     

Outward Foreign Direct Investment Patterns of Italian Firms in the European Union's Emission Trading Scheme*

We consider the role played by the European Union's Emissions Trading System (EU ETS) as a possible driver of outward foreign direct investment (FDI) for Italian manufacturing firms. Using a panel dataset of about 22,000 firms covering the first two phases of the EU ETS and the period before the EU ETS, we measure the patterns of FDI towards countries not covered by the EU ETS. The results show that the EU ETS had a weak effect on the number of new subsidiaries abroad (extensive margin), while it had a larger impact on production taking place in foreign subsidiaries (intensive margin), especially in trade-intensive sectors.     

Privatization, strategic foreign direct investment and host-country welfare

Recent evidence shows that developing countries and transition economies are increasingly privatizing their public firms and at the same time experiencing rapid growth of inward foreign direct investment (FDI). We show that there is a two-way causality between privatization and greenfield FDI. Privatization increases the incentive for FDI, which, in turn, increases the incentive for privatization compared to the situation of no FDI. The optimal degree of privatization depends on the cost difference of the firms, and on the foreign firm's mode of entry.     

TARIFF JUMPING FOREIGN DIRECT INVESTMENT DECISION IN A QUALITY‐DIFFERENTIATED MARKET

Using a product differentiation model, this paper discusses the issue of transnational firms evading tariffs and investing directly in a host country (through foreign direct investment (FDI)). Where product quality is differentiated between foreign and host country firms and assuming a firm's quality requirement is a long‐term strategy and is not affected by a foreign firm's trade decision, we obtain the following findings. First, whether or not a host country firm produces high or low quality products, raising the quality requirement for foreign products will increase the possibility of a foreign firm choosing FDI instead of exporting a product to the host country. Second, raising the quality requirement for domestic products will lower the possibility of foreign firms choosing FDI without regard to the product's quality. Finally, given a competitor in the host country, in FDI, a foreign high‐quality product‐producing firm has an advantage over a low‐quality product‐producing firm. We also find that even when firms' quality decisions are affected by a foreign firm's trade decision, most of the above results will still hold.     

Domestic R&D,Foreign Direct Investment and Welfare

This paper provides a new rationale to examine the two‐way relationship between domestic research and development (R&D) and foreign direct investment (FDI), as well as their impacts on domestic welfare. Our analysis is based on the strategic interaction in cost‐reducing investment decisions between domestic firms and a foreign firm, which is different from the common factors that are discussed in the literature such as spillovers and technology sourcing. Our results are as follows. We show that domestic R&D investment may either increase or decrease the foreign firm's FDI incentives. Further, depending on the marginal cost of domestic firms, domestic R&D incentives can always increase regardless of the effects of domestic R&D investment on the foreign firm's FDI decision. Finally, we find that domestic welfare improves under domestic cost reduction if the slope of the marginal cost of domestic R&D investment is sufficiently small.     

欧盟反倾销政策特征及涉案企业战略行为分析

在分析欧盟反倾销政策的基础上,建立一个两阶段动态竞争模型,对进口国和出口国企业在反倾销博弈中的战略行为及其动机进行了分析。在此分析基础上可得,当中国企业遭遇欧盟反倾销措施时,需要在调查期间减少出口量．欧盟企业在反倾销税的影响下为追求利润最大化会改变产出,中国企业应关注欧盟企业的战略行为以对抗其反倾销措施,为中国企业应对欧盟反倾销措施提出了对策建议。     

Foreign firm entry in an open economy: the case of Portugal

The purpose of this paper is to analyse the entry process of foreign direct investment (FDI) in Portuguese industrial sectors. Portugal presents an interesting case where firms enter to take advantage of export opportunities. The results suggest that foreign firms possess the ability to overcome existing entry barriers that affect domestic firms. Apparently, foreign firms have different expectations about profitability than domestic firms, possibly due to foreign firms’ export-orientation to the rest of the European Union (EU). They appear to desire industries where other foreign firms have clustered. Above all, it appears that these foreign firms enter industries to exploit Portugal's chief location advantage in Western Europe: low wages. Portugal's FDI experience is relevant to other countries that have opened their economies to greater trade and investment and attracted export-oriented firms.     

