Anticipatory Investment Research Articles

The Power Crunch and Firms’ Anticipatory Investment: Evidence from Manufacturing SMEs in China

Using manufacturing survey data from China, we study the relationship between firms’ anticipatory investment (or in other words, willingness to invest) in the short-run future and their perception of the current power crunch for small and medium-sized enterprises (SMEs). Our findings reveal a robust and significant negative association, suggesting a sizable persistent negative impact of the power crunch on firms’ investment lingering over at least a couple of months. The dynamic impacts are very different at the industry level, with electricity-dependent industries appearing to take more hits. However, we find no statistically significant evidence to support the channel of electricity dependence in comparison with the channel of capacity utilization. Moreover, we show that firms of smaller size suffer disproportionately larger damage in future investment, which highlights the importance of caring about SMEs, relative to big firms.

Grid Investment and Support Schemes for Renewable Electricity Generation

The unbundling of formerly vertically integrated utilities in liberalized electricity markets led to a coordination problem between investments in the regulated electricity grid and investments into new power generation. At the same time investments into new generation capacities based on weather dependent renewable energy sources such as wind and solar energy are increasingly subsidized with different support schemes. Against this backdrop this article analyzes the locational choice of private wind power investors under different support schemes and the implications on grid investments. I find that investors do not choose system optimal locations in feed-in tariff schemes, feed-in premium schemes and subsidy systems with direct capacity payments. Consequently, inefficiencies arise if transmission investment follows wind power investment. A benevolent transmission operator can implement the first-best solution by anticipatory investment behavior, which is however only applicable under perfect regulation. Alternatively a location dependent network charge for wind power producers can directly influence investment decisions and internalize the grid integration costs of wind power generation.

The Strategic Euro Laggards

A government applying for a club membership may strategically delay entry to cope with the hold-up problem introduced by anticipatory investments of the private sector. In equilibrium of a two-period incomplete information game, we find that a pro-entry government may strategically delay to imitate an anti-entry government and thereby affect expectations of the private sector. The delay is more likely if the government has a good electoral prospect, is internationally weak, and is not considered to be too keen on entry. The model is related to the case of the Czech Republic where the government recently softened commitment in the euro adoption strategy.

Specific investments and the EU enlargement

This paper analyzes a hold-up problem in the EU enlargement process. EU-specific anticipatory investments of private firms lower the government’s outside option. The EU takes advantage of the applicants’ increased dependency and extracts more surplus through entrance conditions that benefit it and impose net costs on applicants. If private firms pay less than the full entrance fee in taxes, enlargement immiserizes the entrant. While in practice an applicant may possess sufficient bargaining power to avoid immiserization, the hold-up problem reduces its potential gains from joining the EU. This result suggests that previous calculations, ignoring both the applicants’ costs of joining the EU and the dynamics of their bargaining position during the negotiations, overestimate the welfare effects of membership.

Bargaining to preserve a unique ecosystem: the role of anticipatory investments to establish stronger bargaining positions

A forester and a conservation organization bargain over the commercial exploitation or preservation of a forested tract of land with unique ecological characteristics. The forester can improve its bargaining position by preparing a portion of the land for future timber production prior to negotiations between the two. However, doing so decreases the preservation value of the forest, as well as the compensation the conservation group is willing to pay to preserve the forest. The analysis suggests that the forester will begin preparing the land for timber production prior to negotiations only when the value of the land in timber production is significantly lower than the preservation values of the conservation group.

U.S. DIRECT INVESTMENT TO MEXICO: POLITICS, ECONOMICS, AND NAFTA

The goal of this paper is to determine whether the recent opening of the Mexican economy caused a significant change in the investment behavior of U.S. multinational firms. The first finding is that a real investment function that explained the data well through 1989 shifted dramatically thereafter. Tests indicate that the probable causes of this shift were (i) the relaxation of Mexican restrictions on direct investment after 1989 and (ii) anticipatory investment behavior after the positive conclusion of the NAFTA negotiations.

The failure of strategic industrial policies due to manipulation by firms

The home government announces an export subsidy before a home firm and a foreign rival compete in a third market. Anticipating the subsidy, either home or foreign firms may increase their output-cost-savings investments. Anticipatory investments in either country may cause domestic welfare to fall below its free market level. Similarly, if both home and foreign governments use strategic industrial policies, welfare may fall in one or both countries.