Domestic Private Firms Research Articles

Are There Productivity Spillovers from Foreign Direct Investment in China?

We review previous literature on productivity spillovers of foreign direct investment (FDI) in China and conduct our own analysis using a firm-level data set from a World Bank survey. We find that the evidence of FDI spillovers on the productivity of Chinese domestic firms is mixed, with many positive results largely due to aggregation bias or failure to control for endogeneity of FDI. Attempting over 2500 specifications which take into account forward and backward linkages, we fail to find evidence of systematic positive productivity spillovers from FDI. We do, however, find robust evidence that Chinese private firms tend to invest less in innovation in the presence of FDI. Combined with our previous findings that domestic private firms tend to be more involved in providing inputs and intermediary goods for foreign firms (Hale and Long, 2006), these results suggest a more passive role played by domestic firms in the global division of labor than envisioned by the Chinese government.

Investment decisions and the soft budget constraint

AbstractThis paper investigates the investment behaviour of a large panel of Hungarian firms in the period 1989–99, in order to assess the impact of institutional and regulatory changes on the efficiency of credit allocation. We find that the role of financial factors for investment decisions has changed significantly after the introduction of major financial reforms, and that firms were affected differently depending on their ownership type. Reforms have hardened the budget constraint of private domestic firms, particularly small ones, and reduced informational problems for foreign‐owned firms. State‐owned firms remained subject to a soft budget constraint. In particular, small state firms became more sensitive to financial conditions, whereas large state firms were unaffected and kept operating under a soft budget constraint.

Ownership Biases and FDI in China: Two Provinces

Jiangsu and Zhejiang are of two of China most prosperous and dynamic provinces. This paper first presents a factual account of two empirical phenomena: 1) FDI has played a more substantial role in the economic development of Jiangsu than in Zhejiang, and 2) ownership biases against domestic private firms in Jiangsu were more substantial than in Zhejiang. The paper hypothesizes that there is a connection between these two empirical phenomena. Specifically, ownership biases against domestic private firms increase preferences for FDI because FDI provides a measure of relative property rights security. Thus a biased domestic private firm has an incentive to move its assets and/or future growth opportunities to the foreign sector. The paper uses two private-sector surveys - one conducted in 1993 and the other in 2002 - to provide an empirical test of this hypothesis. Our analysis shows, controlling for a variety of firm-level attributes and industry and regional characteristics, those private firms which perceive ownership biases to be more severe are more likely to form joint ventures with foreign firms.

A Tale of Two Provinces: The Institutional Environment and Foreign Ownership in China

In this paper, we use a unique dataset covering joint ventures in two provinces of China, Jiangsu and Zhejiang, to test the effect of the institutional environment for domestic private firms on ownership structures of FDI projects. Unlike many studies on this subject, we approach the issue from the perspective of local firms seeking FDI rather than from the perspective of foreign firms seeking to invest in China. Applying the prevailing bargaining framework in studies on ownership structures of FDI projects, we find that a more liberal institutional environment for domestic private firms is associated with less foreign ownership of the joint ventures operating there. Several mechanisms can contribute to this outcome. One is that a more liberal institutional environment may enhance the bargaining power of those domestic firms negotiating with foreign firms to form alliances (the capability effect). The other mechanism is that a more liberal institutional environment may reduce some of the auxiliary benefits associated with FDI - such as greater property rights granted to foreign investors - and thereby attenuate incentive to form alliances with foreign firms (the incentive effect).

Ownership, firm size and rent sharing in Bulgaria

Using a unique three-digit firm-level data set of all medium and large manufacturing enterprises in Bulgaria covering the years 1997–1998, we investigate how wages are affected by ownership status, firm size and rent sharing. Our pooled OLS, panel and first-difference TSLS estimates clearly point to ownership structure as an important determinant of both the wage level (for given productivity) and the degree of rent sharing. Rent sharing is very pronounced in state-owned firms but far less pronounced in private domestic and foreign firms. The results strongly confirm the existence of a multinational wage premium. In addition, we find weak evidence of a positive firm size-wage effect and a positive effect of firm size on the degree of rent sharing. If these effects exist, they are often more pronounced in private domestic firms.

