Who Benefits from Voluntary Export Restraints?

Using a simple Cournot-oligopoly model, the paper examines the effects of voluntary export restraints (VERs) on profits, market shares, consumers' surplus, and domestic welfare when the domestic market is open to foreign direct investment (FDI) or exports from a third country. A VER may induce FDI from the VER-restricted country or exports from the third country. Under certain circumstances, the domestic firm loses from a VER. Even if the domestic firm gains, the increase in the market share of the domestic country induced by the VER could be less than that of the third country.     

FDI Policy,Greenfield Investment and Cross‐border Mergers

This paper examines a multinational's choice between greenfield investment and cross‐border merger when it enters another country via foreign direct investment (FDI) and faces the host country's FDI policy. Greenfield investment incurs a fixed plant setup cost, whereas the foreign firm obtains only a share of the joint profit from a cross‐border merger under the restriction of the FDI policy. This trade‐off is affected by market demand, cost differential, and market competition, among other things. The host country's government chooses its FDI policy to affect (or alter) the multinational's entry mode to achieve the maximum social welfare for the domestic country. We characterize the conditions shaping the optimal FDI policy and offer intuitions on FDI patterns in developing and developed countries.     

EXPORT SUBSIDIES VERSUS EXPORT QUOTAS WITH INCOMPLETELY INFORMED POLICY MAKERS*

This paper analyses export subsidies (price incentives) and export quotas (quantity controls) in the Brander‐Spencer (1985) model when policy makers have limited information on demand and cost structures. We examine necessary or sufficient information for policy makers to determine welfare‐enhancing policies. It is crucial that they know the elasticity value of the slope of the inverse demand curve and the market share. It is also shown that for policy makers, export quotas are superior to export subsidies under certain conditions.     

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.     

Measuring the Effects of Exchange Rate Changes on Investment in Australian Manufacturing Industry*

This paper examines the relationship between exchange rates and investment in Australian manufacturing between 1988 and 2001. The effects of exchange rates on investment are found to vary positively with the export share of sales and negatively with the share of imported inputs into production, with lower price‐over‐cost mark‐ups increasing the response. For Australian manufacturing, a 10 per cent real appreciation of the Australian dollar leads to an average 8.0 per cent decrease in total investment through the export share channel, and an average 3.8 per cent increase through the imported input share channel, with most of the response occurring through investment in equipment, plant and machinery.     

On the welfare effects of competition for foreign direct investments

This paper investigates welfare effects of subsidy competition for the location of a multinational enterprise. One of the competing regions benefits more from the inward investment but, in the absence of incentives, the multinational's preferred location is the other, more advanced region. The paper shows that subsidies, by making the multinational switch location, may increase aggregate welfare. If the multinational exports in the absence of incentives, the welfare effects of subsidy competition may look very different. Allowing subsidies attracts the direct investment, which otherwise would not take place, in one of the two regions. Further, it intensifies competition in the market. The paper shows that the welfare increasing role of incentives may be amplified, but also that the competition effect, by hurting domestic firms, may cancel out any other positive role of incentives.     

International Income Transfer under Imperfect Competition

This paper examines the effects of an international income transfer under international monopoly. One of the markets in the donor country is monopolized and there exist two distinct types of agent: monopolist and factor owners. The transfer is provided by the agents with different lump sum tax (burden‐share) rates. The burden‐share rate plays a key role concerning the welfare effects of a transfer. We show that the government of the donor country can raise both its social welfare and the wellbeing of the recipient country by providing a further transfer and by simultaneously adjusting the burden‐share rates.     

INTERNATIONALIZATION STRATEGIES IN OLIGOPOLY WITH HETEROGENEOUS FIRMS

This paper examines the foreign direct investment (FDI) versus exports decision of foreign oligopolistic firms under cost heterogeneity. An additional motivation for firms to invest abroad is the technological sourcing via spillovers, which flow from the host more efficient firm to foreign less advantaged firms. For intermediate values of the set‐up costs associated with FDI entry, it is shown that foreign firms choose opposite entry strategies. An equilibrium where the less efficient foreign firm exports whereas the more efficient invests is more likely to happen when foreign firms become more heterogeneous, the larger the trade costs and not too big oligopolistic profitability. Interestingly, the opposite may also be an equilibrium thus finding that the more efficient firm does not choose to invest, a result that emphasizes the relevance of the strategic setting under consideration. The latter result identifies a market failure since welfare in the host market is higher when both firms undertake FDI; a finding that calls attention to how appropriate are host government policies towards internationalization strategies.     

