Resource-based FDI and expropriation in developing economies

Globally, foreign direct investment (FDI) assets are expropriated more in resource extraction industries compared to other sectors. Despite the higher apparent risk of expropriation in resources, countries more likely to expropriate also have a larger share of FDI in the resource sector. An incomplete markets model of FDI is developed to account for this puzzle. The type of government regime is stochastic, with low penalty regimes facing a relatively low, exogenous cost of expropriating FDI, and country risk is measured by the variation in these costs across different regimes. The key innovation of the model is that the government, before the regime type is known, is able to charge different prices to domestic and foreign investors for mineral rights. Granting cheap access increases FDI and reduces the country's share of resource rents, increasing the temptation to expropriate in a relatively low penalty regime. In very high-risk countries, subsidizing resource FDI increases the total value of output by raising investment, and the net gains from expropriating in a low penalty regime outweigh the rents foregone under a high penalty one. However, a stochastic resource output price results in relatively low-risk countries restricting FDI inflows to the resource sector instead — “windfall profits” in this sector raise incentives to expropriate when prices are high, yet minimization of the ex ante risk of expropriation is preferred owing to the relatively high penalty for expropriating. These results imply a higher average share of resource-based FDI in countries most likely to expropriate, while resources account for a high share of expropriated assets compared to the sector's global share of FDI. We show that the model is able to reconcile observed patterns of foreign investment and expropriation for a sample of 38 developing and emerging economies.     

Price Discrimination and the Cruise Line Industry: Implications for Market Definition,Competition, and Consumer Welfare

This article extends the price discrimination literature and applies it to market definition and competitive effects analysis in recent mergers in the cruise line industry. In that industry, short run output is fixed. If firms want to increase price and restrict output to price‐insensitive customers, they have to increase the output and lower price to the price‐sensitive customers. We show that with fixed output (1) it is in firms’ interest to engage in price discrimination, (2) firms have increased ability to engage profitably in price discrimination as the intensity of competition decreases, and (3) the average price of price‐sensitive and ‐insensitive consumers increase with reduced competition. Unlike the economists at the Federal Trade Commission, our analysis suggests that cruise lines engage in third‐degree price discrimination. Moreover, the cruise industry could be a separate market and a reduction in the number of competitors might raise average prices.     

Currency Substitution and Price Endings: Right Digit Effect

ABSTRACT

The strategic manipulation of prices. rightmost digits has been a tactic used by retailers in the western world for decades. By studying the internationalization of pricing tactics in a global economy, our research adds a much needed contribution to the literature of price endings and pricing tactics in global markets. We find that at lower price levels, consumers exposed to a 99 ending price in a currency substitution market are more likely to purchase the product compared to consumers in the US market. At higher price levels, on the other hand, consumers in either market situation exhibit no change in purchase intentions. Thus, the 99 ending tactic has no effect on consumers when the product is expensive. The use of the right digit effect by managers in a currency substitution/ dollarized economy as a way of persuading consumers to buy is still likely to be more successful compared to the USA market. As such, firms in a dollarized economy should structure their pricing strategies while taking into consideration the type of product they are offering and the consumer market they are dealing with.     

Free samples, profits, and welfare: The effect of market structures and behavioral modes

This paper addresses an important and underresearched issue in the economics and marketing literatures: what are the managerial and social consequences when firms use business models that are based on the dissemination of free samples? We develop an analytical model of free samples for both digital and physical goods that addresses three fundamental managerial and social questions. First, what is the effect of different market structures (i.e., monopoly and oligopoly) and cost structures on optimal marketing policy and prices? Second, what is the effect of different behavioral modes on prices and free samples? Third, how do different market structures and behavioral modes affect social welfare?The main conclusion is that a number of standard results do not hold when firms have the option of selling products and of distributing free samples. For example, the optimal strategy for oligopolists who produce homogeneous goods and coordinate their marketing policies is to increase - not decrease - the quantity of sold output. Similarly, under well-defined cost and demand conditions, monopoly can lead to a socially inferior outcome to competition. From a policy viewpoint, the managerial and social welfare implications of free samples depend on the type of market structure (monopoly or oligopoly) and the behavioral modes chosen by the firms in an industry (e.g., whether to coordinate their free sample policies or to behave non-cooperatively).     

