FDI Workshop Nov. 10, 2016: Abstracts of presented papers

KEYNOTE: Beata Smarzynska Javorcik and Steven Poelhekke:

Former Foreign Affiliates: Cast Out and Outperformed?

The literature has documented a positive effect of foreign ownership on firm performance. But is this effect due to a one-time knowledge transfer or does it rely on continuous injections of knowledge? To shed light on this question we focus on divestments, that is, foreign affiliates that are sold to local owners. To examine the effect of the ownership change we combine a difference-in-differences approach with propensity score matching. We use plant-level panel data from the Indonesian Census of Manufacturing covering the period 1990-2009. We consider 157 cases of divestment, where a large set of plant characteristics is available two years before and three years after the ownership change and for which observationally similar control plants exist. The results indicate that divestment is associated with a drop in total factor productivity accompanied by a decline in output, markups as well as export and import intensity. The findings are consistent with the benefits of foreign ownership being driven by continuous supply of headquarter services from the foreign parent.

Michael Irlacher and Carsten Eckel:

Multi-Product Offshoring

We show that the labor market e¤ects of production line relocations within multi-product firms differ significantly from the relocation of production tasks within single-product firms. By incorporating offshoring of labor-intensive goods in a model with multi-product firms, and exploring its implications in partial and general equilibrium, we identify the cannibalization effect of offshoring as an important transmission mechanism within multi-product firms and show that this effect hits domestic labor demand in addition to the well-known relocation effect. Furthermore, we contribute to the growing literature on multi-product firms and trade by showing that lower offshoring costs tend to increase the range of products produced.

Inmaculada Martinez-Zarzoso and Ana Lucía Abeliansky:

The relationship between the Chinese "Going out" strategy and international trade

This study is the first to estimate a system of simultaneous gravity equations for Chinese exports, imports and foreign direct investment (FDI) using a sample of 167 countries over the period 2003-2012. The main results indicate that trade and outward FDI are complementary. In particular, we show that outward Chinese FDI is related to higher exports and imports and that China trades more with countries hosting Chinese FDI. Results are also robust to the use of instrumental variables. Therefore, the popular claim that Chinese investment is bad for developing countries is not supported by the data.

Jan Schymik, Dalia Marin, and Alexander Tarasov:

Trade in Tasks and the Organization of Firms

We incorporate trade in tasks à la Grossman and Rossi-Hansberg (2008) into a small open economy version of the theory of firm organization of Marin and Verdier (2012) to examine how offshoring affects the way firms organize. We show that the offshoring of production tasks leads firms to reorganize with a more decentralized management, improving the competitiveness of the offshoring firms. We show further that the offshoring of managerial tasks relaxes the constraint on managers but toughens competition, and thus has an ambiguous impact on the level of decentralized management and CEO wages of the offshoring firms. In sufficiently open economies, however, managerial offshoring unambiguously leads to more decentralized management and to larger CEO wages. We test the predictions of the model based on original firm level data we designed and collected of 660 Austrian and German multinational firms with 2200 subsidiaries in Eastern Europe. We find that offshoring firms are 22.3% more decentralized than nonoffshoring firms. We find further that the average fraction of managers offshored reduces the level of decentralized management by 3.4%, but increases the level of decentralized management by 6.8% in industries with a level of openness above the 25th percentile of the openness distribution. Lastly, we find that one additional offshored manager lowers CEO wages relative to workers by 4.9%.

Frank Stähler:

An optimal investor state dispute settlement mechanism

Investor state dispute settlements (ISDS) are supposed to protect a foreign investor against opportunistic behavior of a host country. This paper scrutinizes the optimal design of ISDS provisions that solve the holdup problem. It shows that an efficient investor protection mechanism requires a multilateral framework provided

by a supranational institution. Furthermore, any ISDS compensation from the government to the investor must not be based on reductions in investor profits but on the host country's benefits.

