Contextual analysis of legal systems and their impact on trade and foreign direct investment

Differences among nations in legal tradition play a role in foreign direct investment decisions by multinational firms. How large a role and to what degree these factors impact the success of foreign direct investment are important issues for examination. A principal question is whether macro-differences in legal systems are causal for international investment on a stand-alone basis or subordinate to multiple other legal variations and societal considerations. This article examines the historical roots and nature of varying legal systems, traditions, and cultures that continue to affect international business. The study analyzes other major conditions which surround the legal environment in investment target countries such as system transparency, degree of corruption, adequate enforcement, and issues of bias related to foreign-owned firms. In addition, firms may have varying strategic objectives for foreign direct investment which may not be driven by short term profitability.     

East—West joint ventures and buyback contracts

Contractual joint ventures (CJVs) and the buyback form of countertrade are popular methods that Socialist countries use to attract foreign investment. In this paper we explore some reasons why this is so and also explain two predominant characteristics of these contracts: the existence of sharing rules and minimum standard requirements on inputs. The model stresses the incentive problems involved when a (Socialist) host country, which does not allow foreign direct investment, uses a CJV to obtain the fruits of some knowledge-based production process from a multinational enterprise.     

SME Export Performance in Indonesia After the Crisis

Firms in export-oriented sectors with more exporters and more foreign investment, or firms with more access/use of credit, tend to export a higher share of their output, whether they are small or large. The latter points out that the benefits of size-neutral policies that improve the overall business and foreign investment climate and secure access to formal credit for all enterprises produce benefits for the entire economy. Small firms with higher use of machinery and higher use of domestic inputs displayed a higher likelihood to increase the share of their output exported. SMEs show rising productivity with access and use of appropriate production inputs. Decades of protective size-specific policies, such as the reservation scheme for SMEs still in place in Indonesia’s manufacturing may have distorted, more than supported, adoption of appropriate technologies among SMEs. These policies may need to be revisited and refocused on more size-neutral policies such as improved access to collateral or reduced cost of business registration and licensing.     

Wage bargaining and multinational firms

We set up a general equilibrium model with heterogeneous firms to study the interaction between wage bargaining and foreign direct investment. Thereby, we highlight the incentives of firms to invest abroad in order to improve their bargaining position vis-á-vis local unions and we show how changes in the bargaining power of unions affect the share of multinational firms in an open economy. In addition, taking into account this relationship between wage bargaining and foreign direct investment, our analysis provides novel insights on how labor income and the unemployment rate adjust to economic integration and how changes in the bargaining power of unions affect these two labor market variables.     

Developing countries in competition for foreign investment

This study analyzes the competition for foreign direct investment (FDI) among countries at different stages of development. It is assumed that domestic companies in a more-developed country use more capital in production and that wages in a less-developed country are lower. Countries can compete for FDI by increasing the supply of public inputs in the economy, in addition to (or instead of) offering subsidies or tax reliefs to foreign investors. The results reveal that if governments of competing countries are not allowed to discriminate between domestic and foreign firms, there may be situations in which a less-developed economy will attract FDI depending on the labor cost differential and the responsiveness of foreign investor's and domestic companies' output to changes in the supply of public inputs. If tax discrimination between domestic and foreign firms is permitted, both countries will optimally raise the supply of public inputs, but the more-developed country will always win the foreign investment despite higher labor costs. Thus, governments of less-developed countries may have an incentive to work on an international agreement to disallow tax discrimination.     

Endogenous market structures and the gains from foreign direct investment

This paper discusses the gains from liberalizing foreign direct investment (FDI) in a two-country setting with endogenous market structure. We investigate two different scenarios. In the first scenario, headquarters costs are large in the foreign country so that the industry is located in the domestic country only. In this case, multinational and national firms may coexist and market concentration may make FDI welfare improving for the foreign country and welfare reducing for the domestic country. In the second scenario, headquarters costs are symmetric and firms will be located in both countries. Here, profitable FDI activities lead to mutual welfare gains, irrespective of market structure effects.     

Explaining employment changes in foreign manufacturing investment in the UK

This article tests the view that the impact which foreign direct investment (FDI) has upon employment within the host economy will vary according to the entry mode which the multinational enterprise (MNE) chooses, the type of subsidiary and the nationality of the parent organisation which is established in the regional economy. Data were collected from the subsidiaries of foreign-owned firms in the UK. A model was devised and tested with estimations using this data. The results provide support for the view that the impact of FDI may be differentiated by entry mode, nationality and subsidiary type. Specifically, firms which entered by way of greenfield investment created positive employment effects as compared to those which entered by means of a merger or acquisition where the effects were relatively negative. There is some evidence that impact is also ownership specific. Finally, those subsidiaries which performed more value-added functions had a positive effect on employment.     

