Firm heterogeneity and technology transfers to local suppliers: Disentangling the effects of foreign ownership,technology gap and absorptive capacity

In this paper, I present novel microeconomic evidence on the effects of firm heterogeneity on the creation and impact of technology transfers from foreign direct investment (FDI) to local suppliers in a developing country setting. The main findings are threefold. First, FDI firms are significantly more involved in knowledge transfer activities than domestic producer firms. In particular, FDI firms offer more technological support, support with a direct positive impact on production processes of local suppliers. Second, the type of ownership also influences the effect of the technology gap on technology transfers. A large technology gap between a producer firm and its suppliers lowers the provision of support; however, FDI firms offer more technological support to their suppliers of material inputs when the technology gap is large. Independent of the support that the suppliers receive, foreign ownership of client firms and a large technology gap make it more likely that suppliers experience large positive impacts. Third, the level of absorptive capacity of local suppliers is also important for the impact of the technology transfers, confirming the notion that heterogeneity among both producer firms and local suppliers affect the level, nature and impact of local technology transfers.     

World market integration through the lens of foreign direct investors

This paper is motivated by the unparalleled increase in foreign direct investment to emerging market economies of the last 25 years. Using a large cross-country time-series data set, we evaluate the dependence of foreign direct investment on global factors, or worldwide sources of risk (i.e., factors that drive foreign direct investment across several countries). We construct a globalization measure that equals the share of explained variation in direct investment attributable to global factors. We show that our globalization measure has increased steadily for developing and developed countries. For the full sample of countries, the globalization measure rose by over 10-fold from 1985 to 1999. Furthermore, in recent years, developing countries' exposure to global factors has approached that of developed countries. Finally, our globalization measure correlates strongly with measures of capital market liberalization, supporting our hypothesis that increased market integration leads to a greater role for worldwide sources of risk. We discuss the implications of our results for public policies regarding capital market liberalization and policies directed at attracting foreign investment.     

On tax competition, public goods provision and jurisdictions' size

In this paper, we analyze competition among jurisdictions to attract foreign capital through low taxes and public inputs that enhance firms' productivity. The competing jurisdictions are different in size and mobility of capital is costly. We find that for moderate mobility costs, small economies can attract foreign capital by supplying higher levels of public goods than larger jurisdictions, without practicing tax undercutting. The classical result that small jurisdictions are attractive because they engage in tax dumping is recovered only for high mobility costs of capital.     

Corporate tax systems, multinational enterprises, and economic integration

Multinational firms are known to shift profits and countries are known to compete over shifty profits. Two major principles for corporate taxation are Separate Accounting (SA) and Formula Apportionment (FA). These two principles have very different qualities when it comes to preventing profit shifting and preserving national tax autonomy. Most OECD countries use SA. In this paper we show that a reduction in trade barriers lowers equilibrium corporate taxes under SA, but leads to higher taxes under FA. From a welfare point of view, the choice of tax principle is shown to depend on the degree of economic integration.     

Imperfect tax competition for profits, asymmetric equilibrium and beneficial tax havens

We present a model of tax competition for real investment and profits and show that the presence of tax havens in some cases increases the tax revenue of countries. In the first part of the paper, we argue that tax competition for profits is likely to be imperfect in the sense that the jurisdiction with the lowest tax rate does not necessarily attract all shifted profits. Under this assumption, tax competition between a large number of identical countries may lead to either a symmetric equilibrium with no profit shifting or an asymmetric equilibrium where firms shift profits from high-tax to low-tax countries. In the second part of the paper, we introduce tax havens. Starting from a symmetric equilibrium, tax havens unambiguously reduce the tax revenue of countries due to a ‘leakage effect’ — tax havens attract tax base from countries — and a ’competition effect’ — the optimal response to the increased tax sensitivity of tax bases involves a reduction of tax rates. Starting from an asymmetric equilibrium, however, tax havens also raise the tax revenue of countries through a ’crowding effect’ — tax havens make it less attractive to compete for profits and thus induce low-tax countries to become high-tax countries. We demonstrate that the latter effect may dominate the former effects so that countries, on balance, benefit from the presence of tax havens.     

