Entry Of Foreign Firms Research Articles

The Impact of Input Trade Liberalization on the Entry of Foreign Firms: Evidence from a Quasi-Natural Experiment in China

This paper integrates trade policy and foreign direct investment into a unified analytical framework, and investigates the effects of input trade liberalization on the entry of foreign firms. To identify the causal effects, we utilize China’s accession to the WTO in 2001 as a quasi-natural experiment, and perform difference-in-difference estimation. The results show that input trade liberalization significantly increases foreign entry. We also find that input trade liberalization not only promotes the entry of new foreign firms, but also restrains the exit of existing foreign firms, thereby contributing to the net growth of the number of foreign firms. The mechanism tests show that increasing variety as well as quality of intermediate input and reduction in marginal cost are the potential channels through which input trade liberalization promotes foreign entry. This paper further demonstrates that institutional environment strengths the positive effect of input trade liberalization on foreign entry, and the promotive effect of input trade liberalization on foreign entry increases with industry import intensity, additionally, input trade liberalization is also conducive to improving the quality of foreign investment.

COMPARATIVE ASSESSMENT OF ECONOMIC DEVELOPMENT IN THE COUNTRIES OF THE EUROPEAN UNION

Investment, the entry of foreign firms depends of a large extent on the country’s goodwill, which is reflected in various ratings. This representation of the situation is approximate, as it does not estimate the differences between the values of the indicators with adjacent grades. This can be avoided by dividing countries into homogeneous groups. It is appropriate to do so on the basis of non-linear grouping rather than linear grouping. It is based on the transformation of data into a dimensionless scale and linear grouping. In the case, its homogeneity increases thanks to the levelling of the most distinctive values and the alignment of the statistical characteristics of the groups. The aim of the article is to propose in principle, a new approach to the ranking of countries on the basis of their level of economic development. It was found that the nonlinear decision of countries into homogenous groups and compared to the linear grouping more accurately reflect the current situation.

Market must be defended: The role of counter-espionage policy in protecting domestic market welfare

Governments of advanced economies are extremely concerned about the illicit acquisition of information on critical technologies employed by their industries, and countering this economic espionage is quickly becoming one of their top priorities. The present paper advances the theoretical analysis of the interaction between economic espionage and counter-espionage, and presents a first approximation to an inquiry into the rationale for the influence of market competition in its dynamics. The proposed model assumes a country with a one-market economy open to international trade whose product is supplied by domestic firms. Moreover, successful economic espionage implying market entry of foreign firms would harm domestic welfare. Considering counter-espionage policy as entry barrier and sufficient efficiency in espionage and counter-espionage efforts, the analysis of the benchmark case characterized by no foreign consumer and one foreign firm suggests that demand characteristics play an important role in the complex influence of competition in espionage. Irrespective of this, optimal counter-espionage effort is always positive although negatively affected by competition.

The pro‐competitive effects of foreign firm entry: Evidence from the Korean retail sector

AbstractI investigate the effect of foreign entry on host country market competition. Using a firm‐level data set for the Korean retail sector during the process of FDI liberalisation, I find that the increase in the number of foreign stores caused average markups across local firms to fall. I show that the channel through which FDI decreases local firms’ markups increased competition as opposed to productivity spillovers.

Productivity Gap and Inward FDI Spillovers: Theory and Evidence from China

AbstractThis paper constructs a two‐stage sequential game model to shed light on the spillover effect of inward FDI on the efficiency of domestic firms in host countries. Our model shows that, given an optimal joint‐venture policy made by foreign firms, the impact of the spillover effect of inward FDI is contingent upon the productivity gap between the domestic firms and foreign ones. In particular, we demonstrate that the spillover effect of inward FDI varies negatively with the productivity gap between domestic low‐productivity firms and foreign firms but works in the opposite way for high‐productivity firms. This suggests that once the productivity gap widens, the entry of foreign firms will increase the efficiency of high‐productivity firms but reduce the efficiency of low‐productivity firms. In support of our theoretical model, we provide robust empirical results by using the dataset of annual survey of Chinese industrial enterprises.

