Deep preferential trade agreements (PTAs), domestic institutions, and GVC participation: firm-level evidence

(last presented at ISA 2024 and SWIPE 2024)

There is considerable evidence that trade liberalization has uneven distributional consequences for firms. It is also well-established that institutions can significantly affect  trade and economic development. What has received less attention is the interplay between these two at the firm level and in the context of the globalization of supply chains. I measure GVC participation at the micro- (firms) level and combine it with measures of the deepening of preferential trade integration and the quality of domestic institutions at the macro- (country) levels for 124 countries between 2006 and 2020. Leveraging the differential effect of trade integration on firms with different levels of productivity across different institutional environments, I find that deep trade integration helps productive firms participate more in GVCs when the quality of domestic institutions is good.

What explains the uneven participation of regions in global value chains (GVCs)?

(last presented at McGill U in 2023)

Participation in GVCs offers significant opportunities for regional economic development, particularly in developing countries. Over the past two decades, production has shifted from the global North to the South, enabling these nations to specialize and upgrade industrially without building entire sectors. However, the benefits of GVC participation are unevenly distributed. While some countries have thrived, many others have not, despite favourable policies and advantages. This study aims to understand this uneven participation by examining both micro-level factors (firm and location characteristics) and macro-level factors (institutional quality, trade integration, industrial policies). The project builds a comprehensive dataset by geocoding firm-level survey data and combining it with spatial and household survey data that varies over time and space. It integrates economic geography with trade and development economics, using difference-in-differences and case studies. Preliminary findings suggest that macro factors are essential for GVC integration, but their interaction with micro factors creates location-specific advantages.

The effect of FDI on climate-resilient trade: cross-country evidence (with Amelia Santos-Paulino)

(last presented at CPSA 2024, ISA 2024)

Foreign direct investment (FDI) and international trade are the key drivers of international production and Global Value Chains (GVCs). Despite the significant body of research on the spillover effects of FDI on growth and development, the effect of FDI on climate change in the context of trade in GVCs has received little theoretical and empirical attention. Pioneering works on the relation between trade and environmental policies argued that sound environmental policies in the source country decrease its export of pollution-intensive products (pollution haven effect) and cause the relocation of the “dirty” sector to destination countries with less commitment to environmental standards (pollution haven hypothesis). While these studies successfully provided strong empirical evidence for the PHE, their findings supporting PHH have been less consistent. What is even more lacking is the discussion and a systematic assessment of PHE and PHH in the context of FDI patterns and growing trade in GVCs. This paper attempts to address this gap.  It asks whether GFDI from an investor country increases the pollution-intensive import from the destination country when we take into account partners’ relative positions and the decomposition of trade along the supply chains. The paper uses the data on GVCs, bilateral trade, and bilateral greenfield FDI at the sector level. Preliminary findings point that GFDI from a source to destination country increases the CO2 content of final export from the destination back to source only in specific sectors, for intermediate products, when the investor is located downstream along the supply chains, and over the long term. 

The determinants of the formation of MNC’s supply chain networks (with Mehmet Chakkol, Nigel Driffield, and Nancy Yang, Warwick Business School)

(last presented at APSA 2024)

Supply chain data shows that multinational companies (MNCs) tend to retain one group of suppliers in their supply chain network over several years while replacing or removing other groups. However, systematic evidence and understanding of the determinants of supply chain formations and their performance over time is lacking in business and political economy literature. Our paper aims to address this issue and bridge the gap. We begin by asking what explains MNCs’ choices of including, excluding, and replacing certain foreign firms in their global supply chain networks: Do certain firms qualify as suppliers due to their competitive characteristics, such as productivity and production of customized inputs, as trade theory suggests, or are MNCs’ choices of suppliers driven more by macro-level factors, such as trade policy and geopolitics at large? We build a unique dyadic dataset for large US- and EU-based MNCs and their first-tier global suppliers for seven years. We employ network and statistical analysis to map and examine the determinants of MNCs’ supplier choices. The paper shows that a combination of firm-level characteristics for buyers and suppliers and changes in bilateral trade policy explain why certain firms remain in the supply chain over time while others leave. 

Does Vulnerability to Climate Change Affect FDI Decisions of US Firms? (with Nigel Driffield, Fred Dahlmann, and Ye He, Warwick Business School)

The IPE and business literature have extensively analyzed factors influencing foreign direct investment (FDI) by foreign multinational companies (MNCs), but the role of the natural environment in these decisions has been largely overlooked. Climate change and environmental degradation impact economic activities not less than other country-level factors, posing challenges for businesses and society. While existing studies explore firms' mitigation efforts, research on climate adaptation is nascent. There is a growing call for more research on climate change's direct impacts on state and business strategies and performance, focusing on firms' responses to physical and transition risks. This paper contributes to this emerging area. It investigates how the vulnerability of host countries to climate change influences firms' FDI location decisions. By analyzing firm-level FDI data and recipient countries' climate vulnerability from 2013 to 2021, we examine whether US-based MNCs consider a host country's exposure, sensitivity, and adaptive capacity to climate change alongside political and economic factors. The study's contribution is threefold: it presents new empirical findings on firms incorporating environmental awareness into FDI decisions, expands the concept of “location” to include ecological factors, and provides evidence of firms’ strategic choices in climate adaptation, addressing responses to climate change and extreme weather.

The interaction between FDI policies and international politics and their effect on firms (with Sumon Bhaumik, Nigel Driffield, and Saul Estrin)

We argue that international politics influences both the set of locations available to the multinational enterprises (MNE) and the potential strategies that they can employ in those locations. On this basis, we provide a framework to analyse the policy response in host countries. We view the relationship between a potential inward investor and a host country as a bargain in which outcomes depend on the objectives of both and their outside options: the range of alternatives available. On this basis, we develop and apply a framework through cases to explore the key factors influencing MNEs' FDI strategies based on the home-host technological differences and political alignment of the home and host countries. We use this to consider the investment promotion policies of the latter.