Taxation and Ownership Structure in Supplying Foreign Markets

We examine the impact of taxation on foreign direct investment (FDI) flows. Previous research has focused on the impact of the corporate income taxes on aggregate FDI flows. We contribute in the relevant literature in three areas. First, the flows of FDI are classified in two categories according to parent company’s share of ownership of its foreign subsidiary receiving the FDI flow: FDI to majority owned (MOS) and to minority owned subsidiaries (MIS). Second, three different taxation schemes in the host country are considered: the corporate income taxes, the capital gains taxes and the dividend withholding taxes. Third, we study the interactive impact of multiple taxations on FDI flows. Our empirical results indicate that both individually and interactively, the three tax rates have a strong and statistically significant impact on FDI flows to MOS and a much weaker impact on FDI flows to MIS.

New Product Introductions and Price Markups

The present study contributes to the literature of countercyclical price markups (real price rigidities). Specifically, it discusses the relation between new product introductions and industry and aggregate demand fluctuations, as well as their impact on firms' pricing policies, and in particular on price markups. Devinney [1990] shows that the introduction of new products happens mostly at the beginning of the business cycle, while Axarloglou [2003] explores the seasonal and non-seasonal properties of new product introductions in U.S. manufacturing. The present study extends this literature by showing that price markups decline in response to new product introductions, and since new product introductions vary in a procyclical manner, price markups can be countercyclical.Prices

Exchange Rates and the Choice of Ownership Structure of Production Facilities

The aim of this research is to study the effects of real exchange rates on the long-term ownership strategies of production facilities of firms entering foreign markets. Among the strategies considered are exporting (EXP), joint ventures with local partners (JV), and wholly owned production facilities (WOS) in the foreign country. Our research takes a first step in modeling the influence of exchange rates on the choice and dynamic adjustment of such strategies. The insights obtained from our modeling analysis are then translated into testable hypotheses and empirically verified with the use of firm level data from U.S. multinational corporations (both at the firm and a more aggregate level). An insightful result of our model is the identification of a hysteresis phenomenon that characterizes switching behavior between strategies in the presence of switchover cost. The magnitude of the hysteresis band, which is a measure of the inertia associated with keeping the current ownership structure, is affected by a multiplicity of factors such as exchange rate volatility and market power of the entering firm. Analytical and numerical results on the effects of such factors on the hysteresis band are provided. The four testable hypotheses generated from our modeling analysis are rigorously tested with the use of a multinomial logit model on data obtained from the Harvard Multinational Enterprise database, and a data set maintained by the Bureau of Economic Analysis, the U.S. Department of Commerce. The empirical results strongly support our insights that relatively depreciated real exchange rates (i.e., weak home currency) favor (a) the JV over the WOS and (b) EXP mode over the WOS or JV. Finally, we summarize our results into useful guidelines for global production managers.Production Strategy, International Business, Ownership Structure, Exporting, Joint Ventures, Global Pricing Policy, Hysterisis, Real Options, Exchange Rates, Dynamic Programming

Inward Foreign Direct Investment in the US: An Empirical Analysis of their Impact on State Economies

In the present study, we analyze the effects of foreign direct investment (FDI) inflows in local economies across US states. Overall, FDI inflows have a positive and in several cases statistically significant impact on local employment and wages. However, these effects vary across US states. The study presents evidence supporting the idea that these results are due to the industry composition of FDI inflows across states. FDI inflows in Food, Lumber and Wood, Paper, Printing/Publishing, and Primary and Fabricated Metals have positive employment and wages effects, whereas FDI inflows in Petroleum and Instruments have negative effects.