Competition for firms in an oligopolistic industry: The impact of economic integration

We set up a model of generalised oligopoly where two countries of different size compete for an exogenous, but variable, number of identical firms. The model combines a desire by national governments to attract internationally mobile firms with the existence of location rents that arise even in a symmetric equilibrium where firms are dispersed. As economic integration proceeds, equilibrium taxes initially decline, but then rise again as trade costs fall even further. A range of trade costs is identified where economic integration raises the welfare of the small country, but lowers welfare in the large country.     

Outsourcing, unemployment and welfare policy

The paper investigates the consequences of outsourcing of labor intensive activities to low-wage economies. This trend challenges the two basic functions of the welfare state, redistribution and social insurance when private unemployment insurance markets are missing. The main results are: (i) outsourcing raises unemployment and labor income risk of unskilled workers; (ii) it increases inequality between high- and low-income groups; and (iii) the gains from outsourcing can be made Pareto improving by using a redistributive linear income tax if redistribution is initially not too large. We finally derive the welfare optimal redistribution and unemployment insurance policies.     

Democracy, foreign direct investment and natural resources

Empirical studies that examine the impact of democracy on foreign direct investment (FDI) assume that the relationship between democracy and FDI is the same for resource exporting and non-resource exporting countries. This paper examines whether natural resources in host countries alter this relationship. We estimate a linear dynamic panel-data model using data from 112 developing countries over the period 1982-2007. We find that democracy promotes FDI if and only if the value of the share of minerals and oil in total exports is less than some critical value. We identify 90 countries where an expansion of democracy may enhance FDI and 22 countries where an increase in democratization may reduce FDI. We also find that the effect of democracy on FDI depends on the size and not the type of natural resources.     

Who is afraid of political risk? Multinational firms and their choice of capital structure

This paper investigates how multinational firms choose the capital structure of their foreign affiliates in response to political risk. We focus on two choice variables, the leverage and the ownership structure of the foreign affiliate, and we distinguish different types of political risk, such as expropriation, unreliable intellectual property rights and confiscatory taxation. In our theoretical analysis we find that, as political risk increases, the ownership share tends to decrease, whereas leverage can both increase or decrease, depending on the type of political risk. Using the Microdatabase Direct Investment of the Deutsche Bundesbank, we find supportive evidence for these different effects.     

Foreign direct investment and productivity spillovers in Irish manufacturing industry: evidence from plant level panel data

It is often argued that foreign firms may enhance the productivity of indigenous firms in an economy, through forward or backward linkages. Such externality effects typically are called “productivity spillovers”. In terms of foreign direct investment (FDI), Ireland is one of the most globalized economies in the world, having pursued a strategy of promoting investment by foreign companies for over 40 years. This article examines possible productivity spillovers from foreign‐owned firms to indigenous firms in the Irish manufacturing sector, using plant‐level data on all manufacturing firms for the period 1991–1998. Despite Irish policy commitment to building linkages between foreign and domestic firms, we find only weak evidence of spillovers and this evidence is sensitive to the definition and measurement of foreign presence.     

Measuring the benefits of foreign product variety with an accurate variety set

Recent studies have used import data to assess the impact of foreign varieties on domestic prices and welfare. We employ a market-based data set on the U.S. automobile market that allows us to define goods varieties at a more precise level, as well as discern location of production and ownership of varieties. Our estimates of price and welfare changes from new varieties in the U.S. automobile sector are twice as large as standard estimates when using our detailed market-based data. We also show that new varieties introduced by foreign-owned affiliates provided an additional 70% welfare gain during our sample.     