Dominique Bruhn, Axel Berger, and Phan Le:

Links between countries, linkages between firms? The relationship between deep PTIAs, FDI and upgrading in Vietnam

The 21st century has witnessed a deepening of economic integration through numerous preferential trade and investment agreements (PTIAs) and an expansion of global value chains (GVCs). Yet, it remains unclear whether stronger linkages between countries also translate into stronger linkages on the firm-level. Many developing economies have experienced an inflow of foreign direct investment (FDI), stemming from multinational corporations (MNCs) searching for cheap labor or new markets. Nevertheless, they remain trapped in low-skilled activities in GVCs and fail to build linkages with MNCs. Altenburg (2000) conceptualizes that successful linkages require government policies to (i) attract quality FDI, (ii) facilitate technology transfers and (iii) improve SME performance. Based on qualitative interviews and survey data from field research in Vietnam as well as the analysis of legal texts we investigate whether and under which conditions stronger and deeper integration via PTIAs can lead to linkages on the firm-level, referring to the three components above. Vietnam’s electronics sector and its recently signed PTIAs, namely the Transpacific Partnership and EU-Vietnam agreement serve as a case in point. Our findings suggest that these PTIAs will only have a moderate effect on FDI attraction to Vietnam’s E&E sector. ... In sum, we infer that deeper integration can support linkage building and upgrading only with targeted government action within the range of remaining policy instruments. Our framework can be used by other developing countries as an analytical tool to assess the potential impacts of deep PTIAs on industrial upgrading strategies.

Thi Xuan Thu Nguyen and Javier Revilla Diez:

The minor role of MNEs in the productivity upgrading of domestic suppliers: The case of the Red River Delta in Vietnam

The impacts of FDI on the economy and domestic firms of the host country through different spillover channels have captured attention of many researchers. However, there are only few papers addressing backward linkages in which spillover is likely to occur most. This study, therefore, draws on the backward spillover effects from the supplier perspective and applies a new empirical method in the field. In particular, the propensity score matching method enables us to compare the total factor productivity growth between domestic suppliers and non-suppliers of MNEs (Multinational Enterprises) in the Red River Delta in Viet Nam. Contrastingly to prevailing literature domestic firms have a chance to increase their productivity by being a supplier of MNEs, our econometric finding shows the non-difference in total factor productivity growth between suppliers and non-suppliers. In addition, our in-depth interviews with domestic suppliers provide an explanation for non- significant spillover effects from MNEs. We detect that being a supplier is one mode to enhance business performance, but this mode does not always work, especially for firms supplying the standardized simple product with low added value. Indeed, effects of MNEs on domestic suppliers are much more indirect and limited, thus firms should rely on their internal factors like R&D activities or human capital.

Konstantin Wacker and Chris Muris:

When Does FDI Spur Growth? Grouped fixed effects estimation vs. absorptive capacity models

Several studies have indicated that for FDI to spur growth, good fundamentals in the host country are needed. In this paper, we show that this finding with important policy relevance is all but robust. We show that it is driven by misspecification and propose a novel estimation technique that allows to control for unobserved group heterogeneity in interaction models with medium-T panel data. First results suggest little evidence for FDI to need good host-country fundamentals to correlate with growth.

Onur A. Koska:

Consumer-Surplus Standard in Merger Approvals, Foreign Direct Investment, and Welfare

This study scrutinizes the rami cations of a consumer-surplus standard in approvals of firm acquisition on an investor's choice between acquiring existing assets (via negotiations or auctions) and investing in new assets and on welfare under both complete and incomplete information structures. Any firm acquisition fulfilling the consumer-surplus standard is in the best interest of the investor, who prefers to be well informed on acquisition gains and prefers sequential offers. A local firm appropriates a bigger share from acquisition gains in an auction, and prefers generating information asymmetries. Welfare improves with a larger scope for expost firm heterogeneity.

Jöran Wrana and Javier Revilla Diez:

Can Multinational Enterprises trigger an institutional change through Corporate Social Responsibility projects?

The goal of this paper is twofold. On the one hand, the authors examine motives of MNEs for engaging in such CSR collaborations at partnering universities and which part of their firm routines they try to trickle down in the local tertiary and vocational education system. On the other hand, the authors evaluate which elements of firm routines arise firstly as ‘Proto-Institutions’ at the partnering university and to what extent they, eventually, spread over to further universities and Vietnamese firms, thereby triggering an institutional change in the long run. Based on 60 qualitative in-depth interviews with managers from participating MNEs and Vietnamese companies as well as representatives from universities such as presidents, faculty members, teachers and students, the authors draw the following conclusions: First, the largest benefits of such collaborations are shared between the directly involved partners who are the involved MNE subsidiaries as well as teachers and students in the respective CSR programs. Second, the diffusion of skills and technologies across the different departments and institutes within the cooperating university is substantially small due to the existing legal restrictions as well as practical constraints. Third, the transfer of these institutional elements to further educational institutes and Vietnamese universities in the local surrounding is negligible.