FDI Workshop Nov. 27-28, 2017: Abstracts of presented papers
Cross-Border M&A Activity and Wage Dynamics
Francesco Paolo Conteduca (GSESS Mannheim, with Ekaterina Kazakova):
The Structure of Multinational Sales under Demand Risk
This paper analyzes the effects of correlated aggregate demand shocks on the structure
of multinational firms. We build a structural model featuring global production
and demand risk in which heterogeneously risk averse managers decide on the location
of production plants, the set of countries to serve from these plants, and the volume
of sales. These decisions hinge on the expected market demand, and the variancecovariance
of the demand shocks in destination markets. The identification of firmspecific
risk aversion coefficients follows from existence and uniqueness of the firm’s
optimal sales portfolio. The empirical analysis uses firm-level data on German multinational
companies. We find that multinational firms are risk averse. Across industries,
the degree of risk aversion correlates with demand factors rather than with the technological
features of a sector.
Michael Irlacher (LMU Munich, with Baniel Baumgarten and Michael Koch):
Offshoring and non-linear employment effects across industries
We analyze the effects of offshoring across sectors with different shares of offshorable tasks.
Our main result suggests that, when sectors are linked in general equilibrium, a reduction in
labor demand will not only occur in offshoring-intensive sectors but also in sectors with a low
share of offshorable tasks. To derive this result, we set up a GOLE model with a continuum of
sectors that differ in their intensity of offshorable tasks. In this framework, offshoring leads to
heterogeneous profits across sectors with firms in offshoring-intensive industries gaining relative
to their counterparts in non-offshoring sectors. In the long-run, capital is mobile and will be
re-invested towards high profitable industries. This leads to firm entry (exit) in sectors with a
high (low) share of offshorable tasks and generates a hump-shape pattern of employment across
sectors. While offshoring-intensive industries face a reduction in employment because of the
relocation effect, labor demand in sectors with a high prevalence of domestic production falls
because of rising domestic wages in general equilibrium and firm exits. Hence, our model predicts
positive employment effects only for industries with a medium share of offshorable tasks.
To take this prediction to the data, we focus on Germany and use the fall of the Iron Curtain
as a natural experiment, which greatly increased the opportunities of German firms to engage
in offshoring. Using high-quality administrative data, we find strong empirical support for the
hump-shape in the change of employment across industries with different scopes for offshoring.
Christian Fischer (University of Bayreuth, with Fabrice Defever and Jens Suedekum):
Relational Contracts and Supplier Turnover in the Global Economy
Headquarters and their specialized component suppliers have a vital interest in establishing
long-term collaborations. When formal contracts are not enforceable, such eciencyenhancing
cooperations can be established via informal agreements, but relational contracts
have been largely ignored in the literature on the international organization of value
chains. In this paper, we develop a dynamic property rights model of global sourcing. A
domestic headquarter collaborates with a foreign input supplier and makes two decisions
in every period: i) whether to engage in a costly search for a better partner, and ii) whether
to make a non-binding o er to overcome hold-up problems. Our key result is that the
possibility to switch partners crucially a ects the contractual nature of buyer-supplier
relationships. In particular, some patient rms do not immediately establish a relational
contract, but only when they decide to stop searching and thus launch a long-term collaboration
with their supplier. Using rm-product-level data of fresh Chinese exporters
to the US, we obtain empirical evidence in line with the predictions of our theory.
Stefan Goldbach (Bundesbank, with Elias Steinmüller, Arne J. Nagengast, and Georg Wamser):
The effect of investing abroad on investment at home: On the role of technology, tax savings, and internal capital markets
This paper examines the relationship between foreign and domestic investment activity
of multinational enterprises. The empirical analysis is based on micro data of German
firms and their operations at home and abroad, including information on investment
in fixed assets. The empirical approach, which rests upon extensive and intensive
margin variation, is shown to produce very robust results. These suggest a positive
relationship between foreign and home investment in real capital. This positive effect
seems to be mainly related to additional opportunities for tax planning and better access
to financing capital. In contrast, we do not find evidence that improved production
processes and technology upgrading cause the positive effect on investment at home.
