Projects by Focal Areas:
Trade, Investment, and Labor Policy
Property Rights and Global Innovation
Natural Resource Scarcity, Security, and Sustainability
Economic, Financial, and Political Crisis
Diaspora Investment and Entrepreneurship
International Business & Economic Development Research
sponsored by rkl3d llc
Projects by Researcher:
Projects by Focal Areas: Trade, Investment, and Labor Policy
Commitment of Multinational Corporations to Global Initiatives: The Role of Domestic Labor Institutions
PI: Srividya Jandhyala, Assistant Professor, Department of International Business, GWSB
This project will address the question: When do Multinational Corporations (MNCs) join global initiatives? Global initiatives are voluntary programs that guide and constrain the activities of firms, rather than governments, by specifying standards that sometimes exceed government regulations. Existing literature examining the MNCs choice to join a particular initiative and the timing of that decision is limited to the firm's social characteristics, generally in case studies or small samples. Unlike prior research, this project proposes an empirical examination of a large sample of MNCs focusing on the institutional element; specifically the strength of the labor laws and regulations in a firm's home country and other countries that it has operations in. The PI will examine a firm's membership in the UN Global Compact, the world's largest sustainability initiative that stipulates compliance with human rights and labor policies in order to understand the interaction between domestic laws and global initiatives.
Cross-border Mergers and Acquisitions in Time of Crises: New Evidence from Latin America
PI: Wenjie Chen, Assistant Professor, Department of International Business, GWSB
This project aims to understand the impacts of mergers and acquisitions (M&As) during crisis periods. Combining M&A information and firm level data in seven Latin American countries that underwent financial crises between 1990-2008, this study evaluates the performance of firms that are bought during the crisis periods. The research explores the following questions: (i) what firms are being acquired during periods of crises; (ii) what happens to the firm after the acquisition; and (iii) what the welfare implications of these cross-border M&A transactions are.
Facing a Post-Multilateral Trade World: The Future of the WTO
PI: Michael Moore, Professor, Department of Economics, CCAS
This project will consider the impact of the changing trade policy world on the World Trade Organization and what might me done to manage these changes, with a special focus on the U.S. and EU responses. Research will examine the following issues: what are the forces that are undercutting the WTO’s position as the principal anchor in the international trading system?; what are the implications for the WTO if it does not change its structure to deal with an alternative and emerging trade system?; can the U.S. and EU find a common approach to help guide a reformed international trade architecture and what features would it have?; and what are the implications of those changes for U.S. trade policy and U.S. businesses? The research will include interviews with U.S. trade policymakers in Washington, DC, EU trade policy officials in Brussels and WTO officials in Geneva.
Agglomeration of Vertically Linked Multinational Firms
PI: Maggie Xiaoyang Chen, Assistant Professor, Department of Economics, CCAS
Multinational corporations (MNCs), despite their usually different headquarter origins, often cluster in host countries. The goal of this project is to examine the interdependence of location choices by vertically linked multinational firms. The project uses a unique multinational subsidiary dataset and estimates how a multinational firm's location decision in a foreign country depends on the location choices of its upstream and downstream companies and how the interdependence varies with the extent of input-output linkage, firm productivity and market structure.
How Does Democratization Affect Governance in Developing Countries?
PI: Alasdair Bowie, Associate Professor, Department of Political Science, CCAS
This project is aimed at better understanding the ramifications for business of the rapidly changing institutional landscape of government in countries where administrative and fiscal authority has been passed to sub-national governments whose leaders are now democratically elected. By comparing local level impacts of governance reform in Vietnam and Indonesia, this project can inform U.S. democratization initiatives that strengthen those political institutions which achieve political stability and representation. It will have implications for the design of U.S. development assistance programs and will enhance risk assessment of U.S. firms engaged in trade and/or investment in developing countries.
Timing Matters: Market Structure, Export Composition, and Growth
PI: Anna Rakhman, Doctoral Student, Department of Economics, CCAS
This research project expands on the existing literature in international trade which examines the relationships between the composition of a country's export basket and its economic growth. In particular, this study analyzes how the relationship between specific exports and per capita GDP growth changes over time based on the extent of other countries' exports of competing goods.
