Protection from Foreign Direct Investment: Domestic Producers, Market Structure, and Mode of Entry

Abstract

This dissertation investigates the policy preferences of domestic producers who are seeking protection from foreign multinational corporations (MNCs) in their home market. By focusing on the policy demands of domestic producers, this dissertation aims to explain the variation in inward foreign direct investment (FDI) regulations across industries within a country. I argue that industry features and FDI market entry strategies, both of which contribute to a disruption of the market equilibrium, have critical roles in shaping domestic producers’ attitudes toward restrictions on inward FDI. I provide evidence of this theory in the following Chapters. In Chapter 2, I demonstrate how industry features define the degree of market competition and affect domestic firms' preferences regarding inward FDI. I propose that economies of scale are decisive in shaping domestic producers’ attitudes toward restrictions on FDI. Industries with high internal economies of scale are likely to pressure their government to impose higher restrictions on inbound FDI to avoid fierce new competition; industries with high external economies of scale are more likely to welcome FDI to consolidate their country as a production hub. I develop these insights in a formal model of the endogenous barriers to foreign investments and examine data on barriers to FDI across different industries in 36 OECD countries. I include evidence for both patterns, as economies of scale are a significant industrial feature for understanding the variation in barriers to FDI across industries and countries. In Chapter 3, I provide evidence that FDI market entry modes are also important in shaping the preferences of domestic producers regarding inward FDI. Domestic firms are favorable to cross-border mergers and acquisitions (M&As) deals because M&As often involve no new entries or significant technology and information spillovers. However, these firms oppose greenfield investment projects that bring new, large-scale entries without positive spillover effects. By examining the FDI Regulatory Restrictiveness Index of OECD countries, I find that industries with higher share of greenfield investments have stricter FDI regulation compared to industries with higher share of cross-border M&As. Finally, in Chapter 4, I present evidence that governments actively utilize policy tools to protect domestic producers from foreign MNCs. I argue that domestic firms and industries seek insulation, similar to international trade, from profit-lowering international competition by securing restrictions on M&As by foreign firms. Because of limits on overt restrictions of FDIs, potential host governments are incentivized to employ subtler forms of restrictions. I focus on two main types of regulations that govern M&A activities: competition policies and national security reviews. I present that both types of regulations discourage cross-border M&As led by foreign global parents more substantially than cross-border M&As led by domestic global parents. Collectively, these chapters indicate that industry features and FDI entry modes are critical factors that shape domestic producers’ preferences over FDI regulation policies. This research directly reflects the rise of protectionism in contemporary international relations. While inward FDI regulations have been subtle in developed countries, the intensifying security competition between the United States and China as well as the global competition for high-tech leadership have caused countries to begin to adopt barriers against inward FDI. Although these barriers may benefit the domestic national champion firms in the short run, preventing fair competition between domestic and foreign firms may hinder economic growth and contribute to global economic disorder.