Serving Abroad: Export, M&A, and Greenfield Investment (Job Market Paper)
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 Risk
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.
Work in Progress
Export and Innovation Intensity with Heterogeneous Innovations
This project analyzes the differences in innovation intensity of exporters and domestic firms conducting product and process innovations. Reduced form evidence shows that innovation intensity is higher for exporters, in particular, for new exporters. Export intensity is positively associated with product innovation intensity, whereas it is negatively correlated with process innovation intensity. To rationalize these observations, I propose an empirical dynamic model where a firm decides whether to export, how much to invest in innovation, and how to allocate innovation expenditure between the two innovation activities.
Innovations, Technological Diversity, and Industry Dynamics
The project aims at linking technological diversity, emerged from the competition in innovative technologies, with the resulting industry structure and dynamics. In a multi-product firm industry, I characterize firm’s optimal strategy for innovative activity, set of technologies to use, and level of specialization in them.