Corporate governance and merger and acquisition (M&A) FDI: Firm-level evidence from Japanese FDI into the US

Merger and acquisition (M&A) is a mechanism for promoting corporate governance. This suggests that an improvement in overall corporate governance may have a negative effect on M&A activity. Since M&A foreign direct investment (FDI) is a cross-border variant of M&A, we use firm-level data to investigate the effect of US corporate governance on Japanese M&A FDI. Our results indicate that two landmark corporate governance regulations by the US Securities and Exchange Commission (SEC) in 1992 contributed significantly to the sharp decline in Japanese M&A FDI in the US during the 1990s. Our evidence lends some support to the notion that corporate governance may affect not only domestic M&A activity but also cross-border M&A activity. Our study also sheds some light on the puzzle of why Japanese FDI into the US fell during the 1990s despite the depreciation of the US dollar.     

Investment and Uncertainty in the G7

Empirical work on uncertainty and investment generally focuses on one country or one indicator of uncertainty. We extend the literature by assessing the impact of a comprehensive range of potential sources of uncertainty on aggregate business investment across the G7 using Pooled Mean Group Estimation (PMGE) and GARCH methods to model uncertainty. A significant negative long-run effect from exchange rate volatility is found for the G7 and in poolable subgroups including all four larger EU countries. Volatility of long-term interest rates has additionally influenced investment in recent years. For most estimates, a one standard deviation rise in conditional volatility leads to a 2–4 per cent fall in investment although some samples give greater declines. The results suggest inter alia that EMU is beneficial to aggregate investment. JEL no. E22, F31     

Reserve requirements,currency substitution,and seigniorage in the transition to European monetary union

This article considers a transition toward European monetary union that combines increased substitution of currencies and greater monetary, financial, and fiscal policy coordination. It explores how such a transition would affect national inflation and interest rates and required reserve ratios when governments depend in part on seigniorage funding for public expenditures. We find that greater coordination of policies would lead to lower inflation and interest rates but higher reserve-requirement ratios. Because higher reserve-requirement ratios could place European banks at a competititve disadvantage, we conclude that the interaction between reserve requirements and seigniorage concerns makes it less likely that the gradualist approach of the Maastricht treaty is a sustainable means of transition to European union.     

The relative importance of foreign and domestic shocks to output and prices in Mexico and Colombia

The Relative Importance of Foreign and Domestic Shocks to Output and Prices in Mexico and Colombia. — This paper utilizes structural VARs to evaluate the relative importance of foreign and domestic sources of variation in output and prices in Mexico and Colombia. The real exchange rate and commodity export price have a large impact on both output and prices in Mexico, while in Colombia their effects are smaller. U. S. output and interest rates are found to play a significant role in determining output in Mexico and Colombia. For Mexico, external variables are found to be of much greater importance in the oil-exporting years after 1978 as compared to the 1960s.     

Incorporating risk into the analysis of production

This paper evaluates alternative strategies for incorporating risk into the analysis of production and argues that accounting for the effects on production of financial structure and endogenous risk, motivated by the objective of value maximization, is essential to recovering firms' technologies, measuring their efficiencies, and detecting such risk-related phenomena as the effects of better diversification on scale economies and the agency costs of different mixes of debt and equity. This paper also demonstrates how the Most Preferred Production System of Hughes et al. [1996] incorporates endogenous risk and the firm's financial structure and, in doing so, is able to control for differences in risk among banks in measuring their profit efficiency and to uncover scale economies in U.S. commercial banking that elude studies based on standard cost and profit functions.Presidential Address presented at the Forty-Sixth International Atlantic Economic Conference, Boston, Massachusetts, October 8–11, 1998. The author is grateful to William Lang, Loretta Mester, Choon-Geol Moon, and Michael Pagano for their helpful discussions and comments on an earlier draft.     

Learning in the thick of it

The U.S. Army's Opposing Force (OPFOR) is a 2,500-member brigade whose job is to help prepare soldiers for combat. Created to be the meanest, toughest foe that soldiers will ever face, OPFOR engages units-in-training in a variety of mock campaigns under a wide range of conditions. Every month, a fresh brigade of more than 4,000 soldiers takes on this standing enemy. OPFOR, which is stationed in the California desert, always has the home-court advantage. But the force being trained--called BLU FOR--is numerically and technologically superior. It possesses more resources and better, more available data. It is made up of experienced soldiers. And it knows just what to expect, because OPFOR shares its methods from previous campaigns with BLUFOR's commanders. In short, each BLUFOR brigade is given practically every edge. Yet OPFOR almost always wins. Underlying OPFOR's consistent success is the way it uses the after-action review (AAR), a method for extracting lessons from one event or project and applying them to others. AAR meetings became a popular business tool after Shell Oil began experimenting with them in 1998. Most corporate AARs, however, are faint echoes of the rigorous reviews performed by OPFOR. Companies tend to treat the process as a pro-forma wrap-up, drawing lessons from an action but rarely learning them. OPFOR's AARs, by contrast, generate raw material that is fed back into the execution cycle. And while OPFOR's reviews extract numerous lessons, the brigade does not consider a lesson to be learned until it is successfully applied and validated. It might not make sense for companies to adopt OPFOR's AAR processes in their entirety, but four fundamentals are mandatory: Lessons must benefit the team that extracts them. The AAR process must start atthe beginning of the activity. Lessons must link explicitly to future actions. And leaders must hold everyone, especially themselves, accountable for learning.     

Life-insurance Efficiency in China： A Comparison of Foreign and Domestic Firms

The Chinese life-insurance industry has experienced major structural changes in recent years, primarily because of increasing demand and the entry of foreign insurers. Although the market is clearly booming, the efficiency of its growth and development is unclear. In this paper, we evaluate the efficiency of life insurers operating in China and compare foreign firms with domestic firms. We find that foreign insurers have not brought efficiency into the Chinese market, and that the market is still dominated by domestic giants. However, the gap between foreign insurers and domestic insurers is narrowing. After testing hypotheses regarding scale economy, technical progress andpotential improvements, we discuss several issues＇ of importance to life insurers, market investors and government regulators.