Essays on foreign direct investments, imperfectly competitive market and political assets.

Abstract

Although the advantages of foreign direct investments (FDIs) have been widely acknowledged, host governments often pursue restrictive policies, such as free trade zones (FTZs), Negative List (prohibiting entry into the listed sectors) and Prior Approval of entry, towards inflows of foreign capital. This is especially true in less developing countries. The essays in this dissertation explore theoretically and empirically the incentives for host governments to set up foreign investment policies and the impact of these policies on international trade and national welfare. My first essay addresses the motivations of government FTZ policy and the welfare effects based on an imperfect competition analysis. By subsidizing the foreign firms operating in FTZs and requiring their products for exportation, host countries enjoy the benefits brought about by foreign investments, such as higher employment, wage rate and consumption, while at the same time, to protect the domestic firms. The imperfect competition approach also sheds new light on the FTZs' impact on national welfare, since it includes the value of output effect into the welfare analysis. This greatly attributes to the welfare improving argument of FTZ, which is consistent with the empirical regularities. The second essay (co-authored with D. Li) addresses the puzzle that why countries take restrictive policies, such as the Negative List and Prior Approval of entry, toward the inward foreign direct investments. Modeling the lobbying game between contribution- (bribe-) loving politicians and protection needing domestic firms, the paper shows that domestic firms find it harder to lobby for protectionist policies on existing FDI plants than to lobby for protectionist trade policies and therefore pay less political contributions in equilibrium in the former case. Therefore, politicians may choose the import regime in order to obtain more political contributions. My third essay studies the value of political connections by examining four acquisitions made by Chinese companies in Hong Kong infrastructure industries. I investigate the magnitude of Hong Kong stock market reactions to the news announcement of the acquisitions. The stock price jumps of the acquired Hong Kong firms are good measures of the value of political connections, as the Chinese firms do not possess any other intangible assets. The major findings are: (1) The political connections do have values, and they are paid accordingly between the two sides of the transactions. (2) The political connections are perceived more valuable if the acquiring Chinese firm is under control of an economic regulator than that of a non-regulator, or if the acquired Hong Kong firm is economically more integrated with China. (3) The more valuable the market assesses the political connections, the more compensations acquiring Chinese firms get, but at a decreasing percentage of the perceived value of the political assets.