Deborah L. Swenson

Attracting foreign manufacturing: Investment promotion and agglomeration

Abstract We study Japanese investments between 1980 and 1992 to assess the effectiveness of US state promotion efforts in light of strong agglomeration effects in Japanese investment. The provision of foreign trade zones, lower taxes, and job-creation subsidies have statistically significant effects on the location of investment. Simulations indicate that unilateral withdrawal of promotion would have caused individual states to lose substantial amounts of Japanese investment. However, because state promotional policies tended to offset each other, their impact on the geographic distribution of Japanese investment appears small.

Multinationals and the creation of Chinese trade linkages

This paper studies the relationship between multinational firm proximity and the formation of new export connections by private Chinese exporters between 1997 and 2003. The results indicate that growth in the presence of multinational firms is positively associated with the formation of new trade by local Chinese firms. Further exploration suggests that information spillovers may drive this result, as the positive association due to own-industry multinational presence is particularly strong in contexts where information improvements may be the most helpful. Thus, it appears that a growing presence of multinational firms may enhance the export capabilities of local domestic firms.

Competition and the Location of Overseas Assembly

How does international competition affect overseas outsourcing? While it is commonly believed that international competition enables firms to desert high cost countries in favor of low wage locations, the frequency of such responses may be reduced if the movement of outsourcing activities involves sunk costs. To put these factors in perspective, I study the production decisions of participants in the U.S. overseas assembly program (OAP). A number of interesting regularities emerge. First, the strong positive effect of prior participation on current OAP participation probabilities suggests that sunk costs influence outsourcing choices. Such production persistence is especially strong among foreign assemblers who are responsible for completing a large percentage of value-added. Second, increases in own-country costs and declines in competitor-country costs reduce participation probabilities. In addition, while these persistence and cost effects characterize all overseas assembly choices, these effects are much larger for outsourcing in developing countries. Finally, outsourcing responses appear to reflect differences in ?market thickness?, as cost sensitivity generally rises with competitor presence. Taken together, these observations provide empirical support for modeling approaches that feature search costs and partner availability as determinants of outsourcing decisions.

Country Competition and US Overseas Assembly

To examine the role of international competition in outsourcing production decisions, I study the decisions of producers who used the U.S. Overseas Assembly Program (OAP) to conduct assembly operations in developing countries. The evidence, which is based on U.S. OAP imports between 1991 to 2000, shows that production costs and corporate tax policies both shaped production decisions. While increases in own country costs reduced the size of a developing countrys OAP shipments, increases in competitor costs helped to increase a countrys shipments. The effects of competitor country cost changes were relatively large, as the analysis suggests that a ten percent increase in competing country costs would increase a countrys OAP outsourcing activities by 5.8 percent, while a ten percent increase in competitor country taxes would increase a countrys OAP exports by 1.6 percent.

Trade Environment Changes and the Expansion of Private Chinese Exports

This paper examines how changes in Chinas trade environment contributed to the rise in private firm exports. Data from 1997 to 2009 reveal that both increased exposure to multinational firm exports in related industries and expansion in private firm imports at the broad industry level contributed to private firm export growth. The benefits of multinational exposure are particularly strong for consumer goods, and the benefits of private firm provincial imports are most strongly linked to private firm exports of capital goods and intermediate inputs. In contrast, special economic zones and technology zones did not increase private firm exports. Further investigation of the export transaction data at the product level suggest that Chinese private firm export capability was increased by (1) improvements in product quality that was fostered by proximity to multinational firms; and (2) improved access to imported intermediate inputs.

Globalization, ownership, and the effects of trade liberalization on Chinese import prices

This paper studies the differential effects of trade liberalization following China’s accession to the World Trade Organization. While China’s tariff liberalization was uniformly implemented as a matter of national policy, our results show that the pass-through of tariff reductions to import prices was more pronounced for products that were imported by purchasers in China’s provinces that were more exposed to globalization. In addition, we find that the strength of tariff pass-through was also affected by firm ownership: tariff pass-through was lower for products imported by Chinese state-owned enterprises than it was for products imported by foreign-owned enterprises (FOEs). Finally, we show that tariff pass-through increased as provinces became more exposed to globalization – an effect that was more pronounced for imports purchased by private Chinese firms than it was for the imports purchased by FOEs.

Multinational Location Decisions and the Access to Imported Inputs

Although the influence of agglomeration economies on foreign direct investment location decisions is widely recognized in the literature, the nature of positive externalities is less well understood. This paper examines a particular source, access to specialized imported inputs, by applying a conditional logit model to the location decisions of Taiwanese multinationals in China. Our evidence, based on the 2,918 foreign direct investment projects approved between 1994 to 2006 in conjunction with Chinese customs data, reveals a positive effect of access to imported intermediate inputs and capital goods on the average investment, with effects that vary by industry group, time period and investment stage.

Multinationals and Trade Linkages

Between 2000 and 2006 Chinese exports grew at an average rate of 25% per year, which positioned China just behind Germany and the US as the third largest exporter, and on a trajectory to become the world’s largest exporter by 2008.1 Nonetheless, while the exceptional growth of Chinese exports has captured international attention, Chinese trade is remarkable for another reason — the unusually high degree of multinational firm involvement in the architecture of Chinese trade. For this reason, a better understanding of the repercussions of China’s trade integration with the world economy needs to recognize the direct role of multinational firms in China’s trade expansion. In addition, to fully appreciate the influence of multinational firms on Chinese trade, it is also important to consider the long-term effects of multinational firms on the nature and quality of trade by domestic firms in China.

Investment Distinctions: The Effect of Taxes on Foreign Direct Investment in the U.S.

Most studies of taxation and foreign investment limit their investigation to the effects of tax changes on aggregate foreign investment flows. The reason is practical; little evidence is readily available that would allow researchers to consider the effects of taxes on individual firm investment decisions. However, it seems likely that this data limitation may in fact cause researchers to draw the wrong conclusions regarding the actual responsiveness of investment flows to tax differences. In part, there are reasons for firms to remain in a particular location once they have selected it once. This persistence of investment activity may cause most repeat investors to have little responsiveness to small tax differences, while newer investors will respond more vigorously.