One country, two systems: Foreign-invested enterprises and domestic firms in China

This paper shows that there is a dualist legal regime in China in that different bodies of laws and regulations apply to foreign-invested enterprises (FIEs) from those that apply to domestic firms. In general, the legal and regulatory treatments of FIEs are superior to those that pertain to domestic firms, especially domestic private firms. The dualist nature of China's legal regime is designed to insulate the economy from full effects of foreign direct investment (FDI) as well as to protect socialism.

Public Stackelberg Leadership in a Mixed Oligopoly with Foreign Firms

This is the first paper to consider a mixed oligopoly in which a public Stackelberg leader competes with both domestic and foreign private firms. The welfare maximising leader is shown to always produce less than under previous Cournot conjectures. Introducing leadership also alters previous public pricing rules resulting in prices that may be either greater than or less than marginal cost depending on the relative number of domestic firms. Furthermore, entry of a foreign firm will increase welfare only when the relative number of domestic firms is small, but that share is shown to be larger than has been indicated without leadership. Unlike previous models, the influence on public profit of a foreign acquisition is ambiguous and is related to the relative number of domestic firms. Finally, the consequences of privatisation are shown, for the first time, to depend on the relative number of domestic firms.

Strategic and environmental determinants of HRM innovations in post-socialist Poland

In the last two decades, research in human resource management has increasingly focused on the strategic linkage between the activities of the human resource function and the business goals of enterprises. Most of the theoretical and empirical work in this area has focused on the US context. This paper extends this research to a non-US business environment. Specifically, we examine data from 303 state-owned, domestic private and foreign-owned Polish firms to test how strategic and environmental variables are related to the adoption of human resource innovations. This analysis suggests that business strategies, local labour markets and the presence of foreign competition are related to the complexity and extensiveness of firm-level human resource practices.

The Effect of Ownership and Competitive Pressure on Firm Performance in Transition Countries: Micro Evidence from Bulgaria, Romania and Poland

This paper uses a unique representative firm level data set to analyse the effect of domestic and international competitive pressure and ownership changes in three emerging economies, Bulgaria Poland and Romania. Our main findings can be summarized as follows: Domestic competitive pressure, measured by market structure, and increased import penetration are associated with higher firm performance in Poland irrespective of the ownership structure of firms. Furthermore the positive effects of increased import competition are reinforced for foreign owned firms. In contrast, in Bulgaria and Romania, increased import penetration is associated with lower firm performance, while there is some evidence that more competitive market structures are associated with higher total factor productivity. However, these effects depend on the ownership structure of firms, which suggests the existence of complementarities between competitive pressure and ownership changes. The results also indicate that privatisation has positive effects on firm performance. In particular, domestic private firms and foreign owned firms outperform state owned firms. Furthermore, there is evidence that foreign owned firms do better than domestically owned private firms especially in Bulgaria and Poland. The results on ownership are somewhat weaker for Romania.

Currency crises and monetary policy in an economy with credit constraints

This paper presents a simple model of currency crises which is driven by the interplay between the credit constraints of private domestic firms and the existence of nominal price rigidities. The possibility of multiple equilibria, including a ‘currency crisis’ equilibrium with low output and a depreciated domestic currency, results from the following mechanism: If nominal prices are ‘sticky’, a currency depreciation leads to an increase in the foreign currency debt repayment obligations of firms, and thus to a fall in their profits; this reduces firms’ borrowing capacity and therefore investment and output in a credit-constrained economy, which in turn reduces the demand for the domestic currency and leads to a depreciation. We examine the impact of various shocks, including productivity, fiscal, or expectational shocks. We then analyze the optimal monetary policy to prevent or solve currency crises. We also argue that currency crises can occur both under fixed and flexible exchange rate regimes as the primary source of crises is the deteriorating balance sheet of private firms.