Our empirical approach allows us to distinguish between an extensive and intensive
margin effect: setting up a new foreign affiliate leads to an immediate positive effect
of about EUR 450,000 additional investment; the investment elasticity at the intensive
margin is estimated to be approximately 0.13.
Marcel Smolka (Aarhus University, with Michael Koch):
Foreign Ownership and Skill-biased Technological Change
Understanding the e ects of foreign direct investment and the behavior of multinational enter-
prises (MNEs) is a core issue in the study of international economics. We exploit within- rm
variation in ownership structure induced by foreign acquisitions in Spain to provide a new angle
on the relationship among foreign ownership, technology, and skills. We rst develop a model
in which heterogeneous rms decide endogenously about the level of technology, the share of
high-skilled workers, and the level of worker training. Foreign-owned rms implement better
technology than domestically owned rms due to access to foreign markets through the for-
eign parent. This market size e ect, coupled with a technology-skill complementarity, raises
the demand for high-skilled workers as well as worker training upon acquisition. The largest
productivity gains predicted by the model accrue to those rms that optimally combine bet-
ter technology with a larger share of high-skilled workers in production and a better trained
workforce. We test these predictions on a longitudinal data set of Spanish manufacturing rms.
Combining rm xed e ects with a suitable propensity score weighting estimator, we nd empir-
ical evidence that foreign-acquired rms, not only increase their technology level, but also engage
in skill upgrading upon acquisition (through both hiring and training). Moreover, we show that
these changes are driven by the market size e ect, and not by changes in the ownership struc-
ture per se. Finally, we reveal a technology-skill complementarity in the data implying that the
productivity gains associated with better technology are magni ed for rms actively engaging in
skill upgrading. Overall, our paper provides strong evidence for the notion that foreign MNEs
"inject" skill-biased technological change into their aliated firms.
Ekaterina Kazakova (GSESS Mannheim, with Francesco Paolo Conteduca):
Serving Abroad: Export, M&A, and Greenfield Investment
We analyze the determinants of the entry in foreign markets of firms operating in the professional services sector. We propose a structural model in which a firm selects one alternative among direct exporting, M&A, and greenfield investment to serve a foreign location. Before entering a foreign market by exporting or greenfield FDI, a firm does not observe how the quality of its service will be perceived by consumers in
a new market. Entry via M&A resolves this demand uncertainty, whereas the quality
of the potential acquisition target varies across foreign markets. The resulting equilibrium
thresholds reverse the feature of the standard proximity-concentration trade-off
in manufacturing. In particular, we find that high quality firms serve foreign markets
by exporting. Moreover, the ordering of quality cutoffs is determined by the countryspecific
quality perception, the structure of entry costs and size of synergies associated
with M&A. The data on German firms supports this theoretical finding.
Stephan Huber (University of Regensburg, with Katharina Eck):
Product sophistication and spillovers from foreign direct investment
Foreign direct investment (FDI) in developing countries is often associated with
higher economic growth due to knowledge and technology spillovers to local firms. One
way that FDI speeds up growth is by facilitating the manufacturing of more sophisticated
products by local firms. So far, there is a lack of firm-level evidence how the presence of
multinational firms affects the product sophistication of firms in a developing country.
The aim of this paper is to fill this gap. We compile an extensive firm–product-level data
set of Indian manufacturing firms, which we complement with information on product
sophistication and spillovers from FDI.We then explore different channels through which
spillovers from multinationals to local Indian firms foster the manufacturing of sophisticated
products.We find evidence that spillovers through supplier linkages strongly increase
the manufacturing of sophisticated products in India.
Henning Mühlen (University of Hohenheim, with Octavio Escobar):
Structural Transformation in Mexico: What is the Role of FDI?
