Host Country Policies Research Articles

Multinational Investors as Export Superstars: How Emerging-Market Governments Can Reshape Comparative Advantage

This paper investigates three cases — Malaysia, Costa Rica, and Morocco — in which host authorities were successful in using foreign direct investment to change the export profile of the domestic economy. Each case highlights the importance of first-mover firms, and clusters of follower firms, in oligopolistic industries, whose emergence changes the revealed comparative advantage of the domestic economy. The results from these three cases are shown to be consistent with a broader body of econometric analysis. An important implication is that small emerging markets may be better equipped to transform their production structure and stimulate exports with foreign direct investment than by promoting broad domestic entrepreneurship. Our results show that host-country policy changes can have very large effects if they alter the entry of multinationals or the behavior of large firms.

The Effect of Migration on Terror - Made at Home or Imported from Abroad?

We investigate whether the stock of foreigners residing in a country leads to a larger number of terrorist attacks on that country. Our instrument for the stock of foreigners relies on the interaction of two sets of variables. Variation across host-origin-dyads results from structural characteristics between the country of origin and the host, while variation over time makes use of changes in push and pull factors between host and origin countries resulting from natural disasters. Controlling for the levels of these variables themselves and fixed effects for dyads and years, the interaction provides a powerful and excludable instrument. Using data for 20 OECD host countries and 187 countries of origin over the 1980-2010 period we show that the probability of a terrorist attack increases with a larger number of foreigners living in a country. However, this scale effect is not larger than the effect domestic populations have on domestic terror. We find some evidence that terror is systematically imported from countries with large Muslim populations. A larger number of attacks against foreigners in the host country increases the risk of terror from foreigners there. We find that host country policies relating to integration and the rights of foreigners are key to fight terror- stricter policies that exclude foreigners already living in a country increase the risk of terror. High-skilled migrants are associated with a significantly lower risk of terror compared to low-skilled ones, while there is no significant difference between male and female migrants.

Experience, Equity and Foreign Investment Risk: A PIC Perspective

We analyze foreign investment risk-mitigating effects of host-country policy stability, firm experience and equity stakes using an empirical context largely ignored by international business (IB) research: project investment companies (PICs). PICs permit cleaner separation of individual investment project risk from the parent firm, which may otherwise pool risk characteristics from managing multiple projects across different industries and countries. PICs also permit potentially unbiased, prospective risk assessment at the time of a project’s initial announcement based on the mix of debt and equity funding the project. Consistent with previous IB research, our analyses of 396 PICs announced in 53 countries from 1990–2006 indicate that investment risk measured as the percentage of equity-to-total capital funding a PIC decreases with greater host-country policy stability, lead-investor experience in the host country, and lead-investor equity stakes. But contrary to previous IB research, we find that lead-sponsor experience and equity stakes reduce investment risk less as host-country policy stability decreases. From a PIC perspective, investor experience and equity stakes are complements to (not substitutes for) host-country policy stability. Our PIC-based evidence re-invigorates research and related practice and policy debates about how investor experience and equity holdings affect foreign project decisions and suggests new avenues for future work.

Experience, Equity and Foreign Investment Risk: A PIC Perspective

We re-examine foreign investment risk-mitigating effects of firm experience and equity stakes using an empirical context largely ignored by international business (IB) research: project investment companies (PICs). PICs permit cleaner separation of individual investment project risk from the parent firm, which may otherwise pool risk characteristics from managing multiple projects across different industries and countries. PICs also permit potentially unbiased, prospective risk assessment at the time of a project’s initial announcement based on the mix of debt and equity funding the project. In observing risk at initial announcement, we can also observe risk characteristics for completed and uncompleted projects. Consistent with previous IB research, our analyses of 396 PICs announced in 53 countries from 1990-2006 indicate that investment risk measured as the percentage of equity capital funding a PIC decreases with greater host-country policy stability, lead-investor experience in the host country, and lead-investor equity stakes. But contrary to previous IB research, we find that lead-sponsor experience and equity stakes reduce overall PIC equity less (not more) at announcement as host-country policy stability deteriorates. From a PIC perspective, investor experience and equity stakes are complements to (not substitutes for) host-country policy stability. We confirm these trends with alternative analyses replacing the percentage of PIC equity at announcement with a related risk measure, whether there is a substantial delay in securing financing for the PIC after it is announced. PIC-based evidence complements existing evidence on foreign investment project risk and suggests future research opportunities that might benefit from integrating both evidentiary sources.

