Table Of Content

ESSAYSONDIRECTFOREIGNINVESTMENTINUNIONIZEDMARKETS By LAIXUNZHAO ADISSERTATIONPRESENTEDTOTHEGRADUATESCHOOL OFTHEUNIVERSITYOFFLORIDAINPARTIALFULFILLMENT OFTHEREQUIREMENTSFORTHEDEGREEOF DOCTOROFPHILOSOPHY UNIVERSITYOFFLORIDA 1993 ACKNOWLEDGEMENT Thisstudycouldnothavebeenconductedwithoutthecontributionofmanyothers. EliasDinopoulos,whocharredmycommittee,offeredhisguidanceandsupport throughoutthemanystagesofthislearningprocess.Mycommitteemembers,Leonard Cheng,LarryKenny,RichardRomanoandJamesSeale,reviewedearlyversionsofthe manuscriptandmadevaluablesuggestions.ThanksalsogotoKenzoAbe,Makoto OkamuraandPeterThompson,whosecomments,concernandinspirationmadethis studyalotmorefun. Lastbutnotleast,1wouldliketothankmywife.Ping,andallotherfamily membersfortheirpatienceandencouragement. 11 TABLEOFCONTENTS page ACKNOWLEDGEMENT ii ABSTRACT v CHAPTERS 1.POLITICAL-ECONOMYDETERMINANTSOF DIRECTFOREIGNINVESTMENT 1 Notes 7 2.ENDOGENOUSPROTECTIONAND DIRECTFOREIGNINVESTMENT S Introduction X AThree-StageBargainingModelwithLobbying 10 LobbyingandQuidProQuoDFI 22 TheDeterminationofOptimalDFI 24 Conclusions 27 Notes 2S 3.ENDOGENOUSPROTECTIONAND QUIDPROQUOJOINTVENTURES 29 Introduction 29 TheBasicModel 32 DFI,JVandEndogenousLobbying 34 QuidProQuoJointVentures 44 Conclusions 49 Notes 50 iii 4.CROSS-HAULINGDIRECTFOREIGNINVESTMENT ANDUNIONIZEDOLIGOPOLY 51 Introduction 51 AModelofCross-haulingDEI 63 TheAsymmetricCase:OneWayDEI 74 NashEquilibriumandWelfareImplicationsof Cross-haulingDEI 78 ConclusionsandExtensions 81 Notes 82 5.CONCLUSIONS 83 APPENDICES A.COMPARATIVESTATICS 85 B.CONDITIONSFORTOTALMARKETPROFITSTOINCREASE ... 87 REFERENCES 89 BIOGRAPHICALSKETCH 95 IV AbstractofDissertationPresentedtotheGraduateSchool oftheUniversityofFloridainPartialFulfillmentofthe RequirementsfortheDegreeofDoctorofPhilosophy ESSAYSONDIRECTFOREIGNINVESTMENTINUNIONIZEDMARKETS By LaixunZhao August1993 Chair:EliasDinopoulos MajorDepartment:Economics Thedissertationisacollectionofthreeessays,analyzingvariouspatternsofdirect foreigninvestment(DFI)intheframeworkofendogenousprotectionandunionized labormarkets.Chapter2developsamodelofendogenousprotectionwithDFIina3- stage-3-playergameframework.Adomesticlaborunionlobbiesagainstforeign importsandbargainsoverwageswithadomesticfirmandaforeignmultinational. Whenimportprotectiondependsontheunion’slobbying,moreDFIresultsinhigher lobbyingeffortsandlowerimports.However,ifDFIdefusesdirectlytheeffectiveness ofunionlobbyingduetopoliticaleconomyconsiderations(quidproquoDFI),then moreDFIcoulddecreasetheleveloflobbyingandincreaseimportsallowed. Chapter3buildsamodelofinternationaljointventures(TV)withpolitical economyconsiderationsasthemainmotivation,basedontheinsightofquidproquo V DFl.Adomesticfirmandaunionbothlobbyagainstforeignimports,whilethe foreignfirmdecideswhethertoundertakefullownershipDFI,ortoformaJVwith thedomesticfirm,ortodonothingatall.Itisshownthatintheabsenceofpolitical economyconsiderations,aJVisneverformed;inthepresenceofpoliticaleconomy considerations,theformationofaJVistheuniqueequilibrium. Chapter4constructsamodelofintra-industrycross-haulingDFI,wherewagesand