Dynamic effects of trade openness on financial development

This paper employs the Pooled Mean Group (PMG) approach of Pesaran et al. (1999) to study the dynamic effects of trade openness on financial development. The advantage of the PMG estimator over other dynamic panel econometric techniques is that it allows short-run coefficients, speeds of adjustment and error variances to vary across countries, with cross-country homogeneity restrictions only on long-run parameters. Our results spanning 88 countries over 1960–2005 show that a positive long-run relationship between trade openness and financial development coexists with a negative short-run relationship. But when splitting the data into different income or inflation groups, this finding is observed only in relatively low-income countries or high-inflation economies.     

Economic integration and the profitability of cross-border mergers and acquisitions

The 1990s was a decade of increased economic integration. The decade also witnessed a sharp increase in cross-border mergers and acquisitions. From a theoretical perspective, the increase in international mergers in more integrated economies is rather puzzling. It is a well-established result that due to the “business stealing effect”, mergers in integrated markets are not likely to be profitable. A reasonable conjecture would therefore be that closer integration of markets would reduce the attractiveness of cross-border mergers and acquisitions. The present paper demonstrates that this is not necessarily the case: Economic integration may trigger cross-border acquisitions by reducing the business stealing effect and by reducing the reservation price of the target firm. The paper thus provides explanations to the observed increase in cross-border mergers in a world of more integrated economies.     

Steel safeguards and the welfare of U.S. steel firms and downstream consumers of steel: a shareholder wealth perspective

Abstract.  This paper analyses the steel safeguards applied during 2001–3. Results reveal that for shareholders of U.S. steel companies safeguards generated positive 'abnormal' returns of approximately 6%. The cancellation of the safeguards resulted in wealth gains of about 5%. Steel shareholders experienced negative abnormal returns of −5% in response to the WTO ruling that the U.S. had violated WTO law. Our results are consistent with the neoclassical view that producers gain at the expense of consumers. Also, findings indicate that downstream-consuming firms that diversify production in NAFTA countries avert some trade policy risk associated with higher steel costs caused by safeguard protection.     

FDI in space: Spatial autoregressive relationships in foreign direct investment

There are a number of theoretical reasons why foreign direct investment (FDI) into a host country may depend on the FDI in proximate countries. Such spatial interdependence has been largely ignored by the empirical FDI literature, with only a couple recent papers accounting for such issues in their estimation. This paper conducts a general examination of spatial interactions in empirical FDI models using data on US outbound FDI activity. We find that estimated relationships of traditional determinants of FDI are surprisingly robust to inclusion of terms to capture spatial interdependence, even though such interdependence is estimated to be significant. However, we find that both the traditional determinants of FDI and the estimated spatial interdependence are quite sensitive to the sample of countries one examines.     

VOLUNTARY IMPORT EXPANSION AND DIRECT INVESTMENT*

This paper analyses the welfare effects of a market‐share Voluntary Import Expansion (VIE) in the presence of foreign direct investment utilizing a duality approach. Introducing the cost burden of VIE explicitly, this paper considers the conditions under which a market‐share VIE is voluntary to the importing country. It is shown that the voluntary nature of VIE depends upon the capital import, cost burden and price difference effects and that a VIE is truly voluntary if it is accompanied by direct investment. We also show the existence of a complementary relationship between VIE and direct investment in attaining a particular level of welfare.     

Trade costs, wage rates, technologies, and reverse imports

Abstract .  This paper explores the effects of transport costs, tariffs, and foreign wage rates on the domestic economy in the presence of reverse imports, with special emphasis on inter-firm cost asymmetry in an international oligopoly model. To serve the domestic market, a foreign firm produces in the foreign country, while two domestic firms produce either at home or abroad. Surprisingly, an increase in the foreign wage rate may increase the profits of a firm producing in the foreign country. Even if all firms produce in the foreign country, an increase in the foreign wage rate may improve domestic welfare.     

Migrant networks and foreign direct investment

Although there exists a sizeable literature documenting the importance of ethnic networks for international trade, little attention has been devoted to studying the effects of migrants on foreign direct investment (FDI). The presence of migrants can stimulate FDI by promoting information flows across international borders and by serving as a contract enforcement mechanism. This paper investigates the link between the presence of migrants in the US and US FDI in the migrants' countries of origin, taking into account the potential endogeneity concerns. The results suggest that US FDI abroad is positively correlated with the presence of migrants from the host country. The data further indicate that the relationship between FDI and migration is stronger for migrants with tertiary education.     