Escapism FDI from developed economies: The role of regulatory context and corporate taxation

In this paper, we extend the conceptualisation of escapism Foreign Direct Investment (FDI) holding for emerging economies to developed economies that face specific institutional failures, such as weak or incomplete regulations, along with high taxation. We combine this literature with the recent development of Dunning’s eclectic paradigm, which includes institutional aspects regarding location factors. We argue that in developed economies with problematic regulations and high taxation, sound institutions and lower tax rates abroad are extremely significant for domestic firms’ internationalisation. A central result regards the moderating effect of host regulatory quality on taxation, which highlights the crucial role of institutions for firms originating in developed economies that lack sound institutions. Additionally, the results challenge the available theorising and evidence on the moderating role of institutions in the prior experience of a firm at a location. We instead provide evidence that once firms establish a subsidiary abroad, they acquire substantial knowledge about the host institutional environment, which translates into an Ot advantage, providing an additional motive for further expansion. This work uses a unique database of the total population of Greek MNEs – released for the first time – for an extended time period, 2001–2010. The results could be generalised to similar developed economies facing analogous regulatory failures and high taxation, such as the southern European Union countries, as well as even for northern European Union countries, such as Germany, according to Bundesbank’s report.     

Competition for FDI with vintage investment and agglomeration advantages

Countries compete for new FDI investment, whereas stocks of FDI generate agglomeration benefits and are potentially subject to extortionary taxation. We study the interaction between these aspects in a simple vintage capital framework with discrete time and an infinite horizon, focussing on Markov perfect equilibrium. We show that the equilibrium taxation destabilizes agglomeration advantages. The agglomeration advantage is valuable, but is exploited in the short run. The tax revenue in the equilibrium is substantial, and higher on “old” FDI than on “new” FDI, even though countries are not allowed to use discriminatory taxation. If countries can provide fiscal incentives for attracting new firms, this stabilizes existing agglomeration advantages, but may erode the fiscal revenue in the equilibrium.     

Deforestation,foreign demand and export dynamics in Indonesia

This paper presents a dynamic, heterogeneous firm model of investment in environmental abatement and exporting. The model highlights the interaction between firms' environmental investment and export decisions on the evolution of productivity and export demand in timber manufacturing industries. The model is structurally estimated using Indonesian timber manufacturing data that captures firm-level variation in environmental investment and export behavior. The results suggest that environmental abatement has little impact on productivity dynamics, but does encourage growth in export demand. Counterfactual experiments quantify the impact of policy change on trade and abatement decisions.     

Temporal dimension and equilibrium exchange rate: A FEER/BEER comparison

This paper investigates the temporal links between two models of equilibrium exchange rate, namely the behavioral and the fundamental approaches. Our results show that, even though in the long-run they are closely related, important differences are observed for some countries and/or some periods. Contrary to previous contributions, we analyze the factors that explain this disconnection. We outline structural changes in matter of competitiveness, the dynamics of foreign assets and valuation effects as explanations. This novel evidence is important if the two approaches for assessing misalignments are used for policy decisions such as setting tariffs to cope with the “currency war”.     

Market size and tax competition

With international externalities, different country sizes, imperfect competition, and trade costs, tax competition for mobile firms is efficiency-enhancing with respect to the free market outcome. Under both scenarios, the resulting inefficiencies in international specialization and trade flows vanish when trade costs are low enough. Otherwise, only international tax coordination can implement the efficient spatial distribution of firms.     

Exporting behavior of foreign affiliates: Theory and evidence

Firms have increasingly conducted different stages of production in different countries. In particular, they may set up operations in low-cost countries (those operations are referred to as foreign affiliates in those countries) either as platforms for export or serving the growing markets there. What is the exporting behavior of foreign affiliates? In this paper, using data from China, we find that among foreign affiliates exporters are less productive than non-exporters. We then offer a theoretical explanation by incorporating into the standard firm heterogeneity model the possibility that firms could have different stages of production in different countries.