Foreign entry in the services sector and gender workforce composition

ABSTRACT The services sector and multinational corporations have played an increasingly essential role in promoting gender equality and women’s empowerment in labour markets. This paper examines whether the entry of foreign firms into the services sector can affect the gender workforce composition of their domestic counterparts, and to what extent. The empirical analyses utilise a large panel dataset of firms in the labour-abundant economy of Vietnam. The data show a higher proportion of women employed in foreign firms than local ones across two-digit industries and regions. The estimations indicate that foreign entry induces domestic firms to hire women more intensively. Large, state-owned and less capital-intensive firms tend to employ men at a higher rate. Further analyses reveal divergent effects of foreign affiliates. While increased foreign entry strongly stimulates the hiring of women among local firms in male-intensive industries, it exerts an insignificant impact on gender workforce composition in the female-intensive group.

Foreign Firm Entry and the Productivity of Japanese Listed Manufacturing Firms: An Analysis of Horizontal Spillover Effects Based on the Location of Foreign Establishments

Foreign Firm Entry and the Productivity of Japanese Listed Manufacturing Firms: An Analysis of Horizontal Spillover Effects Based on the Location of Foreign Establishments

Foreign versus local firms: implications for environmental sustainability

PurposeManaging environmental consequences while sustaining economic development necessitate strong commitment and participation of all firms across sectors. However, the environment-related role of foreign and local firms is unclear from previous research. With increasing trade liberalization and entry of foreign firms, this question has become particularly relevant. The purpose of this paper is to contrast the roles and contributions of foreign and local firms from an environmental sustainability perspective.Design/methodology/approachUsing data collected through a structured survey (395 responses) and semi-structured interviews (19 numbers) from the United Arab Emirates (UAE) construction sector (research setting), the study analyses and understands the hypothesized differences between foreign and local firms on three key environmental sustainability aspects: the extent of environmental practices implementation, the strengths/influences of drivers and barriers affecting the implementation, and the environmental, cost-related, and organizational performance benefits derived.FindingsForeign firms were found to implement environmental practices to a greater extent, have a greater internal drive to implement these practices, and face lower barriers to implementation than local ones. Local firms though were found to be not far behind foreign ones with regards to the environmental, cost-related, and organizational performance benefits derived.Practical implicationsFindings from the study are expected to help policymakers and practitioners develop policies/interventions that ensure all firms irrespective of their nature of ownership contribute equitably to environmental sustainability.Originality/valueThis study is arguably the first comprehensive attempt to understand how various environmental sustainability aspects are perceived and performed by local and foreign firms.

Government-induced production commitment vs. import-tariff under endogenous entry of foreign firms

ABSTRACT Governments often have direct or indirect control over domestic production to develop or protect their domestic industries that have cost disadvantages against foreign firms. We investigate the welfare effects of such a production control policy when domestic firms face the free entry of foreign firms. We consider the production control policy as the government inducing domestic firms to commit to some target output levels before the foreign entry, and compare the resulting domestic social welfare with that under an import tariff. We show that when the products are homogeneous, the production control policy yields higher domestic welfare than any level of import tariff, even if the production control policy aims to maximize domestic industry profits rather than overall domestic welfare. We also show that when the products are differentiated, the superiority of the production control policy crucially depends on the degree of product differentiation. The results suggest a benefit of maintaining the government's control over domestic production even after opening the domestic market, particularly for homogeneous products.

Productivity Gap and Inward FDI Spillovers: Theory and Evidence from China

This paper constructs a two-stage sequential game model to investigate the spillover effect of inward FDI on improving the efficiency of domestic firms in host countries. Our model shows that, given the optimal joint-venture policy made by foreign firms, the impact of spillover effect of inward FDI is contingent upon the productivity gap between the domestic firms and foreign ones. In particular, we demonstrate that the spillover effect of FDI inward varies negatively with the productivity gap between domestic low-productivity firms and foreign firms and works conversely for high-productivity firms. This result suggests that once the productivity gap widens, the entry of foreign firms will increase the efficiency of high-productivity firms and reduce the efficiency of low-productivity firms. The implication of our theoretical predictions is that once the productivity of domestic firms (high-productivity firms) is close enough to the world productivity frontier, they will incur the positive spillover effect from the entry of foreign firms. In contrast, the domestic firms with low productivity which are more distant from the world productivity frontier will perform worse owing to the entry of foreign firms, thus leading to the negative spillover effect. Using the data from over 570,000 firms in Chinese manufacturing industry in 2011, we advance the understanding of the theoretical model through empirical analysis.