STAY OR LEAVE? CHOICE OF PLANT LOCATION WITH COST HETEROGENEITY

Using a two-country model, we examine location choices by two domestic firms when they serve only the domestic market and their cost structures differ. The findings indicate that whether the firm that has a greater incentive for foreign direct investment is more or less efficient depends on the differences in domestic and foreign marginal costs, trade costs, and the presence of fixed costs. Plant locations may not be uniquely determined. In particular, a small change in trade costs may reverse plant location. Moreover, a decrease in transport costs in the presence of foreign direct investment may deteriorate domestic welfare.     

Interdependence in multinational production networks

Abstract Most multinational firms today operate multilateral production networks. Most existing empirical analyses, however, have focused on firms’ choice between producing at home and investing overseas. This paper uses detailed French multinational subsidiary data to examine the effect of existing production networks on multinationals’ entry decisions. The paper finds strong horizontal and vertical interdependence across multinationals’ foreign production locations, but little interdependence between home and foreign production when third‐country effects are taken into account. This result constitutes a sharp contrast to the conventional emphasis and highlights the importance of investigating foreign direct investment in the context of multinational production networks.     

Competition in taxes and performance requirements for foreign direct investment

Tax incentives offered to attract firms engaged in foreign direct investment are often tied to performance requirements such as domestic content restrictions or adherence to environmental standards. The tax competition literature has repeatedly shown that competition between municipalities for mobile firms tends to drive taxes to low levels. One would expect a comparable result for burdensome performance requirements. Despite this, the evidence suggests that while taxes have indeed been driven down, performance requirements are as popular as ever. We explain this seeming conundrum by showing that in the presence of spillovers, binding performance requirements can act as a coordination device for firms. In equilibrium, municipalities choose performance requirements, which maximize joint surplus from investment. Competition between municipalities then transfers this surplus to firms via tax subsidies.     

The Feldstein-Horioka puzzle in African countries: A panel cointegration analysis

This paper investigates the Feldstein-Horioka coefficients for 37 African countries using the recently developed Pooled Mean Group (PMG), Fully Modified OLS (FMOLS), and Dynamic OLS (DOLS) panel cointegration techniques. The empirical findings reported in this paper reveal that savings and investment are non-stationary and cointegrated series. The estimated coefficients using FMOLS, DOLS, and PMG are 0.38, 0.58, and 0.36, respectively, for the sample as a whole for the period from 1970 to 2006. These results confirm previous studies' findings that capital was relatively mobile in African countries compared to OECD countries. In addition, our study shows that there are marked differences in savings retention coefficients for different country groups in Africa (CFA franc zone and non-CFA franc zone countries, oil-producing and non-oil-producing countries, civil law and common law countries). These results have some policy implications.     

Systems GMM estimates of the Feldstein–Horioka puzzle for the OECD countries and tests for structural breaks

A systems GMM estimation method is used to estimate the Feldstein–Horioka equation from 1960 to 2007 with a panel of 13 OECD countries. It is found that the Feldstein–Horioka puzzle exists in a weaker form with a much reduced saving retention coefficient. The Bretton Woods agreement in particular seems to have weakened the Feldstein–Horioka puzzle by significantly improving international capital mobility. In comparison the Maastricht agreement seems to have improved capital mobility only by a small magnitude. The Blundell and Bond systems GMM method and structural break tests of Mancini-Griffoli and Pauwels are used in this paper.     

OUTWARD INVESTMENT TO CHINA AND LOCAL INNOVATION OF TAIWANESE MANUFACTURING FIRMS

Does outward investment induce more domestic innovation or simply move local innovative efforts to foreign plants? This question is topical and relevant to Taiwan in view of its large share of outward investment concentrated in China and the special political relationship between the two sides of the Taiwan Strait. The purpose of this paper is to examine the effect of outward investment in China on domestic innovative activity in Taiwan. Overall, this study finds that a positive relationship exists between outward investment and innovation in terms of R&D intensity and patents, implying that investing in China is part of a global resource allocation strategy of Taiwanese multinational enterprises to allocate production in China and pay more attention to innovative activity in their domestic plants. Moreover, the deregulation of the policy regarding investing in China in 2001 has induced an upsurge in investment in China, although it does not seem to have brought about an outflow of technologies.