Intra‐firm trade,exporting, importing,and firm performance

Abstract This paper examines firm heterogeneity in terms of size, wages, capital intensity, and productivity between domestic and foreign‐owned firms that engage in intra‐firm trade, firms that export and import, firms that import only, and firms that export only. As previously documented, heterogeneity between different groups of trading firms is substantial. Taking into account intra‐firm trade in addition to exporting and importing yields new insights into the productivity advantage previously established for exporting firms. The results presented here show that this premium accrues only to exporters that also import and to exporters that also engage in intra‐firm trade, but not to firms that export only. Using simultaneous quantile regressions, the paper illustrates that heterogeneity within different groups of trading firm is equally large. Some of this within‐group heterogeneity can be attributed to differences in trading partners.     

EXPORT‐MARKET DYNAMICS AND THE PROBABILITY OF FIRM CLOSURE: EVIDENCE FOR THE UNITED KINGDOM

This study presents the first empirical analysis of the determinants of firm closure in the United Kingdom with an emphasis on the role of export‐market dynamics, using panel data for a nationally representative group of firms operating in all‐market‐based sectors during 1997–2003. Our findings show that the probability of closure is (cet. par.) significantly lower for exporters, particularly those experiencing export‐market entry and exit. Having controlled for other attributes associated with productivity (such as size and export status), the following factors are found to increase the firm's survival prospects: higher capital intensity and TFP, foreign ownership, young age, displacement effects (through relatively high rates of entry of firms in each industry), and belonging to certain industries. Interestingly, increased import penetration (a proxy for lower trade costs) leads to a lower hazard rate for exporting entrants and continuous exporters, while inducing a higher hazard rate for domestic producers or those that quit exporting.     

What makes a successful export? Evidence from firm‐product‐ level data

Abstract We analyse a very rich and unique panel database that provides information on exports at the firm‐product level. Motivated by the recent theory of multi‐product firms, we investigate what determines the survival of products in the export mix to find that, in export dynamics, characteristics of the product as well as that of the firm matter. In particular, firm productivity as well as product scale and tenure are associated with a higher export survival rate. This suggests, in line with theory, that there are firm‐ as well as firm‐product‐specific competencies that are important for shaping firms’ export mix.     

Foreign market conditions and export performance: does ‘crowdedness’ reduce exports?

Abstract This paper analyzes the link between firm exports and the competitive environment in foreign markets. We derive a theory‐based econometric specification linking market‐specific exports to foreign demand and the degree of a market’s ‘crowdedness,’ which depends on the number and efficiency of firms competing there and the barriers impeding their access. Estimates on a large sample of Italian firms indicate that increased crowdedness has reduced Italian exports, but only by 0.2%–0.3% per year. This is substantially less than the contribution of other factors such as higher unit labour costs or weak demand growth in the EU15.     

Does foreign ownership matter?

The paper both compares productivity of Russian firms that have foreign direct investments with productivity of fully domestically owned firms and analyses spillovers from foreign‐owned firms to domestic firms. Foreign firms are found to be more productive than domestic ones, but productivity of the former is negatively affected by slow progress of reforms in the regions where they operate. It is also found that there are positive spillovers from foreign‐owned firms to domestic firms in the same industry, but negative effects on domestic firms that are vertically related to foreign‐owned firms. The stock of human capital in regions where foreign firms operate is one of the factors which help domestic firms to benefit from the entry of foreign firms.     

On Mergers and Agglomeration

We formulate a model of mergers and acquisitions assuming a monopolistic competitive industry that exhibits agglomeration economies. We provide the conditions for the existence of a non‐trivial Nash equilibrium in the acquisition market at which the most productive firm acquires a range of less‐productive firms. Most importantly, we show that domestic merger and acquisition activities are international trade promotionary. We also show that such types of mergers and acquisition will improve the competitive position of foreign firms leading to an increase in their market share. In addition, domestic mergers and acquisitions will increase the number of imported varieties.     

Born like China,growing like China

This paper studies the effects of China's one‐child policy on saving and foreign reserve accumulation. Fertility control increases the saving rate both by altering saving decisions at the household level, and by altering the demographic composition of the population at the aggregate level. I show that demographically induced changes in saving explain the build‐up of a large foreign surplus in China. As in Song, Storesletten, and Zilibtti (2011), the model features contractual and financial market imperfections. Government‐owned firms are less productive but have full access to the credit market. Entrepreneurial firms are more productive but face credit constraints. As labour switches from less productive to more productive firms, demand for domestic bank borrowing decreases. As saving increases while demand for loans decreases, domestic savings are invested abroad, generating a foreign surplus. The model predicts that China's foreign reserve accumulation will soon begin to slow down in response to recent relaxation of the one‐child policy.     