Foreign Direct Investment in Hungary

Abstract

When in 1989 the markets in Central and Eastern Europe opened, western firms were quick to move in. Hungary treated foreign firms equal to domestic ones in the privatization process. It attracted most foreign direct investment in the region. Now, other countries are likely to follow the Hungarian path and allow foreign firms to take over domestic firms. This contribution discusses the experience of six Dutch multinational firms in Hungary and discusses whether these can be useful for expansion into other countries in the region. The results indicate that firms easily underestimate the cost of reconstructing acquired enterprises and that building a market position is more expensive than anticipated.     

Tariffs, quality reversals and exit in vertically differentiated industries

In a vertically differentiated industry a domestic and a foreign firm first choose the quality of their goods and then compete in quantities, or prices, in the home market. We investigate the cases in which a tariff is chosen before, or after, the firms’ quality decision. These cases are referred to as the ex-ante and the ex-post game, respectively. Optimal ex-post tariffs are positive and ensure that the domestic firm always produces the high quality good. The optimal ex-ante tariff is prohibitive and welfare under domestic monopoly is lower than under ex-post tariffs, unless firms compete in prices and the domestic firm is high quality.     

Corporate ventures into industrial markets: Dynamics of aggressive entry

This article reports a study of the effect of aggressive entry by firms venturing into new industrial markets. There are three main sets of results:First, there is a significant correlation between the competitive attractiveness of the target industry and the initial share objective set by the corporation venturing into that industry.Second, the downstream share objective, set at the launch of the venture is significantly correlated with several key marketing strategy and investment strategy options made by the firm at the start of operations.Third, if most of these key strategy decisions are made under the assumption that a high share position will rapidly be achieved, their resulting performance, in terms of both market share and ROI, is superior to firms which enter with less aggressive share aspirations.These results are particularly appealing to the large established firm which has the resources and thus can both afford to absorb the cost of failure and afford to make significant front-end investments in aggressive initial marketing expenses and investments in initial plant capacity. For such firms a feasible strategy for a new venture into an industrial market could be to: if possible (but not essential) seek industries/markets to enter which are less likely to provoke rivalrous responses; set aggressive market share targets; invest aggressively in initial plant capacity; develop aggressive sales force, sales promotion, advertising, service quality, and/or pricing programs relative to competitors, as appropriate to the particular industry being entered.The reason we suggest that the programs be aggressive as appropriate is that different strategic options are likely to be more effective in one industry than another. For instance, aggressive advertising and sales promotions could be more effective for consumables, while aggressive sales calling programs and superior service delivery could be the more effective route for capital goods businesses.     

Trade Intermediaries and the Tariff Pass-through

This paper aims at improving our understanding of the price effects of trade policies following two perspectives. First, we wish to study how the role of intermediaries in international trade affects the transmission of tariff changes to domestic prices. Second, we explore how our results are influenced by the degree of competition in the distribution-service market. In a Cournot oligopoly-oligopsony model, we show how the pass-through of tariff cuts to domestic prices is limited by the market power of intermediaries producing distribution services. Our long-run equilibrium is characterized by a larger number of firms selling at a higher mark-up. Market access barriers in distribution services determine to what extent tariff cuts are transferred to domestic consumers and foreign producers, affecting the size of their welfare effects. The benefits of trade liberalization policies can be better achieved if they are complemented by competition enhancing measures in the intermediation sector.     

外资进入、劳动收入份额与技能工资溢价——来自2008年服务业企业普查数据的经验分析

运用2008年第二次全国经济普查服务业企业数据,文章实证检验了外资进入对服务业企业劳动收入份额和技能工资溢价的影响。结果显示外资企业存在更高的劳动收入份额,且外资进入程度对当地企业的劳动收入份额存在正向的外溢效应。文章进一步将不同所有制类型与技能劳动力占比的交互项引入工资方程,发现外资企业存在更高的技能工资溢价。我们进一步验证了外资进入对当地劳动力市场技能工资溢价的影响。结果表明,在那些外资渗透率较高、市场竞争相对激烈的地区和行业,外资企业的技能工资溢价现象会产生溢出效应,促使当地企业提高对高技能员工的薪酬待遇。因此,在合理发挥服务业外资进入对收入分配优化效应的同时,也要采取相关措施防止其进一步拉大工资差距。     

Standardization,Customization and Revenue from Foreign Markets

Abstract

This study develops theory and empirically tests the influence of heterogeneity (the degree of standardization or customization) of firm outputs on the globalization entry mode decisions, and receipt of revenues from foreign markets. To insure sufficient variance in the sample while also controlling for extraneous sectoral and national variables, this study obtained and analyzed cross-sectional data from 190 U.S. based firms in the environmental control industry. The findings indicate that the outputs of global firms are significantly less heterogeneous than the outputs of domestic firms, but that heterogeneity is not significantly related to the receipt of foreign revenues, or to the use of a higher control entry mode. These findings suggest that firms with more standardized outputs are more likely to globalize, but that standardization fails to help firms create any additional value in international markets compared to firms with more heterogeneous outputs.     