The Influence of Firm's Size and International Experience on the Ownership Structure of Italian FDI in Manufacturing

The literature on foreign direct investment (FDI) has analysed the entry mode choice by multinational enterprises (MNEs) from several theoretical viewpoints. Nevertheless, previous studies have mainly focused on the behaviour of large and established MNEs while little attention has been given to small- and medium-sized firms.The paper aims at providing further empirical evidence on the role of firm size and international experience in influencing the ownership structure of FDI. The main hypothesis is that smaller firms, characterised by financial and managerial constraints, as well as firms lacking experience in managing foreign operations, suffer from a condition of adverse asymmetry in information costs, compared to their competitors. Therefore, they are forced to act prudently, minimising risk and thus preferring a less control arrangement of foreign subsidiaries.A binomial logistic model is developed with reference to manufacturing foreign direct investments undertaken by Italian firms in the period 1986–1993.     

Cooperative ventures in emerging economies

Foreign market entry strategy involves choices about which markets to enter and how to do it. Most of the literature on foreign direct investment reflects an interest in ownership structure decisions and the risks foreign investing firm may face. As recognized in many studies, one set of risks arises from public expropriation hazards, a function of the ability of the host country's institutional environment to credibly commit to a given policy or regulatory regime. Empirical research has shown this hazard to have an impact on ownership levels. This study is a theoretical model that describes how multinational firms face moral hazard risk from their local partners and political risk from the host country when they decide to go abroad in a joint-venture alliance. I found that the greater the level of hazard expropriation, the lower the participation of the multinational firm in the final cash flow, except for when the multinational firm has the negotiation power and there is a high level of local investment protectionism. In that case, the multinational firm increases its participation in the final cash flow.     

The Investment Development Path and FDI From Developing Countries: The Role of Pro-Market Reforms and Institutional Voids

We study the applicability of the investment development path to multinationals from developing countries and illustrate these arguments by analyzing the evolution of Brazilian outward foreign direct investment. This model argues that as countries develop, their firms will develop sophisticated capabilities and eventually become multinational firms. In the case of emerging countries, two additional factors accelerate this process. One is the push of pro-market reforms, whereby firms upgrade their capabilities to compete in the home country, thus becoming multinationals earlier than expected. The second is the push of institutional voids, whereby firms avoid excessive and misguided regulations of the local institutional environment.     

Absorptive Capacity and Geographical Distance Two Mediating Factors of FDI Spillovers: a Threshold Regression Analysis for Spanish Firms

This paper investigates the effect of foreign direct investment on productivity growth in the manufacturing industries of Spain. A theoretical model that includes the effects of technological gaps and absorptive capacity, both presenting nonlinear relationships is proposed. A sample of 2722 Spanish manufacturing firms from 1993 to 2006 was used. Threshold regression made it possible to contrast the non-linear relationship between inward FDI and productivity improvement in domestic firms, which is conditioned by the absorptive capacity and geographical distance. Spanish domestic firms with high absorptive capacities benefit from positive spillovers and have sufficient capability to internalize the more complex knowledge provided by multinational firms. The rest of the firms are negatively affected by the presence of multinational firms.     

Chinese FDI in New Zealand: What Are Chinese Investors Looking For?

In recent years, there has been unparalleled growth in outward foreign direct investment from China. Traditional Western‐dominated international business theory proposes that asset exploitation is necessary for firms undertaking foreign investment. However, more recently, studies suggest asset augmentation is more important for multinational enterprises from emerging countries. This article examines the acquisition by two Chinese firms—Agria and Haier—of two iconic New Zealand firms, each with a significant international presence—PGG Wrightson and Fisher & Paykel. The article determines that Agria and Haier invested to acquire strategic assets in order to strengthen their position in the Chinese market as well as build and sustain a global position. Strategic intent was an important factor in deciding where to invest, and strategic assets complementary to their own competitive advantages were sought by the Chinese firms. © 2016 Wiley Periodicals, Inc.     

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.     

Benefitting from Chinese FDI? An assessment of vertical linkages with Vietnamese manufacturing firms

Previous studies have suggested that foreign direct investment between emerging economies can benefit domestic firms more than investments from industrialised countries because of a lower technology gap and more appropriate technology being transferred. Empirical evidence for this is scarce. Addressing this gap, we investigate the impact of Chinese direct investment on local firms through vertical linkages in manufacturing industries of Vietnam. We find that the share of local sourcing of Chinese firms is similar to other foreign investors while their forward linkages are more extensive. Although this supports assertions about the benefits of investment by emerging market firms, the overall potential gains seem limited. This is due to little value-adding interaction with local firms, the local sourcing of low-technology goods, and the sparse provision of training and financial support.     