Intra‐industry Knowledge Spillovers from Foreign Direct Investment in Research and Development: Evidence from China's “Silicon Valley”

This study examines a specific channel of technology diffusion from multinational enterprises to domestic firms in less developed regions: research and development (R&D) activities of multinational enterprises in the host country. Using firm‐level panel data from a Chinese science park, known as China's “Silicon Valley,” we find that the R&D stock of foreign‐owned firms has a positive effect on the productivity of domestic firms in the same industry, while the capital stock of foreign firms has no such effect. These results suggest that foreign firms' knowledge spills over within industries through their R&D activities, but not through their production activities. In addition, we find no evidence of spillovers from domestic firms or firms from Hong Kong, Macao, or Taiwan, suggesting that the size of knowledge spillovers is larger when the technology gap between source and recipient firms is larger.     

PRECAUTIONARY DEMAND FOR LABOUR AND FIRM SIZE

This paper studies firms' job creation decisions in a labour market with search frictions. A simple labour market search model is developed in which a firm can search for a second employee while producing with a first worker, and this creates the equilibrium size distribution of firms. A firm expands employment even if the instantaneous payoff to a large firm is less than that of staying small – a firm has a precautionary motive to expand its size. In addition, this motive is enhanced by a greater market tightness. Because of this effect, firms’ decisions become interdependent – a firm creates a vacancy if it expects other firms to do the same, creating strategic complementarity among firms and thereby self‐fulfilling multiple equilibria. An increase in productivity can cause a qualitative change in labour market tightness and the rate of unemployment.     

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.     

Physical capital,knowledge capital,and the choice between FDI and outsourcing

Abstract There exist two approaches in the literature concerning the multinational firm’s mode choice for foreign production between an owned subsidiary and a licensing contract. One approach considers environments where the firm transfers primarily knowledge‐based assets and assumes that knowledge is non‐excludable. A more recent approach takes the property‐right view of the firm and assumes that physical capital is fully excludable. This paper combines both forms of capital assets in a single model. There are subtleties, and added structure is needed to establish what ex ante seems a straightforward testable hypothesis: relatively physical‐capital‐intensive firms choose outsourcing while relatively knowledge‐capital‐intensive firms choose FDI.     

Foreign-owned versus Domestically-owned Firms: Economic Performance in Japan

This paper utilizes micro‐panel data for firms located in Japan and examines differences in corporate performance between foreign‐owned and domestically‐owned firms in the 1990s. We find that foreign‐owned firms not only reflect superior static characteristics, but also achieve faster growth. Moreover, foreign investors appear to invest in firms that may not be immediately profitable, but those that are potentially the most profitable in the future. There is also no evidence that foreign investor is “foot‐loose.” These imply that foreign investors bring useful firm‐specific assets into the Japanese market, which may work as an effective catalyst for necessary structural reform.     

WHO GAINS FROM WHOM? SPILLOVERS,COMPETITION AND TECHNOLOGY SOURCING IN THE FOREIGN‐OWNED SECTOR OF UK MANUFACTURING

There is a growing literature explaining foreign direct investment flows in terms of ‘technology sourcing’, whereby multinational firms invest in certain locations not to exploit their firm‐specific assets in the host environment, but to access technology that is generated by host country firms. However, it is far from clear whether the literature has found significant evidence of such activity beyond a few isolated examples. This paper extends this work by allowing for the possibility of multinational enterprises (MNEs) sourcing technology not only from host country firms but also from each other within a host economy. The paper demonstrates that MNEs in the UK do indeed appropriate spillovers both from indigenous firms and from other foreign investors, but that there are also significant competition effects that act to reduce productivity in certain industries. The paper also explores which countries' affiliates gain most from technology sourcing in the UK, and which generate the greatest spillovers within the foreign‐owned sector.     

Strategic Privatization in Developing Countries

Privatization of state‐owned enterprises may have important welfare implications, in particular in less developed economies where markets are small and domestic firms are typically relatively weak, both technologically and financially. In these environments, a high‐tech foreign investor acquiring the state‐owned assets may end up dominating the local market, thereby harming local consumer and producer interests. A foreign investor, however, is likely to be both willing and able to offer a higher bid for the assets than local investors. This paper addresses the trade‐off for local governments between privatization revenues and foreign market power. The authors find that there may be an incentive to privatize “strategically” by selling the state‐owned firm to a local (less advanced) investor at a lower price in order to achieve a more competitive post‐privatization market structure.     