Foreign direct investment (FDI) fows to Mexico are substantial and play an important role in the Mexican economy in the recent past. This is accompanied by the fact that these investments shape to some extent the economic landscape and structure in this host country. Yet, there is considerable variation in the amounts of FDI within the country. Hence, FDI has different impacts on the economic structure across Mexican states. We provide descriptive figures of FDI and structural change indicators that highlight these issues in many dimensions. Based on these observations, the main aim of this paper is to analyze the impact of FDI on structural transformation. We conduct an empirical analysis on the regional level. The unit of observation is a Mexican State for which we calculate structural change from the reallocation of labor between sectors. The results suggest that there is no e ect from aggregated FDI. Considering disaggregated FDI flows, the ndings indicate that FDI from the US seem to have negative effects on e ective structural change while Spanish FDI has a positive impact. Moreover, there is some evidence that FDI flows in agriculture and services have a positive effect.
Daria Suprunenko (University of Trier, with Stephan Huber and Xenia Matschke):
Investment Projects in India: The Role of Upstream and Downstream Industries
It is a widely held belief that agglomeration forces, that is, the proximity to markets and suppliers, determine the location choice of investment projects (IP). The new economic geography literature offers various explanations for the spatial concentration of industries and for firms to locate close to markets and input suppliers.
However, empirical work that evaluates the impact of agglomeration on the location choice of IPs is, so far, restricted to foreign direct investments and focus on the overall market size effect. Moreover, spatial effects are mostly ignored. We aim to contribute here in various ways: First, we offer a more nuanced theoretical and empirical view on the impact of industrial agglomeration on location choices of IPs. We motivate the location choice with a Krugman-type theoretical model where we distinguish horizontal, upstream, and downstream agglomeration at a regional level. In our empirics, we evaluate the impact of spatial concentration of economic activity within the same industry (horizontal) and how the presence of industries that deliver goods to a certain industry (upstream) and receive goods from certain industry (downstream) matter. Second, we account for the spatial structure of industrial agglomeration. Third, we use the CapEx database from the Centre for Monitoring Indian Economy (CMIE). An important feature of our database is that we know whether the IP was carried out by private, public, or foreign investors. Thus, we are able to investigate effects of agglomeration with respect to the decision-maker in further detail.
Robert Genthner (University of Göttingen; with Kriztina Kis-Katos):
The impact of foreign investment regulation on firm productivity and employment in Indonesia
Using a yearly census of Indonesian manufacturing firms for 2000-2014, we investigate
the effects of a sector-specific investment policy reform on firm productivity,
employment and wages. Hereby we exploit a protectionist foreign direct investment
reform (the so-called negative investment list), which enumerated selected sectors
at the five digit level that became only conditionally open to foreign investors. The
list was first released in 2000 and has been repeatedly revised by the Indonesian authorities
since. We use the changes within this regulatory framework to investigate
the effectiveness of the policy by assessing its impact on firm-level productivity and
labor market outcomes within the manufacturing sector, while controlling for firm
and two digit sector-year fixed effects. We find robust evidence in favor of declining
foreign capital shares as a result of a tighter regulation of foreign direct investment
but no evidence of production shifting out of the more heavily regulated sectors.
Our results also indicate a sizable decrease of firm productivity in the years following
the regulation as well as a positive correlation between restrictive regulation and
Laura Montolio (University of València; with Mariam Camarrero and Cecilio Tamarit):
Determinants of FDI for Spanish regions: Evidence using stock data
After two decades of academic debate on the factors that determine FDI, discussion
still remains open. This article empirically investigates the determinants of FDI activity
from a macroeconomic point of view, using Spanish regional data (NUTS 2) for the
period 2004-2013. We apply the Poisson Pseudo-Maximum-Likelihood estimator with
country-time fixed effects in a gravity framework. The empirical analysis revealed the
following allocation patterns: FDI locational strategies in the Spanish regions are determined
significantly by gravity factors related to market conditions (such as market
size and labour productivity), the geographic position of the regions and by trade liberalization
policies. We also confirm the negative impact of the global financial crisis
on the stock of FDI and an improved specification of the model compared to previous
empirical literature based on FDI flows. The results allow us to draw some policy
implications about the prospective promotion of incoming FDI at the subnational level.