Laixun Zhao

Cross-Hauling Direct Foreign Investment and Unionized Oligopoly

We construct a partial equilibrium model of intra-industry cross-hauling DFI with unionized duopoly, where wages and employment are determined through Nash bargaining between firms and national labor unions. We show that under symmetry, cross-hauling DFI is the unique Nash equilibrium, in which the negotiated wage decreases for every level of employment and each firms profit increases. Cross-hauling DFI increases (decreases) employment and national welfare if the union is wage (employment) oriented.

Unionization, vertical markets, and the outsourcing of multinationals

Abstract This paper offers an explanation for multinationals that are both horizontally and vertically related. Specifically, when labor is unionized, the conventional incentives for merger may disappear in industries of successive (or bilateral) monopoly, due to ‘double marginalization’, which limits the amount of surplus that can be bargained between labor and the firms. We show that vertical integration raises both union employment and the negotiated wage, but may reduce total industry profits. As such, the integrated firm has incentives to outsource — to go multinational, regardless of whether the foreign country is unionized or not. We demonstrate that the negotiated wage decreases and firm profits increase with outsourcing. Thus, unionization in vertically related markets can make firms become multinational conglomerates that are both vertically and horizontally related.

Child Labor and Globalization

The article embeds child labor in a standard general equilibrium, two‐sector model of a small open economy facing perfectly competitive markets, efficiency wages, and free trade. The modern sector uses skilled adult labor and capital, and the agrarian sector uses unskilled (child and adult) labor and skilled adult labor. Trade policies, foreign direct investment, or both that increase the modern‐sector output reduce the incidence of child labor. Emigration of skilled (unskilled) workers reduces (increases) the incidence of child labor. Child‐wage subsidies increase the incidence of child labor, and a ban on child labor benefits unskilled adult workers but hurts skilled workers.

Decentralization and Transfer Pricing Under Oligopoly

This paper presents a simple model of a partially decentralized multinational firm (MNF) in competition with a rival firm. It is shown that transfer pricing can be used as a rent-shifting device by the MNF to compete with the rival. This arises because the MNF headquarters uses the transfer price to manage different subsidiaries. The specific value of the transfer price chosen by the MNF depends on whether the rival firm produces the intermediate good, the final good, or both and whether the rival is integrated or not. In particular, both decentralization and competition with a fully integrated rival result in lower transfer prices.

Corporate Control, Foreign Ownership Regulations and Technology Transfer

Multinationals are often required to form joint ventures (JVs) with local firms when entering the host country market. Explicitly taking corporate control into account, we explore the relationship between technology transfer and foreign ownership regulation in the presence of technology spillovers from JVs to local firms. It is shown that foreign ownership regulations may facilitate both technology transfer and spillovers when the multinational has corporate control. Under corporate control by the local partner firm, however, such regulations may hamper technology transfer.

Global Production and Currency Devaluation

We model the production allocation choices of a multinational enterprise (MNE) in a three-country framework-one northern country and two southern ones. Products made in the South are of lower quality than those made in the North. Substitutability between goods differs due to variations in product quality. We investigate how exchange rates affect production, employment, and welfare, and find that currency devaluation from different countries brings contrasting results. In particular, an appreciation in the southern country (X) producing the lowest-quality good with the least cost may reduce production (employment) in the North, while an appreciation in the other southern currency (Y) always does the opposite. A northern depreciation against both southern currencies may increase production in country X, but always reduces that in country Y. These arise because the MNE shifts production globally to minimize costs. Northern welfare always falls following currency appreciation in southern countries. Copyright

Commercial Policy and Foreign Ownership

To serve the domestic market, foreign multinationals often not only export there but also control local firms through FDI. This paper examines the effects of trade and industrial policies on prices, outputs, profits, and welfare when exports and FDI coexist. Specifically, we focus on the case in which a foreign firm has full control of a local firm through partial ownership. Cross-border ownership on the basis of both financial interests and corporate control leads to horizontal market-linkages through which tariffs and production subsidies may harm a locally-owned firm but benefit a foreign firm. Foreign ownership regulation benefits a locally-owned firm.

Temporary and Permanent Immigration under Unionization

This paper investigates permanent and temporary immigration and remittance under the coexistence of unionized and non-unionized manufacturing firms in a two-sector economy. The impacts of immigration and remittance on respectively wages, employment, the union-non-union wage gap and national welfare are analyzed. It is found that both permanent immigration (economy-wide) and temporary immigration in agriculture bring positive effects on most variables (except the competitive wage), but widens the wage gap and causes income redistribution in the host country. However, if temporary immigrants work in manufacturing only, then all wages and the union-non-union wage gap fall. That is, workers become more equally paid but poorer. In addition, remittance and globalization cause negative effects on union workers and employers. It is perhaps such consequences and the income redistribution effect of immigration that cause the media to paint a negative image of immigration. Copyright

Competing to Outsource in the South

This paper analyzes foreign direct investment (FDI) competition in a three-country framework: two Northern countries and one Southern country. We have in mind the competition of Airbus and Boeing in a developing country. The host-country government endogenizes tariffs, while Airbus and Boeing choose domestic output and FDI. Wages and employment in the home countries are negotiated. We find that in the unique equilibrium, both Airbus and Boeing compete to undertake FDI in the developing country. This arises because the host country can play off the multinationals, which in turn stems from three factors: (a) oligopolistic rivalry; (b) quid pro quo FDI; (c) strategic outsourcing-FDI drives down the union wages at home if the host-country wage is sufficiently low. However, if the host-country wage is sufficiently high, the union wage increases under FDI. In such cases, FDI competition benefits the multinationals, the labor unions, as well as the host country. Copyright

Trade and firm heterogeneity in a Schumpeterian model of growth

The present paper explores the effect of trade liberalization on the level of productivity as well as the rate of productivity growth in an R&D-based model with heterogeneous firms. We introduce new and plausible features that are absent in existing studies. First, technical progress takes the form of continual quality improvement of products over time. Second, firm entry and exit are endogenously determined due to creative destruction of products. In this framework, we demonstrate that a lower transport cost or export sunk cost unambiguously reallocates resources to R&D and top-quality product industries from low-quality good industries. This means that trade liberalization increases the rate of technical progress as well as the level of manufacturing productivity. These results are found to be robust in an extended model with population growth without scale effects.