Input-trade liberalization and firm export decisions: Evidence from Argentina

Trade openness contributes to the diffusion of the modern technologies embodied in imported intermediate goods, which play a central role in the economic growth of developing countries. This paper investigates the micro-economic effects of input-trade liberalization. Previous work has found positive effects of access to foreign inputs on firm performance. If the availability of imported intermediate goods yields firm productivity gains, we would also expect a positive effect of input-trade liberalization on firm export decisions. This paper contributes to this literature by looking at the relationship between changes in input tariffs and within-firm changes in export status. Using detailed firm-level data from Argentina, I demonstrate that the probability of entering the export market is higher for firms producing in industries that have experienced greater input tariff reductions. These empirical findings are robust to alternative specifications that control for other trade-policy reforms, and industry and firm characteristics.     

Firm exit,technological progress and trade

The dynamics of export market exit and firm closure have found limited attention in the new heterogeneous-firms trade literature. In fact, several of the predictions on firm survival and exit stemming from this new class of models are at odds with the stylized facts. Empirically, higher productivity firms survive longer, most firm closures are young firms, higher productivity exporters are more likely to continue to export compared to less productive exporters and market exits as well as firm closures are typically preceded by periods of contracting market shares. The present paper shows that the simple inclusion of exogenous economy wide technological progress into the standard Melitz (2003) model generates a tractable dynamic framework that generates endogenous exit decisions of firms in line with the stylized facts. Furthermore, we derive the effects of faster technological progress and trade liberalization on export market exit and firm closure.     

Foreign ownership wage premia in emerging economies

In this article we examine the relationship between wages, labour productivity and ownership using a linked employer–employee dataset covering a large fraction of the Czech labour market in 2006. We distinguish between different origins of ownership and study wage and productivity differences. The raw wage differential between foreign and domestically‐owned firms is about 23 percent. The empirical analysis is carried out on both firm‐ and individual‐level data. A key finding is that industry, region and notably human capital explain only a small part of the foreign–domestic ownership wage differential. Both white and blue collar workers as well as skilled and unskilled employees obtain a foreign ownership wage premium. Foreign ownership premia are more prevalent in older and less technologically advanced firms. Joint estimation of productivity and wage equations show that, controlling for human capital, the difference in productivity is about twice as large as the wage differential. Overall, results indicate that the international firms share their rents with their employees.     

FDI spillovers in new EU member states

Using an unbalanced panel of firm‐level data in Bulgaria, Poland and Romania, we examine the impact of foreign firms on domestic firms’ productivity. In particular, we try to answer the following research questions: (1) Are there any spillover effects of foreign direct investments (FDI), and if so, are they positive or negative? (2) Are spillover effects more likely to occur within or across sectors? (3) Are the existence, the direction and the magnitude of spillovers conditioned by sector and firm‐specific characteristics? Our findings show that FDI spillovers exist both within and across sectors. The former arise when foreign firms operate in labour‐intensive sectors, while the latter occur when foreign firms operate in high‐tech sectors. Moreover, we find that domestic firm size conditions the exploitation of FDI spillovers even after controlling for absorptive capacity. We also detect a great deal of heterogeneity across countries consistent with the technology gap hypothesis.     

TARIFF JUMPING FOREIGN DIRECT INVESTMENT DECISION IN A QUALITY‐DIFFERENTIATED MARKET

Using a product differentiation model, this paper discusses the issue of transnational firms evading tariffs and investing directly in a host country (through foreign direct investment (FDI)). Where product quality is differentiated between foreign and host country firms and assuming a firm's quality requirement is a long‐term strategy and is not affected by a foreign firm's trade decision, we obtain the following findings. First, whether or not a host country firm produces high or low quality products, raising the quality requirement for foreign products will increase the possibility of a foreign firm choosing FDI instead of exporting a product to the host country. Second, raising the quality requirement for domestic products will lower the possibility of foreign firms choosing FDI without regard to the product's quality. Finally, given a competitor in the host country, in FDI, a foreign high‐quality product‐producing firm has an advantage over a low‐quality product‐producing firm. We also find that even when firms' quality decisions are affected by a foreign firm's trade decision, most of the above results will still hold.     

Reaching up and reaching out: The impact of competition on firms’ productivity and export decisions

Using firm‐level data from 139 countries, this paper investigates the effect of competition in both the domestic and foreign markets on firm productivity and export decisions. Applying a sample selection endogenous treatment (SSET) Poisson model that tackles both the issue of endogenous sample selection and endogenous treatment at the same time, we document robust evidence that strong competition in the domestic market propels firms to be more productive, and decreasing domestic competition increases firms’ propensity to export. However, firms’ export intensity (i.e. how much they export) is not directly influenced by competition in the domestic market. Moreover, lower competition in the foreign market increases the propensity of domestic firms to export, enlarging the set of exporting firms to include firms with relatively smaller export amounts.