Essays on Foreign Direct Investment and International Business Cycles.

Abstract

This dissertation studies two topics. First, a thorough analysis of the investment strategies of multinational firms is conducted. Empirical relationships that govern the evolution of foreign equity participation at the firm level are provided, followed by a theoretical model to explain these relationships. Econometric estimations evidence how equity participation affects firm performance. Second, the role of trade in capital goods in international business cycles is investigated. Empirical facts that describe the relationship between key business cycle variables are documented for a group of emerging market economies. Existing models are revised to capture the empirical observations.

Multinational enterprises (MNEs) are often confronted with the question of what degree of ownership they should assume at subsidiaries. Chapter 1 uses detailed plant-level data from Turkey to show that MNEs typically engage in partial integration. It then lays out a theoretical model to capture the evidence presented and provides a consistent test of the theory using econometric models. The theory highlights the role of joint productivities between MNEs and domestic suppliers and predicts that MNEs will choose to hold a higher share of equity when revealed productivity is higher.

Chapter 2 examines the relationship between foreign equity participation and average plant wages. An econometric result is presented to demonstrate the bias that arises when traditional practice in the literature is followed. Nonparametric methods are employed to show that the true relationship between foreign ownership and average wages is linear. A ten percent increase in foreign equity participation is found to increase the average wage of a non-production worker by four percent.

Chapter 3, co-authored with Jing Zhang, documents the relation between key business cycle variables in a set of emerging and developed economies. The real exchange rate is found to be much more procyclical in emerging economies. Exports are highly procyclical in developed economies, but acyclical in emerging economies. A two-country stochastic growth model with a tradable investment goods sector is developed to explain the empirical findings. Home bias in capital plays a crucial role in the model, which replicates the business cycle characteristics in both sets of economies.