Investment Protection and the Safeguard of the Essential Interests of the State: Drawing Lessons from the Pacific Alliance's Investment Treaty Framework

The Additional Protocol to the Framework Agreement of the Pacific Alliance (PA Additional Protocol) sets forth an additional layer for the protection of foreign investment to the preexisting International Investment Agreements (IIAs) between the PA Member States, posing a number of systemic questions regarding the application and interpretation of different treaty provisions and the way how they interplay. Against this background, the chief purpose of this article is to ascertain the extent to which the PA Member States have preserved a regulatory space for the protection of their essential interests in the PA Additional Protocol and the pre-existing IIAs between them. Particular emphasis is given to variations in the scope of national security and public order exceptions vis-a-vis other investment treaty provisions, taking into account potential situations of overlapping and conflict of norms between the PA Additional Protocol and the pre-existing IIAs in place. The article concludes that the narrower scope of the national security and public order exceptions in the PA Additional Protocol is outweighed by other provisions in the treaty that carefully balance the protection of investments vis-a-vis the right to regulate in the public interest. As highlighted by the UNCTAD, the PA Additional Protocol has all the elements suggested to preserve a regulatory space for public policies of host countries and to minimize the exposure to investment arbitration in this ground; this encompasses sensitives issues that would be otherwise governed by national security and public order exceptions in pre-existing IIAs between the PA Member States.

The size of the cliff at the border

The scale of international migration flows depends on moving costs that are, in turn, influenced by host-country policies. This paper shows how to estimate the influence of policies upon bilateral migration flows to multiple destinations. We rely on a Poisson pseudo-maximum likelihood estimator to derive estimates that are consistent under more general distributional assumptions on the underlying RUM model than the ones commonly adopted in the literature. We derive bounds for the estimated direct and indirect effects of migration policies that reflect the uncertainty connected to the use of aggregate data, and we show that bilateral migration flows can be highly sensitive to the immigration policies set by other destination countries, an externality that we are able to quantify.

Indian Foreign Direct Investment: A Way to Africa

Indian companies are entering into African domain largely guided by the market and resource seeking motives which promotes potential forward and backward linkage. Indian FDI to Africa is concentrated in oil, gas and mining in the primary commodities market. In the manufacturing sector, a dominance of automobile and pharmaceutical firms is seen. Most of the Indian FDI in African countries is through Greenfield investments and joint ventures that are desired by the host countries due to their contribution in creating new production capacity and generating employment, transfer of technology, etc. The identified factors that motivate Indian investors to invest in Africa are socio-cultural, host country policies, regional integration agreements, bilateral investment treaties, gross domestic product growth etc. Also language, culture, presence of Diaspora does play a significant role in attracting FDI in Africa countries. The relationship between India and Africa exists and functions at these multilateral levels that includes commerce converge.

The International Transmission of Shocks: Foreign Bank Branches in Hong Kong During Crises

The international transmission of shocks in the global financial system has always been an important issue for policy makers. Different types of foreign shocks have different effects and policy implications. In this paper, we examine the effects of the recent U.S. financial crisis and the European sovereign debt crisis on foreign bank branches in Hong Kong. Unlike the literature on global banking that studies a global bank’s foreign operations from a home country perspective, our analysis uses foreign bank branches in Hong Kong and has a distinct host country perspective, which is more relevant to the host country policy makers. We find that global banks use their foreign branches in Hong Kong as a funding source during a liquidity crunch in the home country, suggesting that global banks manage their liquidity risk globally. After the central bank in the home country introduced a liquidity facility to relieve funding pressure, this effect disappeared. We also find strong evidence that foreign branches of banks in the crisis countries lend significantly less in Hong Kong relative to a control group, suggesting the presence of a lending channel in the transmission of shocks from the home country to the host country.

Impact of nationality composition in foreign subsidiary on its performance: a case of Korean companies

This study explores how the nationality compositions of management teams and employee groups in foreign subsidiaries can affect subsidiary performance. By analyzing firm-level data on 401 South Korean subsidiaries across 35 countries in the period between 2005 and 2007, we found that balanced compositions in both subsidiary management teams (SMTs) and subsidiary employee groups (SEGs) were positively associated with subsidiary performance. The results suggest that the benefits of balanced composition are higher for both innovative and coordinative tasks conducted by management teams and for simple computational tasks conducted by employee groups. The effect of the SMT and SEG compositions on subsidiary performance, however, may depend on the host country's institutional conditions. These findings have practical implications for multinational staffing strategies in order to ensure high performance in subsidiaries and for host country policies used to attract high quality foreign direct investments.