Export,FDI and the welfare gains from trade liberalization

This paper extends Melitz and Redding (2015) to analyze the welfare gains from trade liberalization by adding foreign direct investment(FDI). Our model predicts that with FDI activities, welfare gains from trade liberalization will be strictly lower than those in a model without FDI, but only takes exports into account. In addition, the calibrated model indicates that with FDI activities, aggregate welfare reaches its maximum when the fixed export costs are positive rather than 0. Furthermore, we decompose the welfare gains induced by trade liberalization from continuing exporters, and switchers. The results show that in any case, with or without FDI, continuing exporters contribute a larger share to welfare gains than status switching firms.     

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.     

The welfare effect of a free trade agreement in the presence of foreign direct investment and rules of origin

This paper investigates the welfare effect of forming a free trade agreement (FTA). To receive tariff‐free treatment, firms must comply with the rules of origin (ROO). Outside firms could undertake either market‐oriented or export‐platform foreign direct investments (FDIs). ROO have the following effects: (i) An infeasible FTA may become feasible by deterring outside firms' FDIs, (ii) an FDI of a less efficient firm could replace that of an efficient firm, or (iii) FDIs made before the FTA is concluded might be eliminated. These potential effects complicate the welfare effect of the FTA and could decrease the consumer surplus.     

Policy competition for foreign direct investment between asymmetric countries

The present paper analyses policy competition for foreign direct investment between countries of different size and different market structure. We demonstrate how policy competition affects the location decision of the foreign investor and derive welfare implications. The key variables in our analysis are intra-regional trade costs, differences in market size, and minimum wages.     

Welfare‐reducing Domestic Cost Reduction*

We show that cost reduction by a domestic firm may reduce domestic welfare if it changes a foreign firm’s production strategy from foreign direct investment to export. Domestic cost reduction can be welfare reducing when the domestic market is sufficiently small and domestic firm’s marginal cost of production is higher than the foreign firm’s marginal cost of production under foreign direct investment, which is a usual feature of trade between developed and developing countries. So, developing countries with small domestic markets need competent competition policies when encouraging domestic innovation and also trying to attract foreign direct investment.     

Market Size and the Survival of Foreign‐owned Firms*

We develop a general equilibrium model with heterogeneous firms and foreign direct investment cost uncertainty and investigate the survival of foreign‐owned firms. The survival probabilities of foreign‐owned firms depend on firm‐level characteristics, such as productivity, and host country characteristics, such as market size. We show that a foreign‐owned firm will be less likely to be shut down when its parent firm's productivity is higher and its indigenous competitors are less productive. Although a larger market size will always reduce the survival probability of indigenous firms, it can lead to a higher survival probability for foreign‐owned firms if their parent firms are sufficiently productive.     

Sudden Stop and Sudden Flood of Foreign Direct Investment: Inverse Bank Run,Output, and Welfare Distribution

In this paper, I focus on a phenomenon that has not received much attention in the literature, namely that the mere expectation of foreign direct investment (FDI) incentivizes long‐maturity investment projects by domestic residents, and a Sudden Stop when expectations are frustrated. Long‐maturity investment projects enhance productivity but increase the economy's vulnerability to Sudden Stop. The discussion is framed in a context in which a Sudden Stop follows a surge of capital inflows (Sudden Flood), and FDI is concentrated on ongoing projects. A Sudden Stop episode can trigger a fire sale of long‐term assets, output collapse, and welfare redistribution, which is another ignored phenomenon.     

