Pehr-Johan Norbäck

Asymmetric Effects of Corruption on FDI: Evidence from Swedish Multinational Firms

We examine the effect of corruption on foreign direct investments. Our model shows that corruption may have different effects on investments aimed at selling to a local market, in comparison to investments aimed at selling from the corrupt market. Using Swedish firm-level data, we find that affiliate local sales decrease with corruption, while affiliate exports increase. Finally, corruption has a negative effect on the probability that a foreign firm will invest in a country. These results are consistent with theory when bribing reduces production costs and local firms have an advantage in bribing vis a vis foreign firms.

Privatization and Foreign Competition

This Paper determines the equilibrium market structure in a mixed international oligopoly, where the state enterprises assets are sold at an auction. The model suggests that low greenfield costs and low trade costs induce foreign acquisitions. The intuition is that domestic firms can then not prevent foreign firms from becoming strong competitors and thus, their willingness to pay for the state assets is low. We also find that profit shifting from domestic to foreign firms generated by National Treatments clauses is partly paid for by the foreign investor in the bidding competition over the state assets. The reason is that the foreign firm pays a price for the state assets equal to the domestic firms valuation of the assets. But the domestic firms valuation of the assets is the negative impact on this firm through the decline in profits created by the foreign acquisition.

The Organization of the Innovation Industry: Entrepreneurs, Venture Capitalists, and Oligopolists

We construct a model where incumbents can either acquire basic innovations from entrepreneurs, or wait and acquire developed innovations from entrepreneurial firms supported by venture capitalists. We show that venture-backed entrepreneurial firms have an incentive to overinvest in development vis a vis incumbents due to strategic product market effects on the sales price of a developed innovation. This will trigger preemptive acquisitions by incumbents, thus increasing the reward for entrepreneurial innovations. We also show that venture capital can emerge in equilibrium if venture capitalists have cost advantages, or if development is associated with double moral hazard problems. (JEL: G24, L1, L2, M13, O3) (c) 2009 by the European Economic Association.

Vertical FDI Revisited

This study explores how relative skilled-wage premia affect FDI. Contrary to previous studies based on factor endowment differences, we find strong support for vertical FDI, in the sense that more FDI is conducted in countries where unskilled labor is relatively cheap. In addition, we find that relative skill-premia also affect FDI activities that have previously been associated with horizontal FDI, i.e. local affiliate sales. Consequently, the potential effects of changes in the relative wage costs on international production reallocation within MNEs are large. In fact, if not for the 8% rise in the US skilled wage premium relative to the average host country between 1986-1994, annual US affi liate sales abroad in relation to US GDP would have been half a percentage point higher.

The Effect of Tax Treaties on Multinational Firms: New Evidence from Microdata

This paper uses affiliate level data from Swedish multinationals to examine the impact of tax treaties on both overall affiliate sales and the composition of those sales. In line with previous results, we find little evidence for an effect of treaties on the level of total sales. We do, however, find that a tax treaty increases the probability of investment by a firm in a given country. In addition, we find that a treaty reduces exports to the parent but increases imports of intermediate inputs from the parent. This is consistent with treaties increasing the effective host tax. This suggests that tax treaties impact the behavior of multinationals along some dimensions but not along others.

Privatization Policy in an International Oligopoly

This paper studies privatization policy in an international oligopoly. The argument that equal treatment of foreign investors will be detrimental to domestic welfare by shifting profits from domestic to foreign firms is shown to be less relevant in privatization auctions than for greenfield FDI. This is because such profit shifts are paid for in part by foreign firms in the bidding competition for the privatized firm in the auction. It is also shown that small local equity requirements are likely to be beneficial, but large ones are counterproductive, preventing welfare-enhancing foreign acquisitions.

Cross-border acquisitions and taxes: efficiency and tax revenues

We develop a theoretical oligopoly model to study how international differences in profit and capital gains taxes affect foreign acquisitions. Reductions in foreign profit taxes tend to trigger inefficient foreign acquisitions, while reductions in foreign capital gains taxes may trigger efficient foreign acquisitions. Foreign acquisitions can increase domestic tax revenues even when profit taxes are evaded. The reason is that bidding competition between foreign firms ensures that all benefits from the acquisition, including tax advantages, are captured by a domestic seller paying capital gains taxes. Tax code issues, such as the treatment of goodwill, are shown to affect the pattern of foreign acquisitions.

Creative Destruction and Productive Preemption

We develop a theory of innovation for entry and sale into oligopoly, and show that inventions of higher quality are more likely to be sold (or licensed) to an incumbent due to strategic product market effects on the sales price. Such preemptive acquisitions by incumbents are shown to stimulate the process of creative destruction by increasing the entrepreneurial effort allocated to high-quality invention projects. Using data on patents granted to small firms and individuals, we find evidence that high-quality inventions are sold under preemptive bidding competition. Asymmetric information problems are shown to be solved by verification through entry for sale.

Heterogeneous Firms, Globalisation and the Distance Puzzle

Despite the strong pace of globalization, the distance effect on trade is persistent or even growing over time (Disdier and Head, 2008). To solve this distance puzzle, we use the recently developed gravity equation estimator from Helpman, Melitz and Rubinstein (2008), HMR henceforth. Using three different data sets, we find that the distance coefficient increases over time when OLS is used, while the non-linear estimation of HMR leads to a decline in the distance coefficient over time. The distance puzzle thus arises from a growing bias of OLS estimates. The latter is explained by globalization more significantly reducing the downward bias from omitting zero trade flows than it reduces the upward bias from omitting the number of heterogeneous exporting firms. Furthermore, we show that including zero-trade flows cannot solve the distance puzzle when using HMR. The HMR estimates are strongly correlated with the time pattern in freight costs reported by Hummels (2007).

Born to be Global and the Globalisation Process

During the last decades, we have witnessed a large number of entrepreneurial firms that reach the world market at a fast pace (‘born global firms’). Our analysis suggests that the ongoing globalisation process indeed implies that born to be global firms would be more prominent in the world economy due to the reduction in the cost of exploiting good business ideas globally. However, our analysis also suggests that entrepreneurial firms have incentives to sell their business to incumbents. Indeed, we show that ‘born to be sold global firms’ can be even more frequent as a result of trade liberalisation and the international deregulation of the market for corporate control.