Multinational enterprises and wage costs: vertical FDI revisited

This study explores how wage costs for high-skilled and less-skilled labor in host countries affect the level of affiliate activities conducted by foreign MNEs. We find support for vertical FDI, in the sense that more FDI is conducted in countries where less-skilled labor is relatively cheap. In addition, we find that skilled-wage cost premia also affect FDI activities previously associated with horizontal FDI, i.e. local affiliate sales. Consequently, the potential effects of relative wage costs on MNE activities are large. Rough calculations suggest that more than 20 percent of US affiliate sales in 1998 can be attributed to skilled-wage cost premia.     

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.     

Who's afraid of a globalized world? Foreign Direct Investments, local knowledge and allocation of talents

We study the distributional effects of globalization within a model of heterogeneous agents where both managerial talent and knowledge of the local economic environment are required in order to become a successful entrepreneur. Agents willing to set up a firm abroad incur a learning cost that depends on how different the foreign and domestic entrepreneurial environments are. In this context, we show that globalization fosters FDI and raises wages, output and productivity. However, not everybody wins. The steady state relationship between globalization and income is U-shaped: high- and low-income agents are better off in a globalized world, while middle-income agents (domestic entrepreneurs) are worse off. Thus, consistently with recent empirical evidence, the model predicts globalization to increase inequality at the top of the income distribution while decreasing it at the bottom.     

Trade policy under firm-level heterogeneity in a small economy

We explore the effect of trade policy on productivity and welfare in the now standard model of firm-level heterogeneity and product differentiation with monopolistic competition. To obtain sharp results, we restrict attention to an economy that takes as given the price of imports and the demand schedules for its exports (a “small economy”). We first establish that welfare can be decomposed into four terms: productivity, terms of trade, variety and curvature, where the last is a term that captures heterogeneity across varieties. We then show how a consumption subsidy, an export tax, or an import tariff allows our small economy to deal with two distortions that we identify and thereby reach its first-best allocation. We also show that an export subsidy generates an increase in productivity, but given the negative joint effect on the other three terms (terms of trade, variety, and curvature), welfare falls. In contrast, an import tariff improves welfare in spite of the fact that productivity falls.     

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.     

Multinationals, technology, and the introduction of varieties of goods

Multiproduct firms and product turnover are widespread phenomena. This paper develops a theoretical framework that links advantages in R&D and variable costs with firm's ability to expand its portfolio of products. The framework is then applied to explain systematic differences in product introduction by affiliates of multinationals and firms that only operate domestically. Using firm-level data for the Chinese manufacturing sector during 1998-2000, I compare the performance of foreign and domestic firms in terms of the new varieties that they introduce and I estimate the quantitative relevance of technological factors as a determinant.I find that firms with more than 50% of foreign ownership introduce on average more than twice as many more new varieties of goods as private domestic firms. Advantages in productivity account for 32 to 62% of the difference in the number and sales of new varieties, while advantages in the cost of development account for 3 to 6% of these differences.     

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.     

Foreign direct investment and customs union: Incentives for multilateral tariff cooperation over free trade

The present article examines the implications of a customs union (CU) on the pattern of tariffs, welfare and the prospects for free trade when the non-member firm has an incentive to engage in foreign direct investment (FDI). First, I show that upon the formation of a bilateral CU, the non-member firm has greater incentives to engage in FDI. However, when FDI becomes a feasible entry option for the non- member firm under a CU, member countries have incentives to strategically induce export over FDI by lowering their joint external tariff. When fixed set-up cost of FDI is sufficiently low, this tariff falls below Kemp–Wan tariff and CU leads to a Pareto improvement relative to no agreement. Moreover, using an infinite repetition of the one-shot tariff game under a CU, I show that the presence of FDI incentive of the non-member firm makes the member countries more willing to cooperate multilaterally over free trade while the opposite is true for the non-member country. Finally, I find that, unless fixed cost of having an additional plant is sufficiently low, multilateral cooperation over free trade is easier to sustain when FDI incentive is present.     

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.     

The effect of investor origin on firm performance: Domestic and foreign direct investment in the United States

This paper evaluates the causal relationship between the source of origin of FDI and the performance of the target firm. The empirical analysis uses new data on a comprehensive sample of public U.S. firms that received FDI between 1979 and 2006. To account for the possibility that performance differences arise due to the selection of superior target firm rather than the change in ownership, I use propensity score matching to create similar comparison groups of target firms prior to acquisitions. The analysis reveals three major findings. First, acquiring firms from industrialized countries lead to labor productivity increases of 13% in the target firm three years after the acquisition compared to targets acquired by domestic firms. Firms that received developing country firm acquisitions, on the other hand, exhibit lower labor productivity gains four years after acquisition, compared to targets acquired by domestic firms. Second, targets receiving FDI by firms from industrial and developing countries also experience increases in profits, compared with firms receiving acquisition by domestic firms from the United States. Third, compared with domestic acquisitions, foreign industrial firm acquisition FDI tends to increase their targets' employment and sales, whereas targets acquired by firms located in developing countries experience a decrease in both revenues and total number of employees. These findings suggest that target firms are subject to significantly different restructuring processes depending on the origin of the acquiring firm.     

