The return of protectionism and industrial policy will affect the international allocation of resources beyond the short run. Analyzing similar events from the past can help us envision their long-lasting effects. I study the anti-dumping and countervailing Duties (AD-CVD) implemented by the Obama Administration in 2012 on the imports of solar panels from China. Due to their differential exposure to US trade policy, Chinese firms are granted different AD-CVD rates. I leverage this variation to develop a difference-in-differences design. I estimate the effect on Foreign Direct Investment (FDI) decisions by Chinese firms using a Poisson Pseudo-Maximum Likelihood method and data on FDI announcements from 2009 to 2015. My findings show that in 2012, targeted firms increase FDI by 145 million dollars per year from a previous average of 9 million dollars. These results are economically more relevant and last longer when considering only the intensive margin effects. However, the main findings for greenfield investment do not carry over to cross-border mergers and acquisitions. I use location choice models to test different hypotheses for FDI location. I find evidence of production fragmentation in Asia after the duties, mostly to countries that become exporters of solar panels to the US. These results document FDI diversion that modifies investment patterns in the short run and eludes the trade barriers in the medium run, weakening the intended effects of the protectionist policy.
with João Albino-Pimentel and Aldo Musacchio
The recent shift in the global economy from openness to trade protectionism challenges international business (IB) practice and theory. We develop a framework in which multinational enterprises face international changes under the World Trade Organization rules and complement it with a resource-based view of IB. We use this framework to analyze unintended consequences on targeted multinational enterprises. We examine the anti-dumping and countervailing duties implemented by the United States on the import of solar panels from China in 2012. Using the Directory of Corporate Affiliations database and a difference-in-differences design, we document how this shock affects Chinese MNEs and how they react. Our findings show that targeted MNEs experience a reduction in their net income and return on assets in the year the policy is implemented. They respond by restructuring their domestic units, increasing the regional dispersion of their foreign subsidiaries, and diversifying their industrial activities. We find large heterogeneity in these groups that conditions their strategic responses and how they adapt to the changing environment. Our results show that US protectionism harms Chinese conglomerates in the short term and that they respond with several strategies to regain financial strength and market preeminence.
Why capital does not flow from rich to poor countries is a classical economic development question that has received many answers since Lucas in 1990. The literature has shown that low institutional quality is the key to explaining this paradox. But how do investors discover the quality of a country’s institutions? In this paper, I analyze the role of Investor-State Dispute Settlement (ISDS), an institutional arrangement that gives foreign direct investors the right to take disputes with host governments to international arbitration, as a mechanism where institutional quality is revealed. Having a “case” is a negative reputational shock that hurts the country’s future foreign direct investment (FDI); the shock is worse if the country loses the case. Since most disputes occur in the context of a Bilateral Investment Treaty (BIT), which functions as a commitment device, the overall result should also include this effect. I test these hypotheses in developing economies and identify the reputational and commitment device effects by estimating a structural gravity equation using a Poisson pseudo maximum likelihood method. Results for my benchmark model show a reputational shock that reduces FDI inflows by USD 20 million one year after a dispute. This is more than compensated for by the commitment device that increases these flows by USD 95 million. My analysis of heterogeneous effects shows that the negative results are driven by a subsample of countries with a large history of disputes. This shows that the ISDS reputational effects are small and that the interaction of the whole set of institutions promotes FDI in developing economies.
with Ishana Ratan
with G. De Melo, N. Castiñeiras, A. Ardente, B. Zelko, F. Araya. Revista Desarrollo y Sociedad, no. 83 (2019): 105-144.
We project the levels of eligibility and gross replacement rates of the pay-as-you-go and individual capitalization pillars in Uruguay. Based on a random sample of worker administrative records, we estimate years of contributions, formal income, and the evolution of the individual savings fund. Our results suggest that while 51% would be eligible for retirement at age 60, 28% would not be able to retire from the contributory system even at age seventy. We expect that 34% of those retiring at age 60 will receive a minimum pension while the replacement rate is estimated to be 52% relative to the previous year’s wage. We conclude that Uruguay still faces challenges regarding individuals’ density of contributions and amounts declared as both reduce eligibility levels and impose financial pressure on the pay-as-you-go pillar.