Barriers towards foreign firms in international public procurement markets: a review

Abstract The international dimension of public procurement has gained in importance in the last decade and has attracted the attention of economist and policy makers. A number of trade agreements were signed with the intention to remove barriers to procurement markets and favour entry of foreign firms and products. However, empirical evidence shows that, despite the existence of trade agreements, discrimination towards foreign firms still applies in a number of countries around the world. In this paper, we present the methodologies used in the economic literature for the identification of overt and covert barriers to public tenders and discuss the importance of collecting high quality data for meliorating the ability of international traders to detect procurement barriers.

A House Divided: Political Pluralism, Institutional Complexity, and Foreign Firm Entry in the Mexican Maquiladora Sector

In this study, we investigate the effect of political pluralism on foreign firm market-entry decisions. Although prior research has argued that political pluralism has a positive impact on organizations, using an institutional theory lens to evaluate political pluralism suggests that in regions with weak political competition, political pluralism also brings potentially negative consequences for firms. Previous studies using a bargaining perspective have largely ignored these negative effects. We propose that in some contexts political pluralism increases institutional complexity and reduces firm access to resources, thereby reducing the attractiveness of such regions as potential sites for foreign manufacturing firms. Empirically, this study examines market entry of all foreign manufacturing firms into Mexico from 1990 to 2006. Our findings show that political pluralism decreases firm entry and that this effect is partially mediated by the amount of public resources that flow from upper- to lower-level government jurisdictions and moderated by the extent to which a state government depends on federal resources and by the extent to which firms depend on government resources.

Shutdown versus M&A: An empirical investigation of Slovenian incumbent firms’ responses to foreign competition

The paper investigates the shutdown and merger responses of heterogeneous incumbent firms to increased foreign competition. Foreign firm entry is confirmed to be significantly tougher than domestic firm entry in terms of its reallocation forces. Accounting for the competing nature of shutdown and merger risk, the results for Slovenian manufacturing firms during the later stage of Slovenia’s transition show that the entry of foreign firms via either FDI or exports increases the relative probability of incumbents deciding to shut down, while the incentive to react by merging is present only when foreign firms enter via a greenfield investment within the same region. While a shutdown decision is detected as the principal response in case of import competition, no predominance can be identified in incumbents’ reactions to FDI entry. Furthermore, firms with foreign owner(s) proved less likely to be a target of takeovers/mergers, although they tend to close down more easily than locally owned rivals.

Openness and the Optimal Taxation of Foreign Know-How

Developing countries frequently offer tax incentives and even subsidize the entry and operation of foreign firms. I examine the optimality of such policies in an economy where growth is driven by entrepreneurial know-how, a skill that is continuously updated on the basis of the productive ideas implemented in the country. Openness allows foreign ideas to disseminate inside a country and can foster the country's domestic accumulation of know- how. With externalities, however, laissez-faire openness is suboptimal and can be growth-and even welfare-reducing. I examine the gains from openness under an optimal taxation program the self-funding taxes on domestic and foreign firms that maximize the welfare of the recipient country, subject to the equilibrium behavior of national and foreign firms. Under optimal taxation, openness is always welfare enhancing and leads lagging countries to catch up with the world frontier. Yet, a country may want to subsidize the entry of foreign firms only if it can also subsidize the domestic accumulation of know-how. I also consider the optimal tax program under a number of restrictions that developing countries typically face. For instance, a country must not subsidize entry of foreign firms if doing so requires taxing the concurrent cohort of domestic firms. Similarly, an international agreement that requires equal taxation of domestic and foreign firms can be welfare reducing for a country close to the knowledge frontier.

Substituted Compliance: The Emergence, Challenges, and Evolution of a New Regulatory Paradigm

Abstract Over the past few decades, the US Securities and Exchange Commission experimented with a number of different approaches to relaxing Securities and Exchange Commission (SEC) rules to facilitate entry of foreign firms into US capital markets. Initially, the SEC favoured an approach I denominate as modified national treatment, under which foreign firms were allowed exemption from a limited number of specific US requirements that were likely to conflict with, or be redundant with respect to, regulatory requirements in their home jurisdictions. In general, these exemptions were available regardless of the quality of home country oversight. Sometimes those exemptions were available only for transactions with large institutional investors located in the USA. Starting in 2007, the Commission began to comtemplate more far-reaching acceptance of foreign regulatory oversight, most prominently in an approach that came to be known as substituted compliance. A hallmark of substituted compliance was that it was to be selective, and thus available only to those jurisdictions that the Commission determined to be substantially comparable to US regulatory oversight. In the face of the Global Financial Crisis in 2008, the Commission backed away from its initial experiment with substituted compliance, but the exercise still offers an interesting content in which to consider the manner in which the Commission might have determined the comparability of foreign regulatory systems. This essay explores the various analytical options available for making such supervisory assessments. It then concludes with some preliminary thoughts on what might be called ‘second-generation’ substituted compliance, which the SEC and the Commodity Futures Trading Commission have begun to employ in the past few years to limit the extraterritorial application of certain provisions of the Dodd–Frank Act.