Permanent and Transitory Macroeconomic Relationships between the US and Developing Countries
PI: Tara Sinclair, Assistant Professor, Department of Economics, CCAS
This project explores the relationships between macroeconomic variables over time for the U.S. and China. The research uses a recently developed statistical model and a new macroeconomic dataset for China. The new statistical model allows to distinguish cross-country correlations driven by the relationships between permanent innovations, caused by real shocks such as changes in technology and institutions, from those between transitory or cyclical movements, caused by changes in aggregate demand in the two countries. The new dataset addresses some of the concerns about the quality of Chinese macroeconomic data.
Tara Sinclair and Yueqing Jai. Permanent and Transitory Macroeconomic Relationships between the US and China
Abstract: The relationships between the economic fluctuations of the US and China, the largest developed and developing countries respectively, are very important not only to both countries but also to the world economy. This paper applies a two-country correlated unobserved components model to explore the relationships between the real output fluctuations for the US and China over the period 1978q1-2008q4. The model allows us to distinguish cross-country correlations driven by permanent movements, caused by real shocks such as changes in technology and institutions, from those due to transitory movements. We find that the two countries share approximately half of their permanent and transitory shocks. With information from the real output of China, the magnitude of estimated transitory components fluctuations of the US real GDP is larger, while the transitory component of China’s real GDP does not change much with the addition of US information.
Antidumping Use in Developing Countries: Implications for U.S. Business
PI: Michael Moore, Professor, Department of Economics, CCAS
This project, consisting of an empirical study and a one-day conference, is an investigation of how U.S. exporters have been affected by the increased use of antidumping in other countries, especially in the developing world. The focus is on determining the economic factors that explain why these nations launch investigations and impose antidumping duties on U.S. firms. The results could help guide U.S. policymakers as they deal with potential antidumping reform in multilateral and bilateral trade talks.
Michael Moore. Sanctuary Markets and Anti-Dumping: An Empirical Analysis of US Exporters.
Abstract: Proponents of antidumping, especially in the United States, have long argued that foreign firms use profits obtained behind formal and informal barriers in their home markets as a way to “subsidize” aggressive pricing abroad. It has been difficult to analyze whether U.S. accusations of sanctuary markets have any basis in reality. On the one hand, authorities are not required to consider such behavior when administering antidumping. On the other, detailed information about internal market structure is difficult to obtain on a systematic basis in a host of countries exporting to the U.S. This project exploits the increased targeting of U.S. exporters in antidumping actions to examine whether there is evidence of the sanctuary markets hypothesis in the U.S. home market. The work expands on the work of many authors who have examined the determinants of antidumping petition initiations. The empirical study focuses on economic factors that explain why these nations launch investigations against U.S. firms. We find no evidence in support of the general proposition that U.S. firms facing frequent antidumping actions abroad are beneficiaries of a home market sanctuary. Instead, capital-intensive sectors that are successful exporters, especially those in sectors that are characterized by antidumping actions involving other countries, are more likely to experience antidumping actions. This evidence casts doubt on one of the main arguments used in favor of antidumping in the United States.
Intra-Arab, Arab MENA-US and Arab MENA-EU Trade: Is It Too Little, Too Late? The Competitive Consequences of Arab Non-Oil Participation in the Global Economy to the US
PI: Joseph Pelzman, Professor, Department of Economics, CCAS
This study discusses the issues of international trade and regional integration for the Arab states of Middle East and North Africa (MENA). More specifically, the PI investigates the reasons behind the insignificant share of intra-Arab, MENA-US, and MENA-EU trade, and seeks to provide an answer to the following question: compared with a sample of other countries, with the same endowment and income, do Arab countries trade less with the EU, U.S., and intra-regionally with each other? In order to assess the competitiveness impact of the volume of intra-Arab and inter-regional trade on the U.S., one needs to make a judgment on the ‘normal or ‘expected’ level of trade in the absence of policy-related trade barriers. The project employs a basic gravity model as a method to measure this ‘expected’ level of intra- and inter-regional trade for the Arab MENA region.
