FROM HONEYMOON TO DIVORCE: INSTITUTION QUALITY AND FOREIGN INVESTORS' OWNERSHIP CONSOLIDATION IN CHINA

In China, joint ventures (JVs) between foreign investors and Chinese local firms were the most popular form of foreign affiliates before 2001. Over time, with policy space to operate as foreign wholly owned (WOs), many foreign investors in JVs chose to consolidate ownership and turned JVs into their WOs. Here, we examine how institution quality affects foreign investors' JV‐to‐WO ownership consolidation odds. For each province‐year, we construct an institution quality index from the business and judicial quality indicators, and further compute a relative quality index to highlight provincial variations. Using more than 43,000 JVs operating in China's 30 provinces over 1998–2007, we find that increases in institution quality decrease the odds of foreign investors to divorce their Chinese local partners. The odds for foreign investors in JVs to consolidate ownerships are significantly higher if they operate in provinces with relatively weaker institution quality. The odds of foreign investors' JV‐to‐WO decision vary with JVs' local firms being state‐owned enterprises (SOEs) and non‐SOEs, with foreign investors' origins from Hong Kong, Macao, and Taiwan (HMT) and other regions (Foreign), and with foreign investors' initial equity positions. Our results are not driven by foreign direct investment policy shocks, and are robust to alternative measures of institution quality. (JEL F23, L23)     

CONTRACTS AS RENT‐SEEKING DEVICES: EVIDENCE FROM GERMAN SOCCER

Recent theoretical research has identified many ways how contracts can be used as rent‐seeking devices vis‐à‐vis third parties, but there is no empirical evidence on this issue so far. To test some basic qualitative properties of this literature, we develop a theoretical and empirical framework in the context of European professional soccer where (incumbent) teams and players sign binding contracts which, however, are frequently renegotiated when other teams (entrants) want to hire the player. Because they weaken entrants in renegotiations, long‐term contracts are useful rent‐seeking devices for the contracting parties. However, they reduce the likelihood of (mutually beneficial) transfers, which generates a trade‐off in the spirit of Aghion and Bolton (1987). Using a data set from the German “Bundesliga,” our model predictions are broadly confirmed. (JEL L14, J63, L40, L83)     

FOREIGN DIRECT INVESTMENT AND COUNTRY‐SPECIFIC HUMAN CAPITAL

This paper exploits an international bilateral data set over the period 1963–1998 to investigate the relationship between foreign direct investment (FDI) and foreign‐educated labor in an FDI host country. Workers educated abroad acquire country‐specific human capital that is more productive in the host country of study. A foreign subsidiary sharing a parent firm's technology will invest more if it has more foreign‐educated labor, since it can utilize this labor more productively because of the country‐specific human capital. Consistent with our predictions, our empirical findings show that foreign‐educated labor accounted for a sizable portion of growth in FDI flows. (JEL F21, F10)     

Investor happiness

We study investor happiness in a panel survey of brokerage clients at a UK bank. When investors anticipate future happiness, they set their return aspirations according to personal portfolio risk, objectives, investment horizon, confidence, and other individual characteristics. They are accurate in their forecasts, only rarely are investors unhappy with outcomes they predicted they would be happy with, and vice versa. However, determinants of experienced happiness only partially correspond to the ones found for anticipated happiness. In particular, relative performance plays an important role investors do not anticipate. Having outperformed other people contributes to investor happiness, as does active trading success.     

SENTIMENT BIAS AND ASSET PRICES: EVIDENCE FROM SPORTS BETTING MARKETS AND SOCIAL MEDIA

Previous research using attendance‐based proxies for sentiment bias in sports betting markets confirmed the presence of investor sentiment in these markets. We use data from social media (Facebook “Likes”) to proxy for sentiment bias and analyze variation in bookmakers' prices investor sentiment. Based on betting data from seven professional sports leagues in Europe and North America, we find evidence that bookmakers increase prices for bets on teams with relatively more Facebook “Likes,” indicating the presence of price‐insensitive investors with sentiment bias. These price changes do not affect informational efficiency in this market. (JEL L81, G14)     

