Home-country environment and firms’ outward foreign direct investment decision: Evidence from Chinese firms

This paper takes a holistic view and examines the environmental effect of the home country on firms’ outward foreign direct investment (OFDI) decisions. We construct an economic growth index to assess the overall economic environment of Chinese regions and find that the home country’s business environment is negatively associated with firms’ decisions to invest abroad, and that such a negative relationship can be intensified for firms with state ownership or without an export network. Moreover, unlike previous literature, we look at both the environmental effect on OFDI decisions and the consequential impact of OFDI on firm performance. We employ propensity score matching and difference-in-differences methods, as well as the Heckman two-step model, for our estimations. Our results show that OFDI does indeed improve Chinese firms’ productivity and sales. This paper, therefore, contributes to the literature by identifying a range of home country business environmental factors that have a combined effect on firms’ OFDI decisions, adding to a more comprehensive understanding of OFDI originating from emerging economies.     

Coordination and delay in global games

What is the effect of offering agents an option to delay their choices in a global coordination game? We address this question by considering a canonical binary action global game, and allowing players to delay their irreversible decisions. Those that delay have access to accurate private information at the second stage, but receive lower payoffs. We show that, as noise vanishes, as long as the benefit to taking the risky action early is greater than the benefit of taking the risky action late, the introduction of the option to delay reduces the incidence of coordination failure in equilibrium relative to the standard case where all agents must choose their actions at the same time. We outline the welfare implications of this finding, and probe the robustness of our results from a variety of angles.     

Behavior of Household Portfolios in France: the Role of Housing

The two-dimensional aspects of dwellings occupied by their owner, consumption and investment, make the analysis of households' portfolio choice and the analysis of housing purchases more difficult. But it seems difficult to analyze portfolio decisions without taking account of owner-occupied housing that has an important effect on wealth composition over the life cycle. In this paper we estimated a portfolio choice model where the different dwellings are defined as assets and we showed that we cannot separate investment decisions from housing consumption. Especially, risky assets demand should be greatly influenced by attitudes toward home property.     

Information-eliciting compensation schemes

This paper examines the implications of the ‘residence’ approach to taxing foreign source income such as employed by the United States. It is argued that, because the repatriation of earnings to the home country investor and not the earnings themselves are typically the source of tax liability, the foreign source income tax should affect foreign investment differently depending on the required transfers of funds within the firm.One implication of viewing the tax in this way is that in order to maximize after-tax profits, a firm should finance its foreign investment out of foreign earnings to the greatest extent possible. That is, a firm's required foreign return jumps at the point at which desired foreign investment just exhausts foreign earnings. This allows us to draw a distinction between ‘mature’ foreign operations, which are at any point in time financed at the margin by investing earnings (and perhaps also pay dividends to their parent firm in the home country), and ‘immature’ foreign affiliates, which rely on funding from their parents (and should not be paying dividends). It is noted that survey evidence on multinational firm behavior is consistent with this distinction. Direct investment data indicate that mature foreign operations probably account for nearly 90 percent of U.S. foreign direct investment.The discussion then turns to investment incentives. It is shown that the home country's rate of tax on foreign source income and the presence or absence of a foreign tax credit should be irrelevant to a mature foreign operations's investment and dividend decisions. This conclusion, which conflicts sharply with the conventional wisdom, follows because the home country tax acts as an unavoidable cost. New firms' investment decisions are, on the other hand, influenced by home country taxes.     

Search efficiency,wage dynamics and welfare

Advances in information technology have improved the job-search process in the labor market. We analyze the effects of this improvement by constructing a search-and-matching model with two sectors: a risky sector with firm-specific productivity shocks and a risk-free sector. The risky sector is characterized by a low level of commitment between employers and workers – either party can end the employment relationship. We show that a better job-search process generates more job matches in the risky sector, and this benefits workers by improving their outside options. The effect on employers is subtle: while it is easier to fill vacancies, workers become more expensive. At the same time, the ease of finding new workers makes it harder for employers to keep their wage promises to workers and increases wage volatility. Our paper contributes to the literature by offering a novel explanation for the observed rise in wage volatility.     

LOBBYING UNDER ASYMMETRIC INFORMATION

We analyze an informational theory of lobbying in the context of strategic trade policy. A home firm competes with a foreign firm to export to a third country. The home policy-maker aims to improve the home firm's profit using an export subsidy. The optimal export subsidy depends on the demand conditions in the third country, which are unknown to the policy-maker. The home firm can convey this information to the policy-maker via costly lobbying. Surprisingly, the presence of lobbying costs can be advantageous for both: it makes the home firm's lobby effort credible and eases the policy-maker's information problem. We identify the conditions under which lobbying is beneficial on balance and the conditions under which it is harmful.     

