1 / 17

Are foreign firms privileged by their host governments? Yasheng Huang MIT Sloan School

Are foreign firms privileged by their host governments? Yasheng Huang MIT Sloan School. Agenda: --Summary of main findings --Issues with the prevailing view in the literature: National preference --Discussions of WBES --Findings --Policy implications.

cindy
Download Presentation

Are foreign firms privileged by their host governments? Yasheng Huang MIT Sloan School

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Are foreign firms privileged by their host governments? Yasheng HuangMIT Sloan School Agenda: --Summary of main findings --Issues with the prevailing view in the literature: National preference --Discussions of WBES --Findings --Policy implications

  2. Summary of main findings: Based on subjective evaluations by firms • Host governments privileged foreign firms over domestic firms in five out of nine regulatory arenas; • In the remaining four arenas, host governments treat foreign firms as well (or as poorly) as domestic firms; • Foreign privilege is present only when benchmarked against politically-weak domestic firms; • Foreign privilege appears to be greater in more corrupt countries than in less corrupt countries. • Less robust evidence that foreign privilege is greater in countries with low regulatory quality. • Foreign privilege is NOT absent in institutionally strong countries.

  3. Prevailing view in the FDI literature: National preference • National preference: A building bloc in standard economic theories of FDI • Why FDI does not occur all the time in the face of “presumed penalties for operating across national and cultural boundaries” (Ethier 1986). • Legal and policy advantages of domestic firms (in addition to social advantages). • Thus the importance of possessing “firm-specific” advantages to overcome these natural infirmities. • One theoretical FDI piece postulating foreign privilege • An exercise postulating theoretically exhaustive scenarios facing foreign firms: Both national preference and foreign privilege both included. • Conjecture not straightforward. • Here is what Rugman and Verbeke (1998) have to say: The reason for such preferences is that a symmetrical position of inward and outward FDI at the public policy level, and a dispersed FDI configuration at the firm level, lead to complexities in terms of optimal business-government interactions that cannot be solved at the national level.

  4. Prevailing view in the FDI literature: National preference • Empirical origins of this view: Ray Vernon (1971) • Many governments suspicious of MNCs in the 50s, 60s and 70s. • Imposed various restrictions: Export requirements, equity limitations, local content, etc. • Conceptual origins of this view: Caves (1996) • Domestic residents do not derive dividends from equities held by foreigners • Foreigners do not vote • Governments seek electoral benefits by appropriating income of MNCs.

  5. Issues with the national preference view • An assumption, not yet tested despite wide currency. • An example: “Foreign ownership frequently involves additional verifications and procedures” (Djankov, La Porta, Lopez-de-Silanes and Shleifer 2002). • No evidence cited in the paper to support this view. • Empirical issues: • Media coverage: We know far more about bad things happening to MNCs than those to domestic firms without political clout. • FDI policies have changed dramatically in the 1980s and 1990s. • Conceptual shortcomings: • How about authoritarian regimes? • Voting is not the only political currency: Do MNCs hold a political advantage in other power corridors such as bribery and rent seeking? • Hellman et. al. (2002): Foreign firms bribe more.

  6. Previous research: Case study evidence by regional specialists • Latin America in the 1970s: • Guillermo O’Donnell (1978; 1979): Authoritarianism, import substitution, repression of domestic capitalists and courting of FDI. • China in the 1990s: • Huang (2003): Political pecking order of domestic firms and implications for FDI. • Malaysia in the 1980s and 1990s: • Many scholars: FDI as “an ethnic bypass policy” to repress Chinese businesses.

  7. Previous research: Three statistical analyses by World Bank • All three studies find foreign firms less constrained compared with domestic firms almost across all business constraint areas. • Issues with these studies: • A factual documentation rather than an analysis. • Not focused on adjudicating national preference vis-à-vis foreign privilege. • For some reason, they are very reluctant to accept this finding: “This is an interesting finding in itself since the opposite finding would have been equally possible” (Schiffer and Weder 2001).

  8. WBES • Can we generalize the insights from regional studies? • Cross-country survey data • WBES • Implemented in 1998-2000. • Over 10,000 firms in 81 countries. • Most of the domestic firms are private. • About 20 percent of firms are foreign.

