IDEAS home Printed from https://ideas.repec.org/a/bla/ecopol/v33y2021i2p209-243.html
   My bibliography  Save this article

The price of doing business: Why replaceable foreign firms get worse government treatment

Author

Listed:
  • Leslie Johns
  • Rachel L. Wellhausen

Abstract

We argue that a host government treats foreign firms better if those foreign firms have fewer replacements. We identify a key structural determinant of replaceability: the startup costs that foreign firms must incur to begin production. Since the host government can only take from foreign firms that actually produce in its market, it must treat foreign firms better when their startup costs are high, lest the government drive all foreign firms out. Our theoretical model applies contemporary trade theory to foreign direct investment and provides insights about the understudied relationship between foreign and domestic firms. Most importantly, it endogenizes market entry and exit, establishing the importance of entry despite scholars' long‐time focus on exit. Our analysis uses cross‐national firm‐level data on taxes and production outcomes, and we provide a new industry‐level measure of government treatment of foreign firms.

Suggested Citation

  • Leslie Johns & Rachel L. Wellhausen, 2021. "The price of doing business: Why replaceable foreign firms get worse government treatment," Economics and Politics, Wiley Blackwell, vol. 33(2), pages 209-243, July.
    • Handle: RePEc:bla:ecopol:v:33:y:2021:i:2:p:209-243
    DOI: 10.1111/ecpo.12172
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/ecpo.12172
    Download Restriction: no
    File URL: https://libkey.io/10.1111/ecpo.12172?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Grossman, Gene M & Helpman, Elhanan, 1994. "Protection for Sale," American Economic Review, American Economic Association, vol. 84(4), pages 833-850, September.
    2. Thomas Chaney, 2008. "Distorted Gravity: The Intensive and Extensive Margins of International Trade," American Economic Review, American Economic Association, vol. 98(4), pages 1707-1721, September.
    3. repec:hal:spmain:info:hdl:2441/6apm7lruv088iagm4rv2c33jtg is not listed on IDEAS
    4. Nathan Jensen & Edmund Malesky & Matthew Walsh, 2015. "Competing for global capital or local voters? The politics of business location incentives," Public Choice, Springer, vol. 164(3), pages 331-356, September.
    5. Melitz, Marc J. & Redding, Stephen J., 2014. "Heterogeneous Firms and Trade," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 1-54, Elsevier.
    6. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-959, December.
    7. Wellhausen, Rachel L., 2019. "International Investment Law and Foreign Direct Reinvestment," International Organization, Cambridge University Press, vol. 73(4), pages 839-858, October.
    8. Gopinath, G. & Helpman, . & Rogoff, K. (ed.), 2014. "Handbook of International Economics," Handbook of International Economics, Elsevier, edition 1, volume 4, number 4.
    9. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    10. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March.
    11. Thomas Chaney, 2008. "Distorted Gravity: The Intensive and Extensive Margins of International Trade," Post-Print hal-03579844, HAL.
    12. Quintin H. Beazer & Daniel J. Blake, 2018. "The Conditional Nature of Political Risk: How Home Institutions Influence the Location of Foreign Direct Investment," American Journal of Political Science, John Wiley & Sons, vol. 62(2), pages 470-485, April.
    13. Johns, Leslie & Wellhausen, Rachel L., 2016. "Under One Roof: Supply Chains and the Protection of Foreign Investment," American Political Science Review, Cambridge University Press, vol. 110(1), pages 31-51, February.
    14. Wellhausen, Rachel L., 2013. "Innovation in Tow: R&D FDI and investment incentives," Business and Politics, Cambridge University Press, vol. 15(4), pages 467-491, December.
    15. Joshua D. Angrist & Jörn-Steffen Pischke, 2009. "Mostly Harmless Econometrics: An Empiricist's Companion," Economics Books, Princeton University Press, edition 1, number 8769.
    16. Glen Biglaiser & Hoon Lee & Joseph Staats, 2016. "The effects of the IMF on expropriation of foreign firms," The Review of International Organizations, Springer, vol. 11(1), pages 1-23, March.
    17. Nan Jia & Kyle J. Mayer, 2017. "Political hazards and firms' geographic concentration," Strategic Management Journal, Wiley Blackwell, vol. 38(2), pages 203-231, February.