employmentaredeterminedthroughsimultaneousefficientNashbargaininggames betweenthemultinationalfirmsandnationalunions.ThreedifferentequilibriaofDFI arestudied:a),noDFIbyeitherfirm,b).onewayDFI,c).cross-haulingDFI.Itis shownthatundertheconditionsgiven,cross-haulingDFIistheuniqueNash equilibrium,withwhichthenegotiatedwagedecreases,firmprofitincreases,union rentdecreases.Employmentincreases(decreases),nationalwelfareincreases (decreases)iftheunioniswage(employment)oriented. VI CHAPTER 1 POLITICAL-ECONOMYDETERMINANTS OFDIRECTFOREIGNINVESTMENT Accordingtotraditionaltheoriesofinternationaltrade,intheHeckscher-Ohlin setup,forexample,capitalmovementsareseenlargelyasasubstitutetocommodity trade.Inthepresenceofimpedimentstointernationaltrade,e.g.commercialpolicy, transportationcosts,etc.,differentialstocapitalreturnarecreatedacrosscountries. Directforeigninvestment(DEI)isinducedtoflowfromthecountryinwhichcapital istherelativelyabundantfactor(withalowreturn)tothecountryinwhichcapitalis therelativelyscarefactor(withahighreturn).Thus,DEIissimplyaformof internationalcapitalmovementseekinghigherreturn,eventhoughportfolioinvestment canachievethesamepurpose. AsecondapproachtoDEIemergedfromindustrialorganizationtheory.' Itissaid thatfirm-specificadvantagessuchasintangibleassetsdriveDEI.Theseintangible assetsexi.stintheformoforganizationalormarketingskills(know-how),production orprocessingtechnologies(patents).Thefirm-specificadvantagesenablemultinational firms(MNF)toovercometheextracostsofmanaginggeographicallywidespread operationsindifferentculturalandpoliticalbackgrounds.DEIischosenover alternativemodesofdoingbusiness(e.g.exportingorlicensing)becauseDEI 1 1 encountersthelowest‘transactioncost’ofcontractenforcementandmaintenanceof quality.Withexportingorlicensing,themarketfailstoawardthefirmadequate returnsduetothepublic-goodsnatureofintangibleassets,shirkingofthelicenseeand uncertaintyinthequalityofthegoods;withDFI,thefirmcaninternalizethemarket inefficiencies.Accordingtothisapproach,DFIoccursmostofteninindustrieswhere researchanddevelopmentaremostactiveorintermediategoodsareheavilyused. AttemptshavebeenmadetoextendtheindustrialorganizationapproachtoDFIto explaintheformationofinternationaljointventures'(JV).Itisarguedthatthe formationofJVsputspartnersinamutualhostagesituation,whichmitigatesthe incentivestoshirk.AJVbypassesinefficientintermediatemarketsandavoidstheloss duetotacitknowledgetransfer.Thus,JVsarecommonlyseeninindustrieswheretacit knowledgeandintermediateinputsaretransferred. Itisnotclearwhythefirmdoes not‘internalize’allthewayandcreatewhollyownedsubsidiaries. Theaboveapproachesalmostcompletelyignoretherolesofpoliticaleconomyand interestgroupssuchaslaborunions.Eventhoughthetwoapproachesmentiontariffs asimpedimentstointernationaltradewhichmayfacilitateDFI,traderestrictionsare treatedasexogenouslygiven.SuchDFIismerelyapassivereactionoftheexporting countrytoevadetraderestrictions.However,internationaleconomistscommonly believethattradebarriersarearesultofthedomesticpoliticalprocess,wheredifferent interestgroupslobbytoinfluencethegovernmentanddeterminethecontentof