The Subsidiary Network of Multinational Firms
PI: Maggie Xiaoyang Chen, Assistant Professor, Department of Economics, CCAS
Existing theoretical studies have predicted that a multinational firm's location choices are interdependent across countries. However, little has been done to test the hypothesis at individual subsidiary level. This project seeks to use a detailed French multinational subsidiary dataset and estimate how a firm's decision to invest in a foreign country is not only conditional on the characteristics of that country but also the firm's existing subsidiary network. Preliminary results suggest there is evidence of both horizontal and vertical interdependence in multinationals' location decisions. While multinational firms have little incentive to duplicate their production in countries with low bilateral trade costs, they are motivated to build a vertical subsidiary network in these countries - especially when the countries have complementary comparative advantages.
How Do Labor Standards Affect Trade and Investment in Developing Countries
PI: Emmanuel Teitelbaum, Assistant Professor, Department of Political Science, CCAS
In recent years, social scientists have become increasingly interested in how government respect for worker rights affects trade and investment in low- and middle-income countries. According to the general discussion in the econometric literature, higher labor standards result in increased labor costs. If the principle comparative advantage of developing countries lies in their low labor costs, and higher labor standards result in higher level of unionization and therefore higher wages, more respect for worker rights should cut against export performance and foreign direct investment (FDI). However, the literature examining how worker rights affect investment has been characterized by contradictory findings. A fundamental reason for this may be that the mechanisms through which labor standards affect trade and investment have not been fully explored. Therefore, the PI takes up on investigating one such underdeveloped mechanism of this relationship, and this mechanism refers to the argument that higher labor standards facilitate trade and investment by enhancing social stability and promoting human capital.
Emmanuel Tietelbaum. Measuring Trade Union Rights Through Violations Recorded in Textual Sources: An Assessment
Abstract: The author uses Item Response Theory to evaluate the increasingly prominent method of measuring labor rights developed by Kucera (2007). The analysis shows that most of the component items in the Kucera index relate to the same latent variable, which can be construed as ‘the propensity to violate labor rights.’ At the same time, individual country scores highlight the method’s inability to distinguish between countries known to have excellent respect for worker rights and extremely repressive countries. The final section tests the robustness of Kucera’s finding that there is no relationship between observed labor rights violations and foreign direct investment.
Public-Private Partnerships: Addressing Global Challenges and Opportunities
PI: Jennifer Brinkerhoff, Associate Professor, Trachtenberg School of Public Policy and Public Administration
This project builds on the conceptual and empirical knowledge of public-private partnerships (PPPs) in the international arena. Although PPPs have traditionally been used for service delivery and infrastructure, they have the potential to contribute to providing global public goods, establishing new global governance architecture, coping with the unprecedented movement of people and information, and mitigating intra-state conflict and its security implications. Therefore, a better understanding of the range and potential of PPPs can: clarify the role of the private sector’s contribution; inform U.S. businesses’ competitiveness strategies in terms of new markets, new partners, new marketing opportunities, and risk management; and help guide government policymaking to better support initiatives that capitalize on the strengths of the private sector.
Resource Nationalism Meets the Market: Competition between Private and State-Owned Enterprise in Oil
PI: Robert Weiner, Professor, Department of International Business, GWSB
This project examines the impact of resource nationalism in oil industry (where state-owned enterprises remain dominant) on the competitiveness of multinational enterprises (MNEs). More specifically, it investigates if the state role in the industry provides an unfair competitive advantage to national oil companies (NOCs) over MNEs. The assessment of NOC-MNE competition involves the identification of the market with (i) relevance to resource nationalism; (ii) head-to-head competition between the two groups; (iii) many transactions (to permit statistical analysis); and (iv) detailed information about each transaction and its counterparties, including their ownership.
The Role of Targeted Promotion of FDI in Industrialization Strategy: An Analysis of Institutions Promoting or Curtailing FDI into Developing Countries in Light of Recent Research
PI: Stephen Smith, Professor, Department of Economics, CCAS
This project examines incentives designed to promote (or sometimes channel or curtail) Foreign Direct Investment (FDI) into developing countries by multilateral, bilateral, and domestic developing country agencies. The project focuses on theory and (conjecture) practice of targeted promotion of particular types of FDI as part of an industrialization strategy (and more broadly of national economic development policies). In particular, the study will examine the relationship between strategic export promotion and strategic FDI promotion. Related economic development policy issues to be considered in the context of FDI promotion are human capital policy and infrastructure planning.
