Alan C. Spearot

Market Access, Investment, And Heterogeneous Firms

This article presents a model of international trade in which heterogeneous firms can expand through capital acquisitions. I show that demand elasticities are a crucial element in predicting which firms invest, in what location, and for what reason. High-productivity firms, who tend to sell goods at a low elasticity, invest for market access (tariff jumping). Middle productivity firms, who tend to sell at a higher elasticity, invest for productivity improvement. The relative value of trade costs dictates which incentive is larger. In equilibrium, trade liberalization can reduce aggregate productivity by reducing an important source of investment demand: foreign firms.

Core competencies, matching and the structure of foreign direct investment

We develop a matching model of foreign direct investment to study how multinational firms choose between greenfield investment, acquisitions and joint ownership. Firms must invest in a continuum of tasks to bring a product to market. Each firm possesses a core competency in the task space, but the firms are otherwise identical. For acquisitions and joint ownership, a multinational enterprise (MNE) must match with a local partner that may provide complementary expertise within the task space. However, under joint ownership, investment in tasks is shared by multiple owners and, hence, is subject to a holdup problem that varies with contract intensity. In equilibrium, ex ante identical multinationals enter the local matching market, and, ex post, three different types of heterogeneous firms arise. Specifically, the worst matches are forgone and the MNEs invest greenfield; the middle matches operate under joint ownership; and the best matches integrate via full acquisition. We link the firmlevel model to crosscountry and industry predictions and find that a greater share of full acquisitions occur between more proximate markets, in hosts with greater revenue potential and within contractintensive industries. Using data on partial and full acquisitions across industries and countries, we find robust support for these predictions.

Firm Heterogeneity and Acquisition Incentives

This paper presents a tractable model of acquisitions with heterogeneous firms. Acquisitions improve aggregate productivity by transferring productive assets from the least efficient firms to more efficient firms. However, these acquiring firms are in a mid-range of productivity, whether acquiring at home or abroad. This result is a function of a variable-elasticity demand framework, and highlights the sensitivity of investment decisions to model preliminaries. In linking the model to a Q-Theory of investment, a corollary of this result is that a firm’s average-Q is a poor proxy for marginal-Q, especially for the highest productivity firms. The predictions of the model are tested using a 25-year sample of firms from the Compustat database. To account for productivity, a measure of average Q is constructed which controls for serial correlation in Q values. By accounting for serial correlation, average-Q is positively related to firm size (sales). Using this measure, and by harnessing nonparametric techniques, I find precise evidence that mid-productivity (mid-Q) firms are the most likely to acquire another firm.

Relaxing CAFE: Foreign direct investment, NAFTA and domestic product standards

This paper studies the effects of domestic product standards on the offshoring behaviour of automotive firms. In particular, we examine an important non-tariff barrier to trade within US fuel economy policythe Corporate Average Fuel Economy (CAFE) two-fleet rule. By leveraging the removal of the two-fleet rule upon implementation of NAFTA and exploiting a policy discontinuity based on vehicle characteristics, we present evidence that the costs of offshoring were reduced to a larger degree for varieties that were subject to US fuel economy rules. Specifically, we estimate that prices fell between 5% to 10% for varieties subject to the CAFE two-fleet rule relative to varieties that were exempt from the rule. These effects are persistent, not present for manufacturers that did not offshore prior to NAFTA and are robust to variety-specific trends. These effects also reconcile the post-NAFTA differences in implied compliance costs between cars and trucks for our treatment manufacturer (Chrysler). Overall, the results highlight the potential costs of regional enforcement of otherwise location-neutral product standards, which may act as a barrier to natural patterns of efficient specialization.

US-Carbon Steel (India): Multi-Product Firms and the Cumulation of Products

One of the key findings in this case deals with the appropriate method to determine material injury when imported products are subject to simultaneous anti-dumping and countervailing duty (CVD) investigations. Along with addressing a number of legal issues concerning CVD investigations, the Appellate Body clarified restrictions on cross-cumulation of injury, essentially prohibiting the current US practice, and implicitly raising the burden of proof for parallel claims of dumping and subsidies. This decision is justified on economic grounds, where cumulation imposes a counterfactual scenario against which marginal damages of dumping and subsidies by each country cannot be properly evaluated. However, what the legal rulings by the Appellate Body did not recognize is the economic reality that many like products produced by the firms alleged to have received subsidies were selectively absent from the investigation, which more generally complicates the assessment of injury in dumping and subsidy cases.

Firms in International Trade

Firms play a critical role in the global economy. In this paper, we survey the behavior of firms in the international economy, both in theory and in the data. We first summarize the key empirical facts that motivate the study of firms in trade. Then, we detail recent theoretical developments on the micro-foundations of firm behavior in an international context, focusing on how firms select into exporting, and how firms respond to international shocks. Finally, we turn to a “real world,” empirically focused view of exporting, beginning with the growth dynamics of firms expanding to global markets, and then addressing the critical financing decisions firms make when engaging in international commerce. We conclude with directions for future research.

US-Countervailing Measures on Certain Hot-Rolled Carbon Steel Flat Products from India: To Cumulate or Not Cumulate Products

One of the key findings in this case deals with the appropriate method to determine material injury when imported products are subject to simultaneous anti-dumping and countervailing duty (CVD) investigations. Along with addressing a number of legal issues concerning CVD investigations, the Appellate Body clarified restrictions on cross-cumulation of injury, essentially prohibiting the current US practice, and implicitly raising the burden of proof for parallel claims of dumping and subsidies. This decision is justified on economic grounds, where cumulation imposes a counterfactual scenario against which marginal damages of dumping and subsidies by each country cannot be properly evaluated. However, what the legal rulings by the Appellate Body did not recognize is the economic reality that many like products produced by the firms alleged to have received subsidies were selectively absent from the investigation, which more generally complicates the assessment of injury in dumping and subsidy cases.

Does Tariff Liberalization Kick the Good Apples Out? Theory and Evidence

This paper examines the liberalization of a common tariff when imported varieties vary in quality and cost. Varieties of higher quality and/or lower cost (a) are imported at lower absolute demand elasticities and (b) earn higher revenues. By virtue of larger demand elasticities, low revenue varieties benefit the most from tariff liberalization. Further, if varieties are substitutable, low revenue varieties may benefit at the expense of high revenue varieties. These predictions are confirmed using a case study of US Uruguay Round tariff cuts, where within products, low revenue exporters experienced large gains, and high revenue exporters experienced negligible gains.