Privatization, Underpricing, and Welfare in the Presence of Foreign Competition

AbstractWe analyze privatization in a differentiated oligopoly setting with a domestic public firm and foreign profit‐maximizing firms. In particular, we examine pricing below marginal cost by the public firm, the optimal degree of privatization, and the relationship between privatization and foreign ownership restrictions. When market structure is exogenous, partial privatization of the public firm improves welfare by reducing public sector losses. Surprisingly, even at the optimal level of privatization, the public firm's price lies strictly below marginal cost, resulting in losses. Our analysis also reveals a potential conflict between privatization and investment liberalization (i.e., relaxing restrictions on foreign ownership) in the short run. With endogenous market structure (i.e., free entry of foreign firms), partial privatization improves welfare through an additional channel: more foreign varieties. Furthermore, at the optimal level of privatization, the public firm's price lies strictly above marginal cost and earns positive profits.

Pollution, foreign direct investment, and welfare

We characterize the optimal environmental policy in an oligopolistic model of production and production-generated pollution. A number of foreign firms are located in the host country which is assumed to be small in the market for foreign direct investment so that entry of foreign firms is endogenous. We derive closed-form solutions for the optimal entry tax and the optimal emission standards for foreign and domestic firms. Inter alia, we find that the optimal tax must be positive to control FDI, the number of domestic firms does not affect optimal policy and the emission standards depend on the relative efficiency of the domestic and foreign firms.

Job Destruction and Productivity Gains in Heterogeneous Incumbent Firms: Comparing the Effects of Imports and Inward Foreign Direct Investment

:Using a ten-year panel of firm-level data for the Slovenian manufacturing sector, we find that as a result of investment liberalization, the least-efficient incumbent firms are experiencing job destruction, and the most-efficient are experiencing productivity gains; firms from the middle part of the total factor productivity (TFP) distribution are faced with both effects. Further, local firms from the lower and middle parts of the TFP distribution also experience a competition effect from imports in terms of both reduced employment and TFP growth. Our results imply that policy measures affecting foreign firm entry would have a relatively uniform effect on the employment growth of local firms, while their TFP growth would adjust significantly differently across the TFP distribution.

Entry of foreign firms and the R&D behaviour: a panel data study of domestic and foreign firms in China's manufacturing sector

Rapid globalization has resulted in increased competitive pressures. The entry of foreign firms in a host economy increases the level of competition faced by not only the domestic firms but also the existing foreign firms. We argue that domestic firms, especially in developing countries, respond to this situation by increasing their research and development (R&D) spending, whereas the foreign firms decrease their R&D spending. By making use of firm-level panel data from China's manufacturing sector, over the period 2005–2007, this paper investigates the impact of the entry of foreign firms on R&D behaviour of domestic and foreign firms. Empirical analysis, based on Tobit and Instrumental Variables Tobit regression, reveals that foreign entry increases the R&D intensity of domestic firms but its impact on R&D intensity of foreign firms is negative. The estimated results are found to be robust across balanced and unbalanced panels.

Optimal Trade Policy under Endogenous Foreign Entry

I characterise the optimal unilateral trade policy for domestic firms competing in domestic or integrated markets with endogenous entry of foreign firms. Under conditions satisfied in most trade models (as with quasi‐linear or CES preferences) the analysis is simplified by a Neutrality Theorem: any policy affecting the profitability of the domestic firm is not going to affect consumer surplus and the strategies of the foreign firms, but affects their entry decisions. In a domestic market, we fully characterise the optimal import tariff: this is positive in the classic linear Cournot case, but with a convex demand or product differentiation it is optimal to adopt an import subsidy. In an integrated market, the optimal subsidy to domestic production is always positive, independent from form of competition and size of the domestic market.