Multinational Firms, FDI Flows and Imperfect Capital...

Multinational Firms, FDI Flows and Imperfect

Capital Markets

Pol Antras Mihir A. Desai C. Fritz Foley

Quarterly Journal of Economics (2009)

presented by Fabrizio Leone

March 29, 2017

Antras et al. MNCs, FDIs and Financial Frictions 1 / 16

Introduction

• Theoretical part. Understand how firms make decisions in a

world with heterogeneous institutions, asymmetric information

and financial frictions.

- Baseline model with two countries.

- Multicountry model.

• Empirical part. Test the theoretical predictions of the model

using firm-level data for the US.

- Rich robustness check analysis.


The Environment

• An inventor owns a technology to deploy in a foreign country

with the help of a local entrepreneur. Available contracts:

- Arm’s length technology transfer.

- Equity share or direct financing

• The local entrepreneur needs to raise funding to finance the

investment.

• External investors can provide funding, but they are concerned

with misbehaviour of the entrepreneur.

=⇒ MNCs and FDIs endogenously arise in response to investors

concerns with entrepreneurs mismanagement (Disney case).


The Model

Following Holmstrom and Tirole (1997)

• Three periods:

- t = 0: contracting stage.

- t = 1: investment stage.

- t = 2: production/consumption and loans repayment stage.

• Three risk neutral agents.

• Two countries:

- Home (H).

- Foreign (F).


The Model (1)

The inventor’s problem

• Has initial wealth W > 0.

• Owns a production technology of a differentiated good:

- Can directly sell in H.

- Cannot directly sell in F =⇒ set a contract with local

entrepreneur.

• If at t = 1 invests 1 unit of W in H, he gets an exogenous

return β > 1 at t = 2.

• Investing in F yields a cash flow R(q) s.t. R ′(q) > 0,

R ′′(q) ≤ 0 and R(0) = 0.


The Model (2)

The local entrepreneur’s problem

• Has initial wealth W = 0: her exit option is 0.

• Need to raise funding at t = 0.

• At t = 1 she can:

- Well behave and enjoy no private benefits. The investment

success probability is pH =⇒ E0[R(q)] = pHR(q)

- Misbehave and enjoy private benefits. The investment success

probability is pL < pH =⇒ E0[R(q)] = pLR(q)

• Private benefits from misbehaving are BR(q) s.t. BR ′(q) > 0.


The Model (3)

The external investors’ problem

• Continuum of investors who can invest in F with return 1.

• External investors protection is imperfect.

• Introduce a monitoring technology that reduce the

entrepreneur’s profits from misbehaving.

- Monitoring cost for inventor: CR(R(q)) with CR ′(R(q)) > 0.

- Entrepreneur’s benefit with monitoring:

BR(CR, γ) = (1− γ)δ(CR).

s.t. γ ∈ (0, 1) and δ′(CR) < 0, δ′′(CR) > 0 and δ(0) = δ.


The Model (4)

Setting contracts

• At t = 0, the inventor and the entrepreneur set a contract

about:

- Lump sum transfer F > 0 (or cost F < 0) to be repaid at

t = 2 contingent on the project return via equity share φI .

- The investment size x carried by the entrepreneur at t = 1.

• At t = 0, the entrepreneur and the investor set a contract

about:

- Credit E borrowed by the entrepreneur to be repaid at t = 2

contingent on the project return: φE .

• Rule out direct bargaining between inventor and investor.


The Model (5)

Inventor’s perspective

max{F ,φI ,φE ,C ,E ,x}

ΠI = φIpHR(x) + (W − F )β− CR(x)

s.t x ≤ E + F (1)

φEpHR(x) ≥ E (2)

pH(1− φI − φE )R(x) ≥ 0 (3)

(pH − pL)(1− φI − φE )R(x) ≥ (1− γ)δ(C )R(x) (4)

(pH − pL)φIR(x) ≥ CR(x) (5)

In equilibrium:

• All constraints but (3) are binding.Antras et al. MNCs, FDIs and Financial Frictions 9 / 16

Solution

Optimal contracts characterization

Given risk neutrality and payoff structure, optimal contracts are

s.t. payoffs at t = 2 can be expressed as shares (φE , φI ) of the

project return.

• If R(x) > 0, the agent becomes an equity holder of the

entrepreneur production facility.

• Proposition 1: Inventor’s equity shares are decreasing in γ.

- Corollary: ∃ a threshold γ∗ s.t. FDI take place only if

γ < γ∗. Otherwise we have an arm’s length transfer.

• Proposition 2: Output and cash flow in F are increasing in γ.

• Proposition 3: The share of inventor’s financing of

entrepreneur’s project(Fx

)is decreasing in γ.


Empirical Testing

LPM and conditional logit specification

• Use a firm-level annual panel data about MNCs in the US

from 1982 to 1999 Data .

• Include fix effects to control for some model parameters.

• Corollary of proposition 1 if confirmed Table 1 .

• Proposition 2 if confirmed Table 2 .

• Proposition 3 if confirmed Table 3 .


Conclusions

• Market capital development and investor protection are

key to explain the patterns of MNCs and FDIs.

• MNCs and FDIs endogenously arise due to monitoring issues

in a world with imperfect information and incomplete financial

markets.

• First trial of connecting the macro-literature about capital

flows and the micro-literature about multinational enterprises.


Data Back


Data Back

Evidence on liberalization of ownership restriction events


Data Back


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