The impact of cultural value orientations on individual HRM preferences in developing countries: lessons from Kenyan organizations

The intention of the study is to examine the impact that individual national culture value orientations have on the preference for the design of HR policies and practices. The value orientation structure and preferences for thirty-four HR design choices are studied in a sample of 274 Kenyan employees from eight multinational, state and private domestic firms operating in the manufacturing and processing sector. The study shows that the HR design choices of Kenyan employees reflect the following picture across four factors: high HR involvement/participation: high predictability of rewards; performance rather than loyalty-based policies; and moderate levels of HR empowerment. Kenyan employee value orientations reflect: activity thinking over activity doing; individual over collective relationships; relationship to nature mastery over relationship to nature harmony; low subjugation to nature; and human nature evil (manipulative). More importantly, three out of the four HR preference factors are valuesrelated, i.e. the individual's value orientation is highly predictive of their preference for the design of HR policies and practices. From 9 per cent to 19 per cent of the variance in preferences for involvement, empowerment and predictability of rewards is accounted for by national culture value orientations. HR involvement preferences are related to activity thinking values. Predictability of rewards is related to high activity doing. Empowerment HR is related to low relationships hierarchical values. Preferences for performance versus loyalty-based HRM are intriguingly values-free judgements, although ethnic factors play a role here.

Currency Crises and Monetary Policy in an Economy with Credit Constraints

This paper presents a simple model of currency crises which is driven by the interplay between the credit constraints of private domestic firms and the existence of nominal price rigidities. The possibility of multiple equilibria, including a 'currency crisis' equilibrium with low output and a depreciated domestic currency, results from the following mechanism: if nominal prices are 'sticky', a currency depreciation leads to an increase in the foreign currency debt repayment obligations of firms, and thus to a fall in their profits; this reduces firms' borrowing capacity and therefore investment and output in a credit-constrained economy, which in turn reduces the demand for the domestic currency and leads to a depreciation. We examine the impact of various shocks, including productivity, fiscal, or expectational shocks. We then analyze the optimal monetary policy to prevent or solve currency crises. We also argue that currency crises can occur both under fixed and flexible exchange rate regimes as the primary source of crises is the deteriorating balance sheet of private firms.

China's Troubled Workers

For financial managers monitoring trade from the tall towers of Wall Street, China's high-growth economy inspires awe and investments. To the men and women employed on the factory floor of the People's Republic, however, the economic scene looks grimly different. China's workers are in trouble, some in deep trouble. Since their inauguration in 1978, Deng Xiaoping's economic re forms have wrought vast changes in the nation's labor force. While diversifying the types of enterprises in China, the reforms have exac erbated labor problems across all of them: state-owned firms, joint ventures, urban, township, and village collectives, domestic private firms, and foreign-funded enterprises. A key innovation of Deng's socialism with Chinese characteristics was that some people would get rich first. But most workers, the supposed masters of the country, are still waiting for their share. Some economists claim that the workers' day will come with fur ther growth, but double-digit growth rates do not necessarily trans late into a better life for workers. After a decided improvement in living standards during the first half of the 1980s, income inequal ity has widened, with workers' social status declining apace. In 1978, 27 percent of the members of the National People's Congress were worker representatives. Their numbers declined to 15 percent in 1983,12 percent in 1988, and 11 percent today. Worse yet, many so

A Mixed Oligopoly in the Presence of Foreign Private Firms

In this paper, a mixed oligopoly model is considered in which a state-owned public firm competes with both domestic and foreign private firms. Previous articles on mixed oligopoly did not include foreign private firms. The effect on the equilibrium involves a lower price and a different allocation of production (relative to the case when all private firms are domestically owned). In addition, issues such as the effects of an open door policy allowing foreign firms to enter and the effects of foreign acquisition of domestic firms are discussed.

Concentration in Indonesian Manufacturing∗

This paper reports new data on patterns and trends in concentration in Indonesian manufacturing from 1975 to 1983. Seller concentration is found to be remarkably high, exceeding that of most other sizeable developing countries for which data are available. Manufacturing activity is heavily concentrated around Jakarta and neighbouring areas and in East Java; moreover, the six most industrialised provinces account for well over 80% of industrial output. In terms of ownership, private (domestic) firms are by far the most important group, and their share has been expanding. For various reasons, the significance of these firms is overstated in the statistics. ∗ For helpful comments on an earlier draft I thank H.W. Arndt and Anne Booth. For assistance with the preparation of some of the tables I am most grateful to Anna Weidetmann.