Why offer lower prices to past customers? Inducing favorable social price comparisons to enhance customer retention

Price discrimination policies vary widely across companies. Some firms offer new customers the lowest price; others give preferential prices to their past customers. We contribute to the literature on price discrimination in behavior-based pricing by exploring how customers’ social price comparisons, i.e., comparing one’s price to that received by similar peers, impact the optimal structure of price discrimination. Social price comparisons have a negative (positive) impact on customers’ transaction utility if the price charged to past customers is higher (lower) than a new customer’s price. Using an analytical model with vertically differentiated firms, we show that a firm with relatively large market share will reward its past customers with relatively low prices when social price comparisons have a sufficiently large impact on utility. Furthermore, we find that social price comparisons lead to a relaxation of the price competition for new customers. Thus, both firms can earn higher profits when such comparisons are made than when they are absent. We also examine how other factors, such as horizontal competition and strategic customers, interact with social price comparison concerns to impact pricing strategies. Finally, we show how pricing behavior differs when price comparisons are based on historic reference prices rather than on peers’ prices.     

Import Demand Elasticity and Exporter Response to Anti-Dumping Duties

ABSTRACT

This article investigates exporting firms’ behavior following the imposition of anti-dumping (AD) duties. AD duties tend to increase the prices of imported goods via a mechanism different from any other trade barrier because the AD duty size is endogenously dependent on import prices. Our model accounts for this feature and demonstrates that exporters are more likely to adjust their price upward when they face a less elastic demand. The theoretical predictions are supported empirically by relating product-level U.S. import demand elasticities and exporting firms’ reactions to duties inferred from a dataset on U.S. AD investigations from 1980 to 1995.     

A review and evaluation of market orientation research in an emerging African economy

ABSTRACT

The paper synthesizes the level of strategic market orientation of firms operating in the emerging economy of Ghana over the last two decades. It dwells on market orientation studies in general, and the banking industry and exporting firms in particular. Market orientation has a positive relationship with performance for both foreign and domestic firms across the many studies. Foreign firms in general appear more market oriented due to experience effect and relationship with parent organizations. As competition heats up in the banking industry, organizations need to be more innovative to sustain their performance or to survive. For exporting firms, there is the need for decreased formalization and increased decentralization so as to enhance the levels of market orientation. The paper develops propositions to guide organizations in applying marketing principles in the running of their business activities. Further, the paper provides an update on the literature with suggestions for future research in the theory and practice of strategic market orientation in the context of the study.     

Welfare gains from Foreign Direct Investment through technology transfer to local suppliers

We hypothesize that multinational firms operating in emerging markets transfer technology to local suppliers to increase their productivity and to lower input prices. To avoid hold-up by any single supplier, the foreign firm must make the technology widely available. This technology diffusion induces entry and more competition which lowers prices in the supply market. As a result, not just the foreign-owned firm, but all firms downstream of that supply market obtain lower prices. We test this hypothesis using a panel dataset of Indonesian manufacturing establishments. We find strong evidence of productivity gains, greater competition, and lower prices among local firms in markets that supply foreign entrants. The technology transfer is Pareto improving — output and profits increase for firms in both the supplier and buyer sectors. Further, the technology transfer generates an externality that benefits buyers in other sectors downstream from the supply sector as well. This externality may provide a justification for policy intervention to encourage foreign investment.     

The Impact of Perceived Expectations and Uncertainty on Firm Investment

This paper analyses the (differential) impact of perceived expectations and uncertainty on investment spending in small and large firms. We analyse two types of investment, viz. aggregate investment and investment in energy-saving technologies, using Dutch firm level data. The results show that expectations and uncertainty about input- and output prices and domestic demand have substantial but different effects on investment spending in firms of different sizes. Furthermore, we find evidence, at least for small firms, that there are important differences between the effects of uncertainty about input and output variables.     