THE ROLE OF REGULATORY ARBITRAGE IN U.S. BANKS' INTERNATIONAL FLOWS: BANK‐LEVEL EVIDENCE

I study the prevalence and profitability of regulatory arbitrage in U.S. banks' foreign activities. I analyze a publicly available bank‐level data set on bilateral lending flows to 75 countries over 2003–2013. U.S. banks' affiliates lend less to borrowers in host countries with stricter bank capital regulations, and are less likely to maintain affiliates in such countries. Banks substitute from (host‐regulated) affiliate toward (U.S.‐regulated) cross‐border lending in hosts with strict bank capital rules. This is particularly so for low‐capitalized banks with lower foreign ownership shares. Banks that reduce their exposure to stricter host capital rules are more profitable in foreign activities. (JEL F3, F4, G2)     

OLIGARCHIES AND DEVELOPMENT IN A GLOBAL ECONOMY: A TALE OF TWO ELITES

This paper studies how comparative advantage and the political elites' endowments shape long‐run performance in economies with imperfect political institutions. The trade regime interacts with industrial policy and regulations on capital mobility in governing capital accumulation. In a capital‐scarce economy, capitalist oligarchs striving for import substitution industrialization (ISI) initially shelter the economy from trade, while promoting industrial policies that promote total factor productivity growth in the manufacturing sector. This gradually shifts the comparative advantage toward manufacturing and renders the economy attractive to foreign investors. Allowing for trade and foreign capital inflows are thus complementary policies that spur growth in the capital oligarchy. By contrast, landed oligarchs in a capital‐scarce economy favor openness to trade at an early stage of development, neglect industrial policies, and block foreign capital to maximize extractable rents. The policy mix causes the economy to stagnate. Consistent with the experiences of South Korea and Argentina in the postwar era, the model predicts that the success of ISI policies depends crucially on the conditions governing the incentives for capital accumulation. (JEL F10, F20, P40, P50, O10, O24)     

THE IMPACT OF TRADE COSTS ON FIRM ENTRY,EXPORTING, AND SURVIVAL IN KOREA

This study examines how changes in trade costs have affected entry, exit, productivity, and exporting in the Korean manufacturing sector. We verify several predictions of heterogeneous‐firm models of international trade. For example, falling import‐trade costs are associated with less entry and lower market shares among existing domestic firms, and higher total factor productivity for Korean manufacturing as a whole. The size of firms plays an important role in many of our results. New domestic firms are more likely to be small, but large firms are less likely to exit and more likely to have an increase in total factor productivity. (JEL F10, D24)     

DISENTANGLING DEMAND‐ENHANCING AND TRADE‐COST EFFECTS OF MAXIMUM RESIDUE REGULATIONS

Maximum residue level (MRL) regulations in plant products can create unnecessary trade barriers on one hand and enhance demand via risk mitigation or quality assurance on the other. We stipulate a generalized gravity equation model to disentangle the effects of MRLs on the import demand and foreign exporters' supply. Applying the framework to the MRLs on pesticides imposed by high‐income Organization for Economic Co‐operation and Development countries, we find that the MRLs jointly enhance the import demand and hinder foreign exporters' supply. In addition, exporters from the less and least developed countries are more constrained by the MRLs than their competitors from the developed world. (JEL F14, Q17)     

MEASURING THE INTERDEPENDENCE OF MULTINATIONAL FIRMS' FOREIGN INVESTMENTS

Earlier work found evidence for geographic linkages of aggregate foreign direct investment across countries and country‐pairs. From a theoretical point of view, such linkages at the macroeconomic level may root in between‐firm as well as within‐firm linkages and originate from information spillovers across or within firms in exploring unknown markets, and vertical linkages between production plants across different locations within the firm. We use data on the universe of German multinational enterprises (MNEs) to empirically explore how marginal investments at one foreign affiliate depend on investments at other affiliates within the same MNE. The empirical approach employs two channels or modes of cross‐affiliate interdependence: mere geography (capturing horizontal linkages through correlated learning and horizontal competition within the firm) and input–output relationships within or across industries (which capture vertical linkages). Adding to earlier findings at the aggregate level, we find evidence of a significant interdependence of investments within the firm. In the firm‐level data at hand, vertical linkages appear to be more important than horizontal ones. Investments at one location tend to stimulate investments at other locations of the same MNE, particularly if input linkages are strong. The opposite seems to be true for output linkages. Beyond vertical linkages, mere geographic proximity matters only to a minor extent. This suggests that evidence of linkages through geographic closeness at aggregate data levels accrue mainly to reasons of vertical linkages within networks of affiliates. (JEL C31, D22, F21, F23, F68, G31, H32)     