Brotherhood of competition: Foreign Direct Investment and domestic mergers

We examine the effects of mergers on Foreign Direct Investment (FDI), and on shaping national policies regarding FDI. In this work we develop a partial equilibrium model of an oligopolistic industry in which a number of domestic and foreign firms compete in the market for a homogeneous good in a host country. It is assumed that the number of foreign firms is endogenous and can be affected by the government policy in the host country. The government sets the policy (subsidies) to maximise social welfare. We allow domestic mergers. Our main results suggest that when the host country government imposes discriminatory lump-sum subsidy in favor of foreign firms, a merger of domestic firms will increase the number of FDI if the subsidy level is exogenous. With an endogenous level of subsidy, a merger of domestic firms will decrease (increase) the welfare if the domestic firms are more (less) efficient.     

Chinese firm and industry reactions to antidumping initiations and measures

China has been the subject of large numbers of both antidumping initiations and measures. This article explores the reactions of Chinese firms and industries to these actions by using dynamic system GMM estimator and industrial panel data on all Chinese firms in the industry, foreign firms operating within China and state-owned enterprises (SOEs) for aggregated firms group between 1997 and 2007. We find that antidumping actions by developed and developing countries negatively impact industrial profits and employee and firm numbers and also exports, but improve labour productivity. We also find that different kinds of firms show different responses. All firms together in an industry react to antidumping the most, and foreign and SOE firms show a much smaller response. Further, antidumping effects from different countries are different. Developed countries’ antidumping actions have more negative impact than developing countries’ actions; the effects of US actions are different from the European Union’s.     

Sovereign Risk, FDI Spillovers, and Growth

This paper studies the effect of sovereign risk on capital flows from rich to poor nations in the context of a two-country model, where Foreign Direct Investment (FDI) creates positive externalities in domestic production. We show that if externalities are large, a developing country never expropriates foreign assets, and behaves as under perfect enforcement of foreigners' property rights, jumping to the steady state in one period. If externalities are absent, a developing country always expropriates foreign assets and, then, there are no capital flows in equilibrium, as occurs in autarky. If externalities are of a medium size, our model can account for scarce capital flows from rich to poor nations, as well as other key features of the data, such as rising-over-time patterns of foreign capital and FDI in developing countries. In addition, the model offers an economic rationale for the FDI restrictions observed across nations.     

Determinants of Chinese direct investments in the European Union

This article analyses the determinants of Chinese foreign direct investment (FDI) activities in the European Union (EU). Evidence is based on panel Poisson models drawing on two investment monitors at the individual project level. Greenfield investments (GI) and mergers and acquisitions (M&A) are distinguished. The findings indicate that market size and bilateral trade are the main factors for Chinese investment in the EU. In contrast, business-friendly institutions do not foster FDI. Probably, Chinese investors are risk averse, and prefer regions with less competitive markets. The striking difference between GIs and M&As is related to unit labour costs. Higher costs make the host country less attractive for the establishment of new firms, but do not affect the involvement in existing firms. The sectoral dispersion of Chinese FDI in the EU did not change much since the global financial crisis. Most relevant shifts have occurred in research and development (R&D), where low-income EU countries have become increasingly attractive.     

Wage,foreign-owned firms,and productivity spillovers via labour turnover: a non-linear analysis based on Chinese firm-level data

Using firm-level panel data from Chinese manufacturing firms over the period 2004–2007, this article investigates the impact of the wage gap between local and foreign-owned firms on foreign direct investment (FDI) spillovers in terms of total factor productivity (TFP). We find a non-linear threshold effect that: a low-level wage gap threshold exists, below which FDI spillovers are significantly negative. This is because FDI spillovers via labour turnover are blocked due to the low wages of local firms, which jeopardizes the flow of skilled workers from foreign firms to local firms. In contrast, when the wage gap reaches a high-level threshold, local firms can get benefits from FDI spillovers. The reason is that high wages of local firms attract skilled employees to leave foreign firms, which yields a large magnitude of worker mobility from foreign firms to local firms. Our article provides evidence that labour turnover as the channel of FDI spillovers only works when the wage gap is beyond some threshold. Also, these thresholds vary across regions and firm ownerships.     