Economic Determinants of the Preferential Trade Agreement Network
PI: Maggie Xiaoyang Chen, Assistant Professor, Department of Economics, CCAS
Preferential Trade Agreements (PTAs) have become an increasingly favored approach for countries who are seeking free trade. However, although economists have extensively studied the effect of these agreements, little attention has been devoted to analyzing their determinants. This project aims to identify the economic and strategic factors that play a significant role in countries' decision to form a PTA and their choice of preferential trading partners. Research for the project includes inquiry into current PTAs that have been adopted by nearly all WTO member nations.
Maggie Xiaoyang Chen. Third-Country Effects in the Formation of Free Trade Agreements
Abstract: The proliferation of regional economic integration has resulted in a complex and continually expanding network of free trade agreements (FTAs). In explaining the formation of these agreements, the literature has generally focused on the effect of country-pair characteristics and ignored the role of existing FTA network. In this paper we investigate, both theoretically and empirically, how third countries affect nations' incentives to form new FTAs in various types of network. Compared to an empty network where there is no FTA between countries, having an exclusive FTA with a third country raises a country's incentives to form new FTAs but weakens the incentives of others to reciprocate. A new FTA will therefore only be jointly supported when the country with exclusive FTA partners has a sufficiently large market size and high marginal cost of production. In a hub-and-spoke network, however, where two countries are mutually linked to a third country, the existence of the mutual FTA partner raises both nations' incentives to form an agreement leading to an unambiguous increase in the probability of jointly supported FTAs.
Role of Institutions and the Business Environment in Determining Industry Life Cycles
PI: Meghana Ayyagari, Assistant Professor, Department of International Business, GWSB
Using new panel data on 30 industries across 100 countries, this study examines the impact of institutions on industry life cycles. The PI discusses factors such as industry and country characteristics, as well as the interaction between the two, to analyze the changes in number of producers within an industry and thus predict its life-cycle stage. Additionally, the impact of stock market liberalizations on industry life cycles is analyzed, and a new algorithm is also used in order to identify and map out structural breaks in both industry life cycles and in growth rates of countries. The research consists of three components - research, dissemination, and teaching.
Meghana Ayyagari, A. Demirguc-Kunt, and V. Maksimovic. What determines protection of Property Rights? An Analysis of Direct and Indirect Effects
Abstract: Using cross-country data, this paper evaluates historical determinants of protection of property rights. We examine four historical theories that focus on conceptually distinct causal variables believed to shape institutions: legal origin, endowments, ethnic diversity and religion. There is only one realization of the data with relatively few observations, which have by now been well explored in the literature. Given the correlations between the explanatory variables, it is difficult to fashion empirical tests which are consistent in their treatment of the competing theories and to know which regressions to take seriously, giving rise to competing interpretations in the literature. We use Directed Acyclic Graph (DAG) methodology to identify which historical factors are direct determinants of property rights protection and which are not, and subject the outcomes to a battery of robustness tests. The empirical results support ethnic fractionalization as a robust determinant of property rights protection. Despite the attention it has received in the literature, the impact of legal origin on protection of property rights appears fragile and dependent on the inclusion of transition economies in the sample.
Meghana Ayyagari, A. Demirguc-Kunt, and V. Maksimovic. Firm Innovation in Emerging Markets
Abstract: In this paper we investigate the determinants of firm innovation in over 19,000 firms across 47 developing economies. We define the innovation process broadly, to include not only core innovation such as the introduction of new products and new technologies, but also other types of activities that promote knowledge transfers and adapt production processes. We find that more innovative firms are large exporting firms characterized by private ownership, highly educated managers with mid-level managerial experience, and access to external finance. By contrast, firms that innovate less are typically state owned firms without foreign competitors. Identity of the controlling shareholder seems to be particularly important for core innovation - private firms whose controlling shareholder is a financial institution are the least innovative. While the use of external finance is associated with greater innovation by all private firms, it does not make state owned firms more innovative. Financing from foreign banks is associated with higher levels of innovation compared to financing from domestic banks.
The Implications of Union Political Ties for Economic Development
PI: Emmanuel Teitelbaum, Assistant Professor, Department of Political Science, CCAS
This project examines the economic effects of union political ties in developing countries by testing the hypothesis that major political parties restrain and institutionalize protest. For this purpose, the PI compiles three original cross-national datasets, which help (i) determine how the political structure of the labor movement affects worker protest, (ii) the ability of the working-class to influence legislative outcomes, and (iii) the impact of labor protest and working-class political mobilization on economic performance.