Taxation of Foreign Profits with Heterogeneous Multinational Firms

This paper analyses optimal taxation of foreign profits using a model with heterogeneous multinational firms that serve a foreign market through exports or foreign direct investment (FDI). If a firm switches from exporting to FDI, domestic activity and tax payments may decrease, stay constant or even rise because of intra‐firm trade. It turns out that, in contrast to recent claims, in all three cases, the optimal tax system implies full taxation after deduction of foreign tax payments. If the country accounts for the effects of its policy on the foreign price level, the case for taxing foreign income becomes even stronger. However, the globally optimal tax system may require exemption of foreign income from tax.     

Determinants of Sales Destinations of U.S. Multinational Firms' Affiliates in Developing Countries

This study examines the determinants of the sales of .U.S. multinational firms' affiliates to alternative destinations, including sales to other affiliate firms in a host country and a source country markets as well as sales to other non-affiliate persons in each market. Sample host countries are drawn from developing economies where U.S. multinational firms had affiliate firms during the period 1983–1998. The results of the study reveal that affiliates of multinational firms manipulate sales to minimize international taxation. This is supported by the finding that foreign corporate income taxes: affect sales between affiliate firms favorably, unlike its impacts on sales of affiliates to non-affiliate persons in both a host country and source country markets. Considering all markets together, economic volatility and political instability have minimal impacts on sales of affiliates to other affiliate firms compared to their impacts on sales to non-affiliate persons. The results also confirm that host countries' economic policy reforms and membership in multinational investment guarantee agencies facilitate sales of affiliates to other affiliate firms.     

FDI location choice of Chinese multinationals in East and Southeast Asia: Traditional economic factors and institutional perspective

This paper investigates the factors determining foreign direct investment (FDI) location choices of Chinese multinational firms. We developed a conceptual framework that synthesizes traditional economic factors and institutional perspective. Then several hypotheses were developed in line with the framework and empirically tested using panel data of Chinese outward FDI to eight economies in East and Southeast Asia across a time period of thirteen years. Our findings suggest that institutional factors demonstrate a higher level of significance, complexity and diversity in determining FDI location choice in comparison with economic factors, while both types of factors influence the FDI location choice of Chinese multinational firms. We also found that the FDI location choices of Chinese firms have a dynamic nature, as statistical evidence indicates a heterogeneous response of Chinese FDI towards different economic groups and during different time periods.     

Foreign Firms and Chinese Employment

This paper examines the effect of foreign direct investment (FDI) on employment in the Chinese manufacturing sector. As one of the world's largest recipients of FDI, China has arguably benefited from foreign multinational enterprises in various respects. However, one of the main challenges for China, and other developing countries, is job creation, and the effect of FDI on employment is uncertain. The effect depends on the amount of jobs created within foreign firms as well as the effect of FDI on employment in domestic firms. We analyse FDI and employment in China using a large sample of manufacturing firms for the period 1998–2004. Our results show that FDI has positive effects on employment growth. The relatively high employment growth in foreign firms is associated with their firm characteristics and their high survival rate. Employment growth is also relatively high in private domestic Chinese firms. There also seems to be a positive indirect effect of FDI on employment in private domestically‐owned firms, presumably caused by spillovers.     

Picking cherries or lemons: A unified theory of cross‐border mergers and acquisitions

This article provides a theoretical framework that enhances understanding of empirical evidence suggesting that international mergers and acquisitions, a key source of foreign direct investment, seemingly target in‐country firms that are at the extremes of the productivity spectrum—either high‐productivity firms, so‐called cherries, or low‐productivity firms, the “lemons.” The framework demonstrates that foreign firms with intermediate inputs seek high‐productivity domestic firms, while foreign firms with managerial expertise seek low‐productivity domestic firms. We also show that because of the difference in available outside options, high‐productivity domestic firms can demand a significantly higher portion of profits in the partnership than low‐productivity domestic firms.     

Multinationals and the investment provisions of the nafta

The foreign direct investment (FDI) provisions of the North American Free Trade Agreement (NAFTA) are examined in light of a worldwide trend toward liberalization of the policy environment for multinational firms. We first examine the rationale for entering into international investment negotiations from the perspective of the three signatories—Canada, Mexico, and the United States—and then analyze the accomplishments embodied in the resulting investment provisions. We also briefly address areas where these provisions could be strengthened and that may be on the agenda of future international trade and investment negotiations, whether in other fora or during negotiations involving accession of new member states to the NAFTA.