Measuring Price Effects of Concentration in Mixed Oligopoly: An Application to the Swedish Beef-slaughter Industry

Empirical studies of market power focus exclusively on industries with private firms. Yet, it is not uncommon to find private firms competing with public firms or cooperatives (coops) within the same market. We develop an empirical procedure for measuring market-power and cost-efficiency effects of concentration in mixed oligopoly consisting of coops and investment-owned firms (IOF) and apply the procedure to the Swedish beef-slaughter industry. We find that the cost-efficiency effect of coop concentration more than offset its market power effect, resulting lower beef prices. IOFs are found to be price-takers in both cattle procurement and beef sales.      

International Catalog Mix Adaptation

Abstract

Striking the right balance of adaptation of the international catalog mix may be the key to profitability. U.S. catalog firms, new to international markets, have less experience in adapting than firms in more globalized industries. The literature on international marketing strategy adaptation reveals that this decision depends on the environment, industry, market, product, and characteristics of the firm. This paper examines the influence of market similarity, type of business and the firm's international experience on international catalog adaptation, and explores the effects of catalog adaptation on a firm's performance. We hypothesize that the greater the market similarity, the less likely it is that firms will adjust their catalog. We also argue than adaptation is greater for consumer catalogs than for business-to-business catalogs. A third hypothesis is that more internationally experienced firms will adapt more and a final hypothesis is that a greater degree of adaptation will increase the international catalog performance. The results did not support the association of international catalog adjustment and market similarity, experience, and type of catalog. Findings are mixed both on catalog adaptations and firm performance. We found that some but not all adaptations in the catalog lead to improved performance. We speculate that U.S. catalog firms are making adaptations to reduce the costs of international marketing operations. This cost reduction strategy may not necessarily lead to profitability, thereby discouraging other firms from entering international markets.     

Firm-level volatility and exports

This paper shows that the share of exports in the total sales of a firm has a positive and substantial impact on the volatility of its sales. Decomposing the volatility of sales of exporters between their domestic and export markets, I show using an identification strategy based on a firm-specific geographical instrument that firms with a larger export share have more volatile domestic sales and less volatile exports. These empirical patterns can be explained using a model in which firms face market-specific shocks and short-run convex costs of production. In such a framework, firms react to a shock in one market by adjusting their sales in the other market. I point to strong evidence that output variations on the domestic and export market are negatively correlated at the firm level. This result casts doubts on the standard hypothesis that firms face constant marginal costs and maximize profits on their different markets independently of each other. Furthermore, it points to the caveat that sales volatility on a particular market only gives limited information about the size of shocks on that market.     

The DNA of the domestic value added (DVA) in exports: Firm‐level analysis of DVA in exports

This paper sheds light on the relationship between domestic value added in exports (DVA) and the different ways firms participate in GVCs by exploiting a detailed firm‐level data set for the whole population of Slovenian exporting firms for the period 2002–14. The paper draws attention to those firm characteristics that allow a greater share of DVA to be captured. Although reliance on industry‐level data from input–output tables is the most common way of doing this in the literature, this paper develops a method for estimating DVA in exports using firm‐level data by adapting the approach taken by Kee and Tang (2016). The paper finds that in terms of DVA, domestic‐owned exporting firms outperform more productive foreign‐owned firms and that firms not affiliated with permanent suppliers from abroad capture higher DVA in exports. Positive outcomes of DVA in exports can be observed, all else being equal, for firms with a larger share of intangible capital per worker and firms with a smaller share of exports based on imports of the same products. The results also show that when exporting more to less demanding markets, like the countries of former Yugoslavia, firms benefit more in terms of greater DVA gains in exports.     

How does FDI inflow affect productivity of domestic firms? The role of horizontal and vertical spillovers,absorptive capacity and competition

This paper examines the existence of externalities associated with foreign direct investment (FDI) in a host country by exploiting firm-level panel data covering the Polish corporate sector. We distinguish between horizontal spillovers (from foreign to domestic firms operating in the same industry) and two types of vertical spillovers: backward (from FDI in downstream industries) and forward spillovers (from FDI in upstream industries). The main findings are as follows. Local firms benefit from foreign presence in the same industry and in downstream industries. The absorptive capacity of domestic firms is highly relevant to the size of spillovers: vertical spillovers are larger for R&D-intensive firms, while firms investing in other (external) types of intangibles benefit more from horizontal spillovers. Competitive pressure facilitates backward spillovers, while market power increases the extent of forward spillovers. Horizontal spillovers are particularly strong in services, while the remaining results, including backward spillovers and the role of absorptive capacity and competition, are mainly driven by manufacturing. Host country equity participation in foreign firms is consistent with higher unconditional productivity spillovers to domestic firms. A number of robustness checks yield results qualitatively similar to those obtained in the baseline specification.