Core competencies,matching and the structure of foreign direct investment

We develop a matching model of foreign direct investment to study how multinational firms choose between greenfield investment, acquisitions and joint ownership. Firms must invest in a continuum of tasks to bring a product to market. Each firm possesses a core competency in the task space, but the firms are otherwise identical. For acquisitions and joint ownership, a multinational enterprise (MNE) must match with a local partner that may provide complementary expertise within the task space. However, under joint ownership, investment in tasks is shared by multiple owners and, hence, is subject to a holdup problem that varies with contract intensity. In equilibrium, ex ante identical multinationals enter the local matching market, and, ex post, three different types of heterogeneous firms arise. Specifically, the worst matches are forgone and the MNEs invest greenfield; the middle matches operate under joint ownership; and the best matches integrate via full acquisition. We link the firm‐level model to cross‐country and industry predictions and find that a greater share of full acquisitions occur between more proximate markets, in hosts with greater revenue potential and within contract‐intensive industries. Using data on partial and full acquisitions across industries and countries, we find robust support for these predictions.     

The limitations of decentralized world redistribution: An optimal taxation approach

A centralized scheme of world redistribution that maximizes a border-neutral social welfare function, subject to the disincentive effects it would create, generates a drastic reduction in world consumption inequality, dropping the Gini coefficient from 0.69 to 0.25. In contrast, an optimal decentralized (i.e., with no cross-country transfers) redistribution has a miniscule effect on world income inequality. Thus, the traditional public finance concern about the excess burden of redistribution cannot explain why there is so little world redistribution.Actual foreign aid is vastly lower than the transfers under the simulated world income tax, suggesting that voluntary world transfers - subject to a free-rider problem - produces an outcome that is consistent with rich countries such as the United States either placing a much lower value on the welfare of foreigners, or else expecting that a very significant fraction of cross-border transfers is wasted. The product of the welfare weight and one minus the share of transfers that are wasted constitutes the implicit weight that the United States assigns to foreigners. We calculate that value to be as low as 1/2000 of the value put on the welfare of an American, suggesting that U.S. policy is consistent with social preferences that place essentially no value on the welfare of the citizens of the poorest countries, or that implicitly assumes that essentially all transfers are wasted.     

VERs,Quid Pro Quo DFI and VIEs: Political-Economy-Theoretic Analyses

The paper addresses three different phenomena: VERs, their causes and consequences; Quid Pro Quo direct foreign investment; and VIEs. Quid Pro Quo direct foreign investment relates to investment that is undertaken in one period to influence the probability of protection being imposed in the next period. VIEs are “voluntary import expansions” which define quantity outcomes in the domestic markets of the country on which they are imposed, as when U.S. requires that a certain share of the Japanese market in an industry must be supplied by U.S. exports by a certain date. [410]     

Trade liberalization,forward‐looking firms,and welfare

We set up an oligopolistic model with two exporting firms selling to a third market to investigate the welfare implications of trade liberalization when the exporting firms are forward‐looking. The results show that with cost asymmetry trade liberalization encourages the exporting firms to engage in tacit collusion, which may not only be detrimental to the domestic welfare, but also to the consumer surplus of the importing country. Moreover, we find that tacit collusion is less sustainable if the government of the importing country imposes a lower (higher) tariff on the more (less) efficient exporting firm. If a nonforward‐looking or a forward‐looking cost‐efficient domestic firm exists in the importing country, then trade liberalization also encourages tacit collusion.     

Comparison of deep integration in the Melitz,Krugman and Armington models: The case of The Philippines in RCEP

We estimate the welfare effects of a modern mega-preferential trade agreement--the Regional Comprehensive Economic Partnership--with three versions of market structure: (i) perfect competition, Armington style; (ii) monopolistic competition based on Krugman (1980); and (iii) monopolistic competition in the style of Melitz (2003). We develop a new numerical model of foreign direct investment (FDI) with heterogeneous firms and extension of the Krugman model that allows small countries to impact the number of varieties. We hold both the trade and FDI responses constant across the three market structures. We find that in all three market structures, there are substantial gains from deep integration, but virtually no gains from preferential tariff reduction. Both our Krugman and Melitz style models produce significantly larger welfare gains than the Armington structure, especially if third countries benefit at least partially from the deep integration reforms via either spillovers or wider liberalization.