    18. Voeten, Erik, 2001. "Outside Options and the Logic of Security Council Action," American Political Science Review, Cambridge University Press, vol. 95(4), pages 845-858, December.
    19. Renáta Kosová, 2010. "Do Foreign Firms Crowd Out Domestic Firms? Evidence from the Czech Republic," The Review of Economics and Statistics, MIT Press, vol. 92(4), pages 861-881, November.
    20. Pinto,Pablo M., 2013. "Partisan Investment in the Global Economy," Cambridge Books, Cambridge University Press, number 9781107617360.
    21. Pinto,Pablo M., 2013. "Partisan Investment in the Global Economy," Cambridge Books, Cambridge University Press, number 9781107019102.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gouel, Christophe & Jean, Sébastien, 2023. "Love of variety and gains from trade," European Economic Review, Elsevier, vol. 158(C).
    2. Mrázová, Monika & Neary, J. Peter, 2020. "IO for exports(s)," International Journal of Industrial Organization, Elsevier, vol. 70(C).
    3. Cheng-wei Chang & Ching-chong Lai & Ting-wei Lai, 2020. "Fiscal stimulus in a simple macroeconomic model of monopolistic competition with firm heterogeneity," The Japanese Economic Review, Springer, vol. 71(3), pages 447-477, July.
    4. Redding, Stephen & Weinstein, David, 2017. "Aggregating From Micro to Macro Patterns of Trade," CEPR Discussion Papers 12446, C.E.P.R. Discussion Papers.
    5. Kox, Henk L.M., 2022. "A micro-macro model of foreign direct investment: knowledge-based gravity forces, self-selection and third-country effects," MPRA Paper 115542, University Library of Munich, Germany.
    6. Andrei A. Levchenko & Julian di Giovanni, 2009. "International Trade and Aggregate Fluctuations in Granular Economies," 2009 Meeting Papers 491, Society for Economic Dynamics.
    7. Yoto V. Yotov, 2021. "The Variation of Gravity within Countries (or 15 Reasons Why Gravity Should Be Estimated with Domestic Trade Flows)," CESifo Working Paper Series 9057, CESifo.
    8. Stephen J. Redding & David E. Weinstein, 2018. "Accounting for Trade Patterns," Working Papers 2018-10, Princeton University. Economics Department..
    9. Ziran Ding, 2022. "Firm heterogeneity, variable markups, and multinational production: A review from trade policy perspective," Journal of Economic Surveys, Wiley Blackwell, vol. 36(5), pages 1311-1357, December.
    10. Melitz, Marc J. & Redding, Stephen J., 2014. "Heterogeneous Firms and Trade," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 1-54, Elsevier.
    11. Antrà s, Pol & Yeaple, Stephen R., 2014. "Multinational Firms and the Structure of International Trade," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 55-130, Elsevier.
    12. Wolszczak-Derlacz Joanna, 2018. "The Analysis of Firms’ Involvement in Internationalisation And Determinants of its Intensity – An Analysis For Developing and Post-Transition Economies," Economics and Business Review, Sciendo, vol. 4(1), pages 44-63, April.
    13. Ignacio Rosal, 2018. "Power laws in EU country exports," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 45(2), pages 311-337, May.
    14. Anders Akerman, 2018. "A theory on the role of wholesalers in international trade based on economies of scope," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 51(1), pages 156-185, February.
    15. Ariel Burstein & Javier Cravino, 2015. "Measured Aggregate Gains from International Trade," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(2), pages 181-218, April.
    16. Kohl, Miriam, 2020. "Redistribution, selection, and trade," Journal of International Economics, Elsevier, vol. 122(C).
    17. Yoto V. Yotov, 2022. "On the role of domestic trade flows for estimating the gravity model of trade," Contemporary Economic Policy, Western Economic Association International, vol. 40(3), pages 526-540, July.
    18. Erhardt, Katharina, 2017. "On home market effects and firm heterogeneity," European Economic Review, Elsevier, vol. 98(C), pages 316-340.
    19. Ian M. Sheldon, 2021. "Reflections on a Career as an Industrial Organization and International Economist," Applied Economic Perspectives and Policy, John Wiley & Sons, vol. 43(2), pages 468-499, June.
    20. Andrew B. Bernard & J. Bradford Jensen & Stephen J. Redding & Peter K. Schott, 2018. "Global Firms," Journal of Economic Literature, American Economic Association, vol. 56(2), pages 565-619, June.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:ecopol:v:33:y:2021:i:2:p:209-243. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0954-1985 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.