Migrants' acquisition of cultural skills and selective immigration policies

Based on the requirement of OECD countries to permit substantial inflows of immigrants to compensate for the effects of the demographic change, this paper explores the incentives of heterogeneous migrants to acquire host country specific cultural skills to improve their labor market outcomes. The theoretical results predict that the migrants` ambition in achieving such skills is increased if the scope of their respective cultural group is small, social permeability of migrants in the native society is large and individual integration costs are low. Based on these results, I study whether cultural heterogeneity among the migrant population is welfare enhancing for the native population. I find that as long as migrants do not differ too much with regard to their costs of learning the native culture, cultural heterogeneity is beneficial for the host economy. The model provides an explanation for the shift in the immigration policies of the traditional host countries throughout the twentieth century as well as the current immigration policies in the EU member states.

International Migration of Skilled Workers with Endogenous Policies

We study the interaction between the optimal immigration policy of a host country and education policy of a source country in a model of international migration of skilled workers. Acquisition of human capital is driven by the academic and career opportunities at home and abroad. Greater opportunities to migrate are found to increase the source country's net stock of human capital only under very stringent conditions concerning the shape of the utility function and of the production function for human capital, the country's emigration rate, and the international wage differential. We use the model to examine the effects of technological improvements in the educational sector, changes in the academic curricula in the source country, and attitudes to immigration in the host country. Of key interest are the implications for the optimal spending on education in the source country and the optimal immigration quota of the host country.

MNEs and Energy Efficiency in Southeast Asian Manufacturing

After controlling for the influences of plant-level factor usage and technical characteristics, foreign multinational enterprises (MNEs) used fuel and total energy more efficiently than local manufacturing plants in about one-third of Malaysia's large energy using industries. MNE-local or MNE-private differentials were insignificant, however, in most industries for electricity in Malaysia; total energy, electricity and three fuels (diesel, natural gas, and coal) in Indonesia; and total energy in Thailand. In short, MNEs and local or private plants generally used purchased energy with similar efficiency, probably because they faced similar host country policies and used similar energy technologies.

Barriers to immigration and the dynamics of emigration

In a dynamic model of emigration and return migration I examine the role of migration costs in the process of capital accumulation of the source country. Every migration attempt reduces the amount of savings available for capital accumulation. It contributes, however, to an increase in the per-capita capital stock of the source country if the migrants leave some of their capital behind or decide to return and repatriate accumulated savings. The interaction among these flows governs the evolution of the economy’s capital stock and factor rewards, which in turn affects the decisions to emigrate and return migrate. Both the quantitative and qualitative effects of host-country policies and other disturbances on the key macroeconomic variables of the source country are found to depend on the level of migration costs.

Global Exchange and Poverty: Trade, Investment, and Migration

Contents: Introduction, Robert E.B. Lucas and Lyn Squire PART I: TRADE 1. Global Economic Institutional, Intellectual and Religious Contacts: A Brief History, T.N. Srinivasan 2. The Impact of Technical Barriers to Trade on Argentine Exports and Labor Markets, Gabriel Sanches, Maria Laura Alzua and Ines Butler 3. Agricultural Subsidies, Trade Barriers and Poverty: Household Micro-simulation for Colombia, Felipe Barrera-Osorio and Marcela Melendez 4. Trade Liberalization in Southeastern Europe, Joze Damijan, Jose de Sousa and Olivier Lamotte PART II: MIGRATION 5. Poverty Impacts of Romanian Remittances from the EU: Effects of Host-Country Migration Policies, Ella Viktoria Kallai and Mircea Teodor Maniu 6. Skill Diffusion by Temporary Migration? Returns from Western European Working Experience in the EU Accession Countries, Anna Iara 7. Host-Country Economic Policies and Worker Remittances to Developing Countries: The Cases of Turkey and Mexico, Serdar Sayan and Ayca Tekin-Koru PART III: FOREIGN DIRECT INVESTMENT 8. Inequality: The Argentine Experience, Daniel Chudnovsky, Andres Lopez and Eugenia Orlicki 9. The Effect of Policies on FDI Flows to Transition Countries, Tom Coupe, Irina Orlova and Alexandre Skiba 10. Does Foreign Ownership Matter for Enterprise Training? Empirical Evidence from Transition Countries, Vitaliy Oryshchenko Index