  9. Issues with WBES • Not clear why the surveyed firms were chosen. • Sectoral composition according to GDP contributions but firms randomly chosen within an economic sector? • Quota sampling of foreign firms (at least 15%, although not met in reality): Best or most visible firms were chosen and thus their rosy views? • Lack of a common reference point: • A cross-sectional evaluation by foreign firms but a historical evaluation by domestic firms • Not a severe problem: 1) Correlations in fact high and 2) Easier to confirm national preference if this bias is strong. • Unbalanced sampling: • Heavy sampling of SOEs and light sampling of foreign firms in CIS and CEE. • Nearly opposite patterns elsewhere. • Difficult to compare foreign firms with SOEs.

  10. Descriptive analysis • Table 1 • WBES questions: Higher value=Greater constraint • Table 2 • Domestic>Foreign: 4 out of 9. • Domestic=Foreign: 2 out of 9 • Domestic<Foreign: 3 out of 9 • Domestic>Foreign: Some of the most important areas for business: 1) general tax and regulatory constraint, 2) business licensing, 3) tax administration and 4) high taxes

  11. WBES: Key variables • Dependent variable: Taxes and regulations • One general constraint variable: TXREG • Eight specific constraint variables: 1) business licensing, 2) customs, 3) labor, 4) foreign exchange, 5) environment, 6) fire and safety, 7) tax administration, and 8) high taxes • Rating from 1 (=no obstacle) to 4 (major obstacle) • Three formulations of the dependent variables (mainly TXREG) • TXREG4=1 if TXREG=4 (probit) • TXREG3_4=1 if TXREG=3 or 4 (probit) • TXREG itself (ordered probit) • All three formulations produced consistent findings although TXREG3_4 is the weakest.

  12. WBES: Key variables • Independent variables: • Key variable: Whether FOREIGN is positive or negative (and whether statistically significant) • Firm-level controls: 1) Export status, 2) Large firm (>500 employees), 3) startup firm since 1994, 4) sales/fixed asset ratios to control for capital intensity • Industry and country dummy variables included in most regressions. • Also country-level economic variables in lieu of country dummies: 1) FDI stock/GDP, 2) per capita GDP, 3) per capita GDP growth and 4) ratios of sampled foreign to sampled domestic firms. • Results reported below are consistent across different specifications and different firm- and country-level controls.

  13. Table 4: Need to control for firm-level, industry-level and country-level characteristics • Negative=less constrained: • FOREIGN is negative and statistically significant for 1) general tax and regulatory constraint, 2) labor, 3) environment, 4) high taxes, and 5) tax administration • No evidence that business licensing is more onerous on foreign firms. • Controlling for export status, firm size, new firm dummy, sale/fixed asset ratios, industry and country dummies. • Not a single FOREIGN coefficient is positive AND significant.

  14. Various experiments: Tables 5 and 6 • Dependent variables not supposed to vary between firms: QTEL and QWAT • FOREIGN is not significant. • Results are robust to • Different formulations of TXREG • Inclusion or exclusion of firm, industry or country controls • Different definitions of FOREIGN: Foreign vis-à-vis domestic or more foreign-owned vis-à-vis less foreign-owned. • Controlling for: • Import activities and cross-border transactions: Placing more transactions outside host government purviews? • Transfer pricing potentials: Less subjected to host tax regimes? • Influences on government: Greater influence on government by foreign firms=better treatment?

  15. Political power of domestic firms • Two definitions of political power: 1) state ownership and 2) self-rated influence on government (WBES question 25) • Table 7 • FOREIGN negative and significant when benchmarked against politically-weak domestic firms • But not when benchmarked against politically-strong domestic firms.

  16. Institutional contexts • World Bank Governance Project ranks countries along six institutional dimensions: • 1) Voice & accountability, 2) control of corruption, 3) government effectiveness, 4) regulatory quality, 5) rule of law and 6) political stability • Table 9: • Foreign privilege most noticeable in corrupt countries (i.e., ranked at or below 20th country) • Foreign privilege somewhat present in countries with low government effectiveness and low regulatory quality. • Foreign privilege is also present in institutionally strong countries.

  17. Policy implications • Positive view of regulations • Need to strengthen regulations of foreign firms • Negative view of regulations • FDI weakens regulations. • Whether a lag or a delay • Does deregulation of foreign firms precede deregulation of domestic firms? • Or does deregulation of foreign firms prolong regulations of domestic firms?

More Related