Emmanuel Tietelbaum. Globalization, Regime Type and Labor Protest in Developing Countries
Abstract: How can states best manage the social dislocations associated with rapid economic development and greater exposure to market forces? In this paper, we explore the relationship between foreign direct investment (FDI), regime type and strikes in low-and middle-income countries. We argue that FDI produces social tensions and a higher demand for labor that can result in higher levels of industrial conflict. However, the effect of FDI is moderated by regime type. While democracies tend to have higher levels of protest overall, they are better able to cope with the strains arising from FDI because conflict can be channeled through state institutions or union-party ties. More institutionalized authoritarian regimes or hybrid regimes also perform better than other kinds of authoritarian regimes. We test the argument using a new dataset of labor protest in low- and middle-income countries for the period 1980-2005.
The Security Behavior of International Business and NGOs
PI: Deborah Avant, Associate Professor, Department of Political Science, CCAS
This project examines how non-state actors, such as businesses and NGOs, respond to new security threats, and how these actors' risk-management activities impact the surrounding communities and the relationships between their home and host government and societies. The study's main contribution is twofold in that it (i) analyses both corporate and NGO behavior, and (ii) relies on a variety of not usually combined sources of information on comparative security behavior. The final outcome of the research provides both theoretical and practical benefits and encompasses (i) a conceptual paper that develops a framework of analysis for non-state actors and security planning, (ii) a database of corporate and NGO response to security, conflict, and crisis management issues over times and territory, and (iii) a book, series of articles, and policy papers utilizing the database to answer theoretical and policy questions.
Deborah Avant. Organizational Security in Areas of Weak Governance.
Abstract: Transnational non-state actors, both corporations and non-profit groups, increasingly confront security challenges in unstable territories around the world. Existing work on how these actors behave in conflict zones demonstrates that their responses have significant political effects, but does not provide a framework for understanding of their role as security actors. We outline a new research agenda that examines the security strategies of transnational non-state actors and their consequences for violence and governance. We outline the array of options transnational organizations choose from and then a set of questions that need to be answered in order to understand why they make different choices, and the ways in which their choices impact their organization’s effectiveness as well as violence and governance in unstable territories.
Does FDI Facilitate Domestic Entrepreneurship? Evidence from the Czech Republic
PI: Meghana Ayyagari, Assistant Professor, School of Business, Department of International Business
Renata Kosova, Assistant Professor, School of Business, Department of International Business
The project investigates the impact of foreign direct investment (FDI) on domestic firm formation and entrepreneurship in transition economies. More specifically, the study examines: (i) if FDI generates positive spillovers that stimulate domestic firms' entry or if it creates barriers to entry; (ii) the nature of the possible spillovers (intra-industry vs. inter-industry); (iii) if the extent of these spillovers vary across countries; and (iv) if the presence of FDI affect the firm size distribution of domestic firms. The focus of the project is on the Czech Republic and encompasses data for an 8-year period and for 245 industries.
Meghana Ayyagari and Renáta Kosová. Does FDI Facilitate Domestic Entrepreneurship? Evidence from the Czech Republic
Abstract: This paper analyzes the impact of FDI on domestic firm entry and firm size distributions in 245 industries in the Czech Republic during 1994 to 2000. We find that larger foreign presence stimulates the entry of domestic firms within the same industry indicating the existence of positive horizontal spillovers from FDI. We also find evidence of significant vertical entry spillovers – FDI in downstream (upstream) industries initiates entry in upstream (downstream) sectors via the presence of backward (forward) linkages. Our results also show that entry spillovers through vertical linkages are stronger than horizontal spillovers. However, these entry spillovers vary substantially across industries: while service industries benefit from both horizontal and vertical spillovers, manufacturing industries do not experience significant positive entry spillovers of any kind. In addition, while vertical spillovers prevail among competitive industries, horizontal spillovers dominate in less competitive industries. We also find that country of origin of FDI matters - horizontal spillovers are driven by FDI from the EU countries. The right skewness of the firm size distributions in industries without FDI further emphasizes an important role of FDI presence for overall industry dynamics.