INVESTMENT CHOICE ARCHITECTURE IN TRUST GAMES: WHEN “ALL‐IN” IS NOT ENOUGH

While many economic interactions feature “All‐or‐Nothing” options nudging investors towards going “all‐in,” such designs may unintentionally affect reciprocity. We manipulate the investor's action space in two versions of the “trust game.” In one version investors can invest either “all” their endowment or “nothing.” In the other version, they can invest any amount of the endowment. Consistent with our intentions‐based model, we show that “all‐or‐nothing” designs coax more investment but limit investors' demonstrability of intended trust. As a result, “all‐in” investors are less generously reciprocated than when they can invest any amount, where full investments are a clearer signal of trustworthiness. (JEL C72, C90, C91, D63, D64, L51)     

Migrant Assimilation in Europe: A Transnational Family Affair1

The paper advances our empirical and theoretical understanding of migrant assimilation. It does so by focusing on a very particular group of individuals who appear more likely than other migrant types to “go native.” We call these individuals “mixed nationality relationship migrants” (i.e., migrants who have committed to a life outside their home country because of the presence of a foreign partner). The paper argues that the transnational family milieus that emerge from this form of international migration are critical to the assimilation process. Empirical material from 11 in‐depth interviews with female migrants in Britain (Sheffield) and France (Paris) supports our argument. We also suggest that such “extreme” assimilation is more likely within a regional migratory system – like the EU – where the “identity frontiers” crossed in the formation of a transnational family are relatively shallow.     

KNOWLEDGE CAPITAL,INTERNATIONAL TRADE,AND FOREIGN DIRECT INVESTMENT: A SECTORAL ANALYSIS

The knowledge‐capital (KC) model of multinational enterprises (MNEs) is now a widely adopted empirical approach to explain the location and production decisions of global firms based on both horizontal and vertical motivations. Although most of the existing studies have focused on highly aggregated national data, we extend this model to sectoral data consisting of broad manufacturing industries and explicitly account for the dynamic nature of international investment data. The empirical results from a dynamic panel data analysis indicate that the predictions of the KC model regarding MNE behavior vary by the type of industry. Production processes in electronics and transportation equipment are more characterized by efficient vertical specialization of research and development activities and assembly, whereas other sectors display more complex motivations. (JEL F14, F23, L23)     

DO TERRORIST ATTACKS IMPACT EXCHANGE RATE BEHAVIOR? NEW INTERNATIONAL EVIDENCE

This study examines whether terrorist attacks affect bilateral exchange rates. Using historical 10‐minute exchange rate data for 21 countries' currency vis‐à‐vis the U.S. dollar, we show that exchange rate returns of all countries are statistically significantly affected by terrorist attacks. Some exchange rates appreciate and some depreciate following a terrorist attack, some currencies experience exchange rate reversals while others experience a persistent effect. Generally, the effect declines but persists as terrorist attacks become stale information. (JEL F31, F37)     

INTELLECTUAL PROPERTY PROTECTION AND THE INDUSTRIAL COMPOSITION OF MULTINATIONAL ACTIVITY

In a North‐South model with endogenous foreign direct investment (FDI), we examine the impact of Southern intellectual property rights (IPR) protection on the mode and industrial composition of international technology transfer. A novel feature of the model is that, due to technological reasons, industries differ with respect to their susceptibility to imitation. In equilibrium, licensing occurs in industries where the risk of imitation is low and FDI where it is of intermediate magnitude. Stronger IPRs in the South (1) alter the industrial composition of multinational activity toward licensing at the expense of FDI; (2) reduce local imitation; and (3) increase licensing and, to a lesser extent, FDI. (JEL F10, O34)     