Corruption and culture: An experimental analysis

Why do some people choose corruption over honesty and others not? Do the social norms and values prevailing in the societies in which they grew up affect their decisions? In 2005, we conducted a bribery experiment and found that, among undergraduates, we could predict who would act corruptly with reference to the level of corruption in their home country. Among graduate students we could not. In 2007, we replicated our result and also found that time spent in the UK was associated with a decline in the propensity to bribe, although this does not explain our inability to predict graduate behaviour. We conclude that, while corruption may, in part, be a cultural phenomenon, individuals should not be prejudged with reference to their country of origin.     

Financial Matching, Asymmetric Information and Entrepreneurial Risk Taking

We study financial matching in credit markets when entrepreneurs have private information about their success potential. Entrepreneurs can search for financing for either a “risky” or a “safe” investment and only the risky project is sensitive to entrepreneurs' intrinsic “types”. There is excess risk taking in the sense that entrepreneurs with inefficiently low success probabilities choose the risky investment. However, steady states featuring greater market liquidity are associated with higher efficiency. As market liquidity also reflects the intensity of competition among financiers, earlier results which indicate a negative relationship between competition and allocative efficiency do not hold in our setup.     

Risk breeds risk aversion

We examine whether exposure to a more or less risky environment affects people’s subsequent risk-taking behavior. In a laboratory setting, all subjects went through twelve rounds of multiple-price-list decisions between a risky alternative and a safe alternative. In the first six rounds, subjects were randomly assigned to a high-, moderate-, or low-risk environment, which differed in the variances of the lotteries they were exposed to. In the last six rounds, subjects in all treatments made decisions on an identical set of lotteries. We found that subjects who had experienced a riskier environment exhibited a higher degree of risk aversion. Our experimental design allows us to conclude that this effect is driven by the risk environment per se, rather than the realized outcomes of the risk. This finding has important theoretical and policy implications.     

Trade cost reduction and foreign direct investment

While the “proximity-concentration” theory suggests a positive relationship between trade cost and foreign direct investment (FDI), there is ample evidence showing a negative relationship between them. We show that the possibility of exporting back to the home country from a host country, which is often referred as “home-country export platform FDI”, may generate a negative relationship between trade cost and FDI. Market demand and product market competition may play important roles in this respect.     

Financial development and remittances: Micro-econometric evidence

We estimate a behavioural model of household’s remittances to investigate to what extent the level of financial development in the home country affects decisions on whether and how much to remit.     

International migration,transfer of norms and home country fertility

This paper examines the relationship between international migration and source country fertility. The impact of international migration on source country fertility may have a number of causes, including a transfer of destination countries' fertility norms. We provide a rigorous test of the diffusion of fertility norms using highly detailed original data on migration. Our results provide evidence of a significant transfer of destination countries' fertility norms from migrants to their country of origin: a 1% decrease (increase) in the fertility norm to which migrants are exposed reduces (raises) home country fertility by about 0.3%. JEL classification: J13, J61, O11     

Is the use of bank debt as a governance mechanism conditioned by the financial system? The cases of Chile and Spain

We test whether the use of bank debt as a governance mechanism is conditioned by the financial system in which firms operate. Our results indicate that the legal and institutional environment determines the use of bank debt to finance growth opportunities. Firms use bank debt to finance their growth opportunities when the country's banking system contributes to solving agency and asymmetric information problems and avoiding information monopoly costs. The evolutionary process of the financial systems in each country means that market imperfections such as information asymmetry or agency costs can have a diverse influence on firms’ bank debt decisions.     

Risk-taking for others under accountability

We let subjects take risky decisions that affect themselves and a passive recipient. Adding a requirement to justify their choices significantly reduces loss aversion. This indicates that such an accountability mechanism may be effective at debiasing loss aversion in agency relations.     