The Bloom of Regionalism: Implications for U.S. Multinational Firms
PI: Maggie Chen, Assistant Professor, Department of Economics, CCAS
The main objective of this project is to investigate and quantify the impact of regional trade agreements (RTAs) on U.S. multinational firms and Foreign Direct Investment (FDI). The PI examines the complexity of regionalism and the opportunities and challenges that it presents to U.S. Multinational Enterprises (MNE) as they consider optimal geographical locations in order to maximize the gains from regional economic integration. The project aims at generating publishable research papers, policy briefings, and a series of presentations and seminars, as well as serving as a foundation for International Trade course development.
Maggie Xiaoyang Chen. Regional Economic Integration and Geographic Concentration of U.S. Multinational Firms
Abstract: A volume of theoretical studies emphasizes that regional economic integration, by improving intra-bloc market accessibility, prompts multinationals to restructure their activities geographically within the bloc and improve the economies of scale. However, little has been done to test this prediction. This paper thus examines theoretically and empirically the divergent impact of economic integration on U.S. multinational firms affiliate sales across host countries. It is found that economic integration does lead to an increase in multinationals' activities especially in countries that are integrated with a large size of markets, because the benefit of a lower trade cost is exclusive to insidefirms. However, this effect is significantly asymmetric both across and within the integrated regions, as multinationals are now motivated to serve the less attractive production locations via exports. In particular, countries with a comparative advantage gain multinationals at the expense of others, including their Preferential Trade Agreement (PTA) partners. Accounting for the potential issues of omitted variables and the endogeneity of PTA does not lead to any significant change in the results.
Organizational Challenges for Businesses, PVOs and Developing Country Partners: Strategy of Bottom-Up Market Development, Scope of International Enterprises, and the Case of BRAC
PI: Stephen Smith, Professor, Department of Economics, CCAS
This project presents an in-depth analysis of the management and influence of BRAC, the world’s largest NGO and developing-country-based non-profit multinational enterprise. Strategies for escaping poverty traps and helping the ultrapoor reach the first step of the economic ladder are researched, and comparative case studies, as well as econometric research on household impacts with different program combinations, are examined. Uganda and Bangladesh are the two focal countries of this study.
M. Shahe Emran, Virginia Robano, and Stephen Smith. Assessing the Frontiers of Ultra-Poverty Reduction: Evidence from CFPR/TUP, an Innovative program in Bangladesh
Abstract: This paper uses household panel data to provide evidence on the effects of a pioneering anti-poverty program of BRAC in Bangladesh (called Challenging the Frontiers of Poverty Reduction/Targeting the Ultrapoor, or CFPR/TUP) that attempts to target the poorest of the poor. We focus on the effects of program participation on a set of household outcomes including food security, income, and asset accumulation. To construct appropriate treatment-control groups, we partition the sample using type 1 and type 2 assignment errors according to BRAC's criteria for inclusion into and exclusion from the TUP program. We use a wide set of econometric approaches including the difference-in-difference matching estimator to identify and estimate the average treatment effect. To capture the potential heterogeneity of the treatment effect, we use a quantile difference in difference approach. The evidence shows that program participation had a significant positive effect on income, and food security of the ultra poor, but there is weak or no evidence in favor of a program impact on health related outcomes and ownership of homestead land. The quantile difference-in difference results show that the lowest two deciles get much less benefit from program participation compared with the two highest deciles among the ultrapoor.
Stephen Smith and Sumit Joshi. Endogenous Formation of Coops and Cooperative Leagues
Abstract: The labor-managed Mondragon cooperatives in the Basque country, and La Lega coops concentrated in North Central Italy, are grouped into leagues that enable them to reap economies of scale in key services such as R&D, marketing and finance. These leagues are relatively rare and there are fewer than a dozen of them globally. We develop a game-theoretic model of league formation to capture some of the strategic incentives behind the formation of labor-managed cooperatives (coops) and their agglomeration into a league.We then compare these incentives with those of conventional profit-maximizing firms to organize into a league. The main result of this paper shows that a divergence in these incentives stemming from their organizational differences may lead to the formation of a league of firms but not one of coops. This turns out to be true even though the coop has lower costs of production and the existence of a coop league would have been socially efficient. Anticipating the non-existence of a coop league then creates a disincentive for individual agents to form coops in the first place. This explains the relative rarity of coops, competing individually or as a part of a league, with conventional firms in imperfect markets.