LIQUIDITY RISK AND TIME‐VARYING CORRELATION BETWEEN EQUITY AND CURRENCY RETURNS

Using the data of 20 major Organization for Economic Co‐operation and Development countries over time, this article documents new evidence on real equity and real currency prices: higher real returns in the home equity market relative to its foreign counterparts are generally associated with real home currency depreciation at monthly frequency, but this negative correlation breaks down or even reverses during times of relatively higher aggregate economic uncertainty or volatility. This article also argues that a long‐run risks‐type model with time‐varying liquidity risk in stock markets can provide one plausible explanation for the time‐varying correlation structure. (JEL E43, F31, G12, G15)     

OFFSHORE OUTSOURCING DECISION AND CAPITAL INTENSITY: FIRM‐LEVEL RELATIONSHIPS

In offshore sourcing, a firm chooses outsourcing to independent suppliers or in‐sourcing from own foreign direct investment (FDI) subsidiaries. Based on the firm‐level data on offshore make‐or‐buy decision covering all manufacturing industries, this paper compares averages, documents inter‐firm distributions, and estimates multinomial logit models of the firm's sourcing mode choice. As predicted by previous theoretical models, this paper directly confirms at the firm level that outsourcing firms tend to be substantially labor‐intensive compared with firms in‐sourcing from the same region, even after the firm's R&D intensity, firm size, or industry is controlled for. (JEL F23, L23, L24, L14)     

OVERSEAS MARKET INFORMATION AND FIRMS' EXPORT DECISIONS

This paper examines how firms' decision to start exporting is affected by the availability of information on export markets. Unlike existing studies that focus on information sharing among firms, we are interested in the information provided by firms' main bank. Specifically, using a unique data set containing information on both Japanese firms' export activities and the experience of their main bank (i.e., their top lender bank) in transacting with other exporting firms, we examine whether main banks act as a conduit of information on export markets. We find that information spillovers through main banks positively affect client firms' decision to start exporting (extensive margin), implying that information on foreign markets provided by banks substantially reduces the fixed entry cost of exporting. On the other hand, we do not find any evidence that information provided by banks has an effect on the export volume or on the growth rate of exports (intensive margin). Our results highlight that channels of information spillovers other than those examined in the literature so far may be of considerable importance. (JEL F10, F14, G21)     

TOPICS AND GEOGRAPHICAL DIFFUSION OF KNOWLEDGE IN TOP ECONOMIC JOURNALS

We study the evolution of topics in economics and their geographical specialization by analyzing 13,233 papers from seven top journals between 1985 and 2012 and their forward citations. The share of U.S. publications declines from 75% to 64% with a corresponding increase of the European share from 12% to 24%. We use topic modeling and document the evolution of the discipline over 27 years. We estimate, with a quasi‐structural model, the citation lag distribution for 18 different topics and three large geographical areas. The modal citation lag is about 6.7 years in the entire sample and 4.8 years for citations from the top 100 journals. We quantify (1) the home bias effect in citations, (2) how it fades away over time, (3) the long lasting impact of U.S. publications vis‐à‐vis other geographical areas, and (4) the higher speed of diffusion and faster obsolescence in the United States. (JEL A14, I23, O33, A11)     

ECONOMIC DETERMINANTS OF THE TIMING OF PREFERENTIAL TRADE AGREEMENT FORMATIONS AND ENLARGEMENTS

Preferential trade agreements (PTAs) have proliferated over the past 60 years. While a small number of recent studies have examined empirically the economic determinants of the likelihood of a pair of countries having a PTA, this study explains empirically the timing of all PTA formations and enlargements from 1950 through 2006 using duration analysis. Our main and novel goal is to predict (in‐ and out‐of‐sample) a substantive share of these 1,560 PTA events using a parsimonious model with mainly economic variables, taking selection dynamics into account. Our analysis reveals that we can predict correctly in‐sample the actual year of entry into force for 26% of the 1,560 bilateral PTA formations/enlargements in the period 1950–2006 among 10,518 pairings of 146 countries using only a few economic and political variables. Moreover, we can predict correctly in‐sample 57% of these PTA events within a 10‐year window leading up to the event using this model. The model also performs well out‐of‐sample for the near term (82%), but not if the out‐of‐sample period is very long. We conclude with an evaluation of the model's ability to predict the timing of the North American Free Trade Agreement, the European Union's formation and enlargements, and the model's ten most likely post‐2006 PTA events. (JEL F14, F15)