protection.TheexportingcountrymayundertakeDFItoinfluencetheattitudesand effortsoftheinterestgroupsinthehostcountry.Byabstractingfrompolitical 3 economyconsiderations,theaboveapproachescannotexplainaconsiderableportion ofDFIeitherintheformofwhollyownedsubsidiariesorJVs. AsecondfactorthatmayhavesignificanceindeterminingthepatternofDFIis therolelaborunionsplay.Unionizedmarketsareacommonphenomenoninmany countries.Laborunionsusuallyseekhigherwagesandhigheremploymentfor members.Theyareveryactiveininfluencinglegislation,agriculturalpolicy,industrial policyandcommercialpolicy.Tothenationallaborunions,capitalmobilityacross bordersmeanstheprospectofjoblossesandthedeteriorationofbargainingpositions. ThustheydonotwelcomeDFI,beitinwardoroutward.Byabstractingfrom modelingtheroleoflaborunions,theaboveapproachesmisstheongoingdebatethat whileunionsoftenblameMNFsforshiftingjobsoverseas,MNFsarguethathigh laborco.stistheexactreasontheydoso. Itissaidthatthefirsthalfofthiscenturyismarkedbytraditionalone-wayDFI, whilethesecondhalfwitnes.sesmorecommonmutuallypenetratingtwo-wayDFI. Undertheassumptionsoftheaboveapproaches,mutuallypenetratingDFIcannot occurwithinthesame.sector.Thusthephenomenonofintra-industrycross-hauling DFIstillremainstobeexplained. Incorporatingpolitical-economyconsiderationsandunionizedmarketsinmodeling thepatternofDFIisthetaskofthisdissertation.Intheearly 1970s,tradetheorists begantobringthepoliticalprocessesexplicitlyintotheanalysisofeconomic phenomenaandpolicy.AmongthepioneersareKrueger(1974)andBhagwati(1982), whoanalyzedtherent-seekinganddirectlyunproductiveprofit-seeking(DUP) 4 activities;BrockandMagee(1978, 1980),FindlayandWellisz(1982),Baldwin(1976, 1982)andMayer(1984)whosuggestedalternativemodelsforstudyingtheeconomic andpoliticalformsthatinteractindeterminingacountry’stariffstructure. Whiletheabovepapersallfocusonthecommoditymarkets,itwasBhagwati (1985)whofirstintroducedpoliticaleconomyinthefactormarkets,whichresultsin whathecalled‘quidproquo’DFI.QuidproquoDFIoccurswhentheforeignfirm investsinperiodonewithaloss,butwithaviewtodefusingthethreatofprotection againstitsexportsinfutureperiods,therebymaximizingdiscountedtotalprofits.Quid proquoDFIdistinguishesitselffromthetraditionaltariff-jumpingDFIinthatwiththe former,theinvestingcountryanticipatesthethreatoffuturetraderestrictionsand investsinordertoinfluencetheattitudesoftheinterestgroupsinthehostcountry, hopingtoreducefuturerestrictions;whilewiththelatter,theinvestingcountryonly actspassivelytoevadetheexogenouslygiventariffs. TheformalanalysisofquidproquoDFIbeganwithBhagwatietal.(1987),who usedthestandard2x2x2modelofinternationaltradetheorytoanalyzetheexporting country’soptimalinterventionpolicy.DinopoulosandBhagwati(1986)analyzed industry-specificquidproquoDFIinthecontextofdifferentindustrystructures. Wong(1989)andDinopoulosandWong(1991)endogenizedthethreatoffuture protectionbyalaborunionwhichlobbiesinordertoeliminateunemploymentand analyzedvariousgovernmentinterventionsinboththeexportingandimporting countries.Dinopoulos(1992)studiedindustry—specificquidproquoDFIbymodeling thelobbyingprocessasaNashbargaininggamebetweenthegovernmentandthe laborunion.