Energy Security in a Market Era
PI: Robert J. Weiner, Professor, Department of International Business, GWSB
This project investigates the role of institutions in responding to oil shocks, as well as host-government/petroleum-MNE relationships. The PI analyzes the reasons behind the dramatic price spikes and the likely effects on oil exporters and importers, as well as on the international petroleum industry. The project has two components: (i) a workshop, aimed at policymakers, researchers, development practitioners, institutional investors, and industry people, to evaluate the state of knowledge in the area and discuss future directions; and (ii) research into political-risk aspects of energy security.
Reid Click and Robert Weiner. Does the Shadow of Risk Fall on Asset Prices?
Abstract: In the oil sector, emerging economies appear to be moving in the opposite direction from that assumed in the conventional wisdom on their integration into the world economy - as oil prices have soared, institutions such as regulatory stability, and contract sanctity and enforcement appear to be in decline, while political risk appears to be increasing. Does institutional deterioration harm the value of the very natural resources on which these countries depend? This paper investigates the effect of political risk on the value of real assets - here petroleum (crude oil and natural gas) reserves - associated with the country in which the reserves are located. We utilize a global transactions database of 1,655 mergers and acquisitions in which petroleum reserves were traded during the period 2000-2006. To capture the riskiness of the location, we consider the political risk rating calculated by International Country Risk Guide (ICRG) and the country risk rating published in Institutional Investor. Controlling for factors that affect reserve value, we demonstrate the value-destruction of political risk, and estimate the asset discount for 37 countries. Furthermore, contrary to the assumption in the scholarly literature, we show that the discount depends on market conditions - the higher the expected future market prices of oil and gas, the larger is the discount, regardless of a country's riskiness. Our findings suggest that treating political risk and market risk separately is likely to yield inaccurate estimates of asset value. The results are salient for evaluating investment opportunities in industries where political risk depends on world markets.
Cross-border Mergers: The Role of International Competitiveness
PI: Protiti Dastidar, Assistant Professor, Department of International Business, GWSB
This project consists of two research papers addressing the following questions: (i) the impact of the institutional framework on cross-border acquisitions; and (ii) the cyclical patterns in and causes of cross-border acquisition activity. The PI investigates the characteristics that distinguish cross-border acquisitions from U.S. domestic ones, and examines how the macro-economic environment and market trends drive managers to take decisions that impact the international competitiveness of firms. Both research studies develop an interdisciplinary approach that draws from the international business, finance, and economics fields to develop testable hypotheses.
Alexander Sleptsov and Protiti Dastidar. Riding the Waves: Cross-border Acquisitions as a Quest for new Capabilities
Abstract: We argue that the cross-border acquisition activity is characterized by a cyclical pattern similar to the domestic merger waves. We consider several factors that can influence the cross-border merger waves, including the changes in the firms’ resource requirements following economic or regulatory shocks. The results of the tests on a large-scale archival dataset suggest that the motivations for cross-border and domestic waves may be different. In the cross-border waves, many acquirers are motivated by the search for new capabilities abroad; in the domestic waves, more acquirers are motivated by the desire to redeploy their existing capabilities.
Anju Seth and Protiti Dastidar. Motives for Domestic and Cross-border Acquisitions: A Comparative Analysis
Abstract: Studies examining value creation in cross-border acquisitions are few, and there are none that compare value creation of domestic vs. cross-border acquisitions. Institutional differences (at both the firm and industry level) may, in addition to economic factors, cause systematic differences in the value created by cross border vs. domestic acquisitions, thus affecting a firm's international competitiveness. We seek to investigate the characteristic features that distinguish cross-border acquisitions from U.S. domestic acquisitions and how total gains are shared between the target and the acquirer. Our empirical results indicate that acquisitions are primarily driven by synergy motives though managerialism and hubris also coexist in the sample. Acquisitions by US acquirers of domestic as well as international targets are characterized by hubris rather than managerialism in our sample of negative total gains, while acquisitions by foreign acquirers of US targets are characterized by managerialism. We show that institutional characteristics matter and that target gains are lower for US acquirers of foreign targets in bank or group oriented countries, which is consistent with the evidence on lower valuations with lower protection of minority shareholder rights in these countries. For the foreign acquirer-US target sub-sample the institutional structure of the foreign acquirer's home country appears to have no impact on target gains.