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.     

Opening services markets within Europe: Modelling foreign establishments in a CGE framework

Foreign direct investment (FDI) in services is often more important to supply foreign markets than cross-border trade. A complete analysis of services liberalization therefore requires the modelling of FDI. This paper presents the treatment of FDI in our CGE model WorldScan based on the ideas of Petri [Petri, P.A., 1997. Foreign direct investment in a computable general equilibrium framework. Paper Prepared for the Conference, Making APEC work: Economic Challenges and Policy Alternatives, March 13–14. Keio University, Tokyo] and Markusen [Markusen, J.R., 2002. Multinational Firms and The Theory of International Trade. MIT Press] that firms which establish affiliates abroad also transfer firm-specific knowledge. Consequently, capital owned by suppliers from home and foreign countries are not perfect substitutes. We apply this model to the proposals of the European Commission to open up services markets. Even when FDI in services could increase by 20% to 35%, the overall economic impact is limited. Our assessment suggests that GDP in the EU25 could increase up to 0.4%. These effects could be up to 0.8% higher if foreign capital also increases the overall productivity of the services sector.     

Foreign direct investment,international trade,and firm heterogeneity

We present an asymmetric model with firm heterogeneity and foreign direct investment (FDI) from a developed country to a developing country. We found that the successful entry firms could be sorted from highest to lowest according to productivity as reimport firms, FDI firms, export firms, and domestic firms. We also found that FDI decreases (increases) the gross national income of the developed (developing) country, but it can either increase or decrease the world income according to the level of the relative propensity to spend. In addition, we demonstrated that FDI influences welfare through variations in average price, national income, and the number of types of goods.     

Financial structure,productivity, and risk of foreign direct investment

This study investigates how heterogeneous firms choose their lenders when they raise external finance for Foreign Direct Investment (FDI) and how the choice of financing structure affects FDI activities. We establish an asymmetric information model to analyze why certain firms use private bank loans while others use public bonds to finance foreign production. The hidden information is the productivity shock to FDI. Banks are willing to monitor the risk of FDI, while bondholders are not; hence, banks act as a costly middleman that enables firms to avoid excessive risk. We show that firms’ productivity levels, the riskiness of FDI, and the relative costs of bank finance and bond finance are three key determinants of the firm’s financing choice. Countries with higher productivity, higher bank costs, or investment in less risky destinations, use more bond finance than bank finance. These results are supported by evidence from OECD countries.     

THE IMPACT OF TRADE AND FOREIGN DIRECT INVESTMENT POLICIES ON TECHNOLOGY ADOPTION AND SOURCING OF CHINESE FIRMS

How do trade and foreign direct investment (FDI) policies impact the decisions of firms in technology adoption (process vs. product innovations) and sourcing (internal vs. external and foreign vs. domestic)? We use a sample of Chinese firms to address this question. China's trade and FDI policies lead to different forms of internationalization: ordinary exports, processing exports, majority FDI, and minority FDI. We find that both exporting and FDI stimulate process innovation; ordinary exports, processing exports, and FDI have strong, weak, and no effects on stimulating product innovation, respectively. Exporting firms source technologies both internally through R&D and externally from foreign and domestic sources. FDI firms have a lower tendency of internal technology development and domestic technology sourcing, but a much higher tendency of foreign technology sourcing than exporting firms. (JEL F13, F23, O32)     

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.     

Cross-Country Externalities of Trade and FDI Liberalization

We develop a three-country heterogeneous-firm model and show that FDI liberalization in one foreign country (F1) results in the following: (i) some firms from the home country switch from export to FDI in F1; (ii) skilled labor’s wage rate drops in the home country; (iii) wage inequality between the skilled and unskilled labor decreases; and (iv) some firms from the home country switch from FDI to export to another foreign country (F2). The effects from trade liberalization are just the opposite, but the effects from education improvement are qualitatively the same as FDI liberalization. The cross-country externalities work through the domestic labor market.