Working Papers

Serving Abroad: Export, M&A, and Greenfield Investment
joint with Francesco Paolo Conteduca

This paper studies foreign-market entry patterns in the professional services industry. We build a structural model of horizontal foreign direct investment (FDI) with firms that are heterogeneous in terms of service quality. Firms can choose to serve foreign markets via exporting, cross-border mergers (M&A), or greenfield investment. Greenfield investment and exporting are subject to the standard proximity-concentration tradeoff and, in addition, associated with uncertainty about foreign quality perception, while M&A resolves this uncertainty by letting multinationals access the demand of the acquired firm. Reproduction of high quality abroad potentially requires larger fixed entry costs, inducing high-quality service firms to export. The model is sufficiently flexible to accommodate different orderings of entry types in terms of firm’s service quality. We then structurally estimate the fundamental market-specific parameters of the model using firm-level FDI and trade data for a sample of German firms. We find that entry patterns are reversed compared to the standard sorting in manufacturing: only the firms providing the highest service quality export, while lower-quality firms conduct FDI. The relative sorting of M&A vs. greenfield FDI in terms of firm quality is market-specific and depends on the relative importance of uncertainty about quality perception, the structure of entry costs, and size of synergies associated with M&A. Finally, we calibrate the model equilibrium to the data on multinational and trade flows between the EU, the US, and the rest of the world. Simulation of the service-trade liberalization between the EU and the US, as planned for TTIP (Transatlantic Trade and Investment Partnership), shows that the reduction of non-tariff trade barriers and introduction of quality standards reallocate quality across entry alternatives, as well as make FDI a more prominent entry type.

The Structure of Multinational Sales under Demand Risktext-logo@2x
joint with Francesco Paolo Conteduca
previously circulated as “Export Platforms and Multinational Demand Risk Diversification”

This paper analyzes the effects of demand risk on the location and sales structure of multinational firms. We build a structural model of horizontal FDI with firms that are heterogeneous in terms of risk aversion and productivity. Firms decide on the location of their production plants, the set of countries to serve from these plants, and the volume of sales for each plant. These decisions hinge both on the expected demand for each market and the correlation structure of demand realizations across destination markets. Ceteris paribus, markets that offer better hedging opportunities to multinationals induce larger sales and are more attractive locations for production. We use firm-level data for German multinational companies to estimate firm-specific risk aversion coefficients as well as other model parameters. We find that multinationals are heterogeneously risk averse. Finally, in a counterfactual analysis, we show how a reduction in tariffs for goods imported into China changes the trade flows to the other countries, the sign of the change depending on the correlation structure.

Assessing the Role of FDI Restrictions in Emerging Market Economies
joint with Francesco Paolo Conteduca

We analyze the effects of FDI restrictions on target firms’ selection, performance, and financial structure. The analysis relies on data on Indian firms in the period 2010–2018 combining information on foreign and domestic acquisitions and joint ventures paired with the balance-sheet entries of firms and hand-collected data on FDI restrictions implemented at the sectoral level. To control for selection in both observables and unobservables characteristics of the target, we use a propensity score matching with a difference-in-difference estimation. We find positive effects of acquisitions and joint ventures on Indian companies; target firms increase their sales, total asset holdings, and solvency upon acquisition. These effects are mostly driven by the acquisitions carried out by foreign companies. When we distinguishing between restricted and non-restricted sectors, we find that firms acquired by foreign companies increase their total assets. However, productivity growth rate relatively increases only for those firms active in the restricted sectors. Results are consistent with the existence of further selection on realized deals because of the presence of restrictions. The analysis for domestic deals in restricted and unrestricted sectors do not show any significant result.

Work in Progress

Export and Innovation Intensity with Heterogeneous Innovations