The role of multinational production in a risky environment

This paper explores the aggregate consequences of Foreign Direct Investment (FDI) on the opportunities for risk diversification available to consumers. The crucial difference between FDI and other international financial flows is that the former involves technology flows across countries. We present a model where firm-embedded productivity can be transferred costly across countries through the activity of multinational firms. We find that risk patterns affect multinationals' location decisions and, in turn, these decisions change the scope for international risk diversification even in a world with complete financial markets.     

State tax competition for foreign direct investment: a winnable war?

When a multinational firm invests in a country, potential host states compete for the firm by offering firm-specific tax reductions. Critics blast such incentives for transferring rents to the firm without affecting the investment decision. In fact, these incentives are tied to the firm's use of domestic inputs and therefore affect output decisions. With positive interstate spillovers, a federal subsidy is necessary to reach the national optimum without tax competition. Competition reduces state taxes and the need for federal subsidies. Also, under competition, the firm locates efficiently. Therefore, tax competition does not always reduce national welfare.     

A race to the bottom? Employment protection and foreign direct investment

A common critique of globalization is that it leads to a race to the bottom. Specifically, it is assumed that multinationals invest in countries with lower regulatory standards and that countries competitively undercut each other's standards in order to attract foreign capital. This paper tests this hypothesis and finds robust empirical support for both predictions. First, a reduction in employment protection rules leads to an increase in foreign direct investment (FDI). Furthermore, changes in employment protection legislation have a larger impact on the relatively mobile types of FDI. Second, there is evidence that countries are competitively undercutting each other's labor market standards.     

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.     

Exports versus multinational production under nominal uncertainty

This paper examines how nominal uncertainty affects the choice that firms face to serve a foreign market through exports or to produce abroad as a multinational. I develop a two-country, stochastic general equilibrium model in which firms make production and pricing decisions in advance, and I consider its implications for the relative attractiveness of exporting and multinational production. I find that when multinational sales are priced in the local currency while exports are priced in the producer currency, destination volatility benefits exporters: during a foreign nominal contraction, the foreign exchange rate appreciates, causing exports to be relatively cheaper. Exporters gain non-linearly through demand, making profit convex in prices. As foreign volatility rises, the model implies that the home country should serve the foreign country relatively more through exports. I take this implication to bilateral U.S. data, using inflation volatility as a proxy for nominal volatility. Using sectoral data on sales by majority-owned foreign affiliates matched with U.S. exports, I find that higher inflation volatility is associated with a significantly lower ratio of multinational sales to total foreign sales.     

Income distribution and unequal gains from trade

This paper studies welfare gains from trade in a tractable model with a nonhomothetic preference over product quality. We show that the welfare changes due to trade shocks are unequal across consumers and derive a parsimonious formula to measure these welfare changes as in Arkolakis et al. (2012, American Economic Review, 102, 94–130). We find that the welfare changes are larger for consumers with lower income. Moreover, this paper shows that the welfare implications are different between a change in (iceberg-type) variable trade cost and a change in tariff when tariff revenue matters. More importantly, we show that the difference varies across consumers with different income levels.     

Endogenous international joint ventures and the environment

This paper examines the welfare effects of emission taxes under a choice between an international joint venture (JV) and a full-ownership FDI (Foreign Direct Investment) by parent firms from a developed country (the North) and a developing country (the South), as well as their location and share decisions. If the South has a poor abatement technology, its best policy is to impose a relatively high emission tax to attract a full-ownership FDI. If it has a good abatement technology, the best policy is to impose a relatively low emission tax to attract the JV. Furthermore, deregulation of foreign ownership of the JV improves the quality of the environment.     

The asymmetric effects of tariffs on intra-firm trade and offshoring decisions

This paper studies the effects of tariffs on intra-firm trade. Building on the Antràs and Helpman (2004) North–South theoretical framework, I show that higher Northern tariffs reduce the incentives for outsourcing and offshoring, while higher Southern tariffs have the opposite effects. I also show that increased offshoring and outsourcing imply a decrease in the ratio of Northern intra-firm imports to total imports, an empirically testable prediction. Using a highly disaggregated dataset of U.S. (the North) imports and relevant U.S. and foreign tariffs, I find robust evidence to support the model's predictions.     

东道国引资政策与跨国企业行为研究

基于东道国引资政策对跨国企业行为的影响,研究建立一个由跨国企业与东道国企业构成的寡头垄断竞争模型,分析跨国企业的选择行为及东道国的最佳优惠政策,结论表明东道国最佳优惠政策与跨国企业直接投资的固定成本密切相关。因此,东道国制定引资政策时应以本国国民福利为首要目标,针对不同类型的FDI给予不同的优惠政策。     

Information, incentives and multinational firms

I present a model that explains a multinational firm's choice of organizational form. If a firm in the developed country outsources the production of its intermediate goods to a supplier in the developing country, it faces an adverse selection problem. If it chooses to produce the intermediate goods in its own subsidiary in the developing country, it faces an inefficient monitoring problem. My analysis of this tradeoff provides a new explanation for the observation that FDI is concentrated in capital intensive industries and yields two empirical hypotheses: more firms should adopt outsourcing instead of FDI after trade liberalization; the share of intra-firm trade in total trade should be increasing in the degree of productivity dispersion across intermediate goods suppliers in the developing country.