Assessing the Scale and Potential of Chinese Investment Overseas: An Econometric Approach

AbstractThe recent rise in Chinese outward direct investment (ODI) has significant global implications and impacts on host country policy. The present paper attempts to provide a theoretical basis and to define a robust econometric approach to assess the performance and potential of Chinese ODI. In this paper, foreign direct investment (FDI) performance is estimated using a frontier FDI model to measure how foreign investors, especially China, and the recipients of this direct investment perform relative to a benchmark of potential FDI. The results show that Chinese ODI achieves less of its potential compared with other investors. However, its ODI to Australia has performed much better than investment to other destinations. The results suggest that Chinese policy‐makers should look at the pattern of China's ODI and, in light of superior performance in destinations like Australia, adjust policy strategies and institutional arrangements to enhance performance and reduce barriers to Chinese ODI.

Effect of Spillovers on Foreign Versus Domestic Industry Leadership in a Developing Economy

An often contentious issue is how spillovers affect foreign versus domestic industry leadership in a developing economy, for instance, whether policies favour domestic firms. To address such issues it is important to understand the baseline effect of spillovers on industry leadership, which I focus on. I develop a formal model that compares the effect of different types of spillovers on industry leadership. I find that spillovers driven by absorptive capacity, versus by demonstration effects, are more likely contentious as: domestic leadership is higher; outcomes are more sensitive to host country policies; and the firm dynamics, such as entry and exit, due to the spillovers are harder to observe. Thus baseline expectations of which firms lead an industry depend on the types of spillovers.

Elite Attitudes Toward Multinational Firms: The Korean Experience

This paper reports the survey results of the recently changing attitudes of the government and business elite groups toward multinational firms in Korea and investigates the major individual attribute determinants of these attitude changes. The elite groups of the public and private sectors in Korea, such as government officials and business leaders, were shown to have favorable attitudes toward multinational firms, in general for varying reasons. The estimation results based on the linear probability (OLS) model and the probit model showed that the most significant changes in attitudes toward multinational corporations in Korea are expected among the young business leaders working for small firms and the government officials at the low hierarchical level. This paper also discusses several policy implications of this study on the enhancement of the receptivity toward multinational firms and the host-country policies of foreign investment in Korea.

Carbon offsets with endogenous environmental policy

Interests in obtaining carbon offsets in host countries for CDM projects may serve as an obstacle to implementing more stringent general environmental policies in the same countries. A relatively lax environmental policy, whereby carbon emissions remain high, can be advantageous for such countries as it leaves them with a higher than otherwise scope for future emissions reductions through CDM and other offset projects. In this paper, the potential to affect the availability of future CDM projects is shown to distort environmental and energy policies of CDM host countries, in two ways. First, policies to reduce the use of fossil energy are weakened. This in turn weakens private sector incentives to switch to lower-carbon technology through CDM projects. CDM host governments then also find it attractive to subsidize this switch, in order to maximize the country's advantage from the CDM.

International joint venture, commitment and host-country policy in an integrated market

To highlight the importance of bargaining power for both host and foreign partners, we envisage two modes, commitment and no-commitment, respectively, to examine the issue on international joint venture (IJV)’s profit-splitting and optimal host-country policy in an integrated market. With a three-stage Nash bargaining model, it turns out that in an integrated market, tax rate under commitment does not exactly equal zero unless the host partner does not benefit at all in terms of production efficiency by the IJV. Government shall subsidize joint venture while the host partner has more bargaining power than the foreign partner. Furthermore, subsidy is the optimal policy under no-commitment.

The Impact of Host Country Policies on the Overseas Chinese Family in Singapore

The purpose of this article is to account for changes in the family construct of the Singaporean Overseas Chinese resulting from migration and settlement. The family institution then changes in response to family policy, so that today it bears little resemblance to the traditional blueprint. Differences between the family institutions of the three major racial groups in Singapore have emerged as a result of discriminatory policy pressures. The Singaporean government has used family planning policies to create the ideal social structure and human resource capital, possibly at the expense of Malays and women with less education. The fate of the Chinese family institution in Singapore may also differ to its counterparts in Malaysia and China. In Malaysia, the pro-Malay affirmative action program contributed to a dramatic reduction in Overseas Chinese fertility, while creating unintended consequences that are not easily reversible. The article concludes with issues for marketing scholars to ponder.