Intentions to Return of Clandestine Migrants: The Perverse Effect of Illegality on Skills

In this paper we show that highly skilled clandestine migrants are more likely to return home than migrants with low or no skills when illegality causes "skill waste", i.e. when illegality reduces the rate of return of individual capabilities (i.e. skills and human capital) in the country of destination. In a simple life-cycle framework, illegality is modeled as a tax on skills that reduces the opportunity cost of returning home particularly for the highly skilled. This proposition is tested on a sample of apprehended immigrants that unlawfully crossed the Italian borders in 2003. The estimation confirms that the intention to return to the home country is more likely for highly skilled illegal immigrants. The empirical results of this paper attenuate the common wisdom on the return decisions of legal migrants, according to which low-skill individuals are more likely to go back home (mainly because of negative self-selection).     

Realitic and Analytic Syntheses of Macro- and Microeconomics

We study the impact of employer's opportunism on wage rigidity in capitalist companies by arguing that the need to fix wages is crucially influenced by the asymmetric distribution of decision-making power and information in favor of the stronger contractual party — the employer, and against the weaker contractual party — employees. The capitalist entrepreneur can make decisions, whose negative consequences are borne by workers in terms of lower wages and more intense work pace. Excessive wage reductions in the face of negative exogenous shocks or too risky investment decisions represent the main instances of such opportunistic behavior. Fixed wages can represent workers' best response to the emerging risk of the employer moral hazard, but this implies a heightened risk of layoffs since wages and employment levels cannot be fixed at the same time. Besides discussing piece rate contracts, profit-sharing and codetermination as counterexamples, we observe worker cooperatives which depart from the presence of contrasting interests and private information in the principal-agent framework. Indeed, several empirical studies have shown greater employment stability and wage flexibility in worker cooperatives vis-à-vis the capitalist firm.     

Misery loves company: Social regret and social interaction effects in choices under risk and uncertainty

Extensive field evidence shows individuals? decisions in settings involving uncertainty depend on their peers? decisions. One hypothesized cause of peer group effects is social interaction effects: an individual?s utility from an action is enhanced by others taking the same action. We employ a series of controlled laboratory experiments to study the causes of peer effects in choice under uncertainty. We find strong peer group effects in the laboratory. Our design allows us to rule out social learning, social norms, group affiliation, and complementarities as possible causes for the observed peer group effects, leaving social interaction effects as the likely cause. We use a combination of theory and empirical analysis to show that preferences including “social regret” are more consistent with the data than preferences including a taste for conformity. We observe spillover effects, as observing another?s choice of one risky gamble makes all risky gambles more likely to be chosen.     

Military aid,direct intervention and counterterrorism

We analyze the choice often faced by countries of whether to directly intervene to counter an external terrorist threat or to subsidize a foreign government to do it. We present a model which analyzes this policy choice where two countries, home and foreign, face a terrorist threat based in the foreign country. The home country chooses how much to invest in defending itself and in reducing terrorist resources either indirectly by subsidizing the foreign country or by directly by intervening itself and risking destabilizing the foreign country. Using a calibrated model, we are able to show that direct intervention is only an equilibrium if foreign and home efforts are not good substitutes in the technology used to reduce the resources of the terrorist group. A higher relative military efficiency by the home country makes intervention more likely.     

Birds of a feather: Evidence on commonality of corruption and democracy in the origin and location of foreign investment in Russian regions

We examine the effects of subnational variations in corruption and democratization on the location decisions of foreign investors in Russian regions using firm-level panel data for the period 1996–2007. We link these effects to the level of corruption and type of political regime in the country of origin of a foreign investor. We find a relationship between attributes of foreign investors' home countries and attributes of the regions in which investment takes place: foreign investors from less corrupt and democratic countries tend to invest in less corrupt and more democratic Russian regions, whereas those from more corrupt and non-democratic countries tend to invest in more corrupt and less democratic regions. An inference is that, in Russian regions with high corruption and with autocratic government, foreign direct investment appears driven by the personal interests of controlling regional political elites who collaborate for mutual gain with foreign investors from corrupt and autocratic countries. Our results suggest a general conclusion that origin and location of foreign investment are linked by common political culture.     

A model of takeovers of foreign banks

This paper investigates the determinants of the takeover of a foreign bank by a domestic bank whereby the former becomes a branch of the latter. Each bank is initially supervised by a national agency that cares about closure costs and deposit insurance payouts, and may decide the early closure of the bank on the basis of supervisory information. Under the principle of home country control, the takeover moves responsibility for both the supervision of the foreign bank and the insurance of the foreign deposits to the domestic agency. It is shown that the takeover is more likely to happen if the foreign bank is small (relative to the foreign banking market) and its investments are risky (relative to those of the domestic bank). Moreover, the takeover is in general welfare improving for both countries.