Brexit (Probability) and Effects on Financial Market Stability
Thomas Krause, Felix Noth, Lena Tonzer
IWH Online,
No. 5,
2016
Abstract
On 23 June 2016, there will be a referendum in the United Kingdom (UK) on the stay of the country in the European Union (EU). Based on recent poll data, the share of supporters and opponents of an exit varies around 50%. Opponents of the UK breaking up with Brussels („Brexit“) refer to high costs in terms of stagnating economic growth if the UK leaves the EU. The risk of reduced trade, declining foreign direct investment, and a lower degree of financial market integration is high following an exit of the “single market”.
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Asymmetric Investment Responses to Firm-specific Uncertainty
Julian Berner, Manuel Buchholz, Lena Tonzer
Abstract
This paper analyzes how firm-specific uncertainty affects firms’ propensity to invest. We measure firm-specific uncertainty as firms’ absolute forecast errors derived from survey data of German manufacturing firms over 2007–2011. In line with the literature, our empirical findings reveal a negative impact of firm-specific uncertainty on investment. However, further results show that the investment response is asymmetric, depending on the size and direction of the forecast error. The investment propensity declines significantly if the realized situation is worse than expected. However, firms do not adjust their investment if the realized situation is better than expected, which suggests that the uncertainty effect counteracts the positive effect due to unexpectedly favorable business conditions. This can be one explanation behind the phenomenon of slow recovery in the aftermath of financial crises. Additional results show that the forecast error is highly concurrent with an ex-ante measure of firm-specific uncertainty we obtain from the survey data. Furthermore, the effect of firm-specific uncertainty is enforced for firms that face a tighter financing situation.
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To Separate or not to Separate Investment from Commercial Banking? An Empirical Analysis of Attention Distortion under Multiple Tasks
Reint E. Gropp, K. Park
IWH Discussion Papers,
No. 2,
2016
Abstract
In the wake of the 2008/2009 financial crisis, a number of policy reports (Vickers, Liikanen, Volcker) proposed to separate investment banking from commercial banking to increase financial stability. This paper empirically examines one theoretical justification for these proposals, namely attention distortion under multiple tasks as in Holmstrom and Milgrom (1991). Universal banks can be viewed as combining two different tasks (investment banking and commercial banking) in the same organization. We estimate pay-performance sensitivities for different segments within universal banks and for pure investment and commercial banks. We show that the pay-performance sensitivity is higher in investment banking than in commercial banking, no matter whether it is organized as part of a universal bank or in a separate institution. Next, the paper shows that relative pay-performance sensitivities of investment and commercial banking are negatively related to the quality of the loan portfolio in universal banks. Depending on the specification, we obtain a reduction in problem loans when investment banking is removed from commercial banks of up to 12 percent. We interpret the evidence to imply that the higher pay-performance sensitivity in investment banking directs the attention of managers away from commercial banking within universal banks, consistent with Holmstrom and Milgrom (1991). Separation of investment banking and commercial banking may indeed be associated with a reduction in risk in commercial banking.
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Foreign Direct Investment: The Role of Institutional and Cultural Determinants
Stefan Eichler, N. Lucke
Applied Economics,
No. 11,
2016
Abstract
Using panel data for 29 source and 65 host countries in the period 1995–2009, we examine the determinants of bilateral FDI stocks, focusing on institutional and cultural factors. The results reveal that institutional and cultural distance is important and that FDI has a predominantly regional aspect. FDI to developing countries is positively affected by better institutions in the host country, while foreign investors prefer to invest in developed countries that are more corrupt and politically unstable compared to home. The results indicate that foreign investors prefer to invest in countries with less diverse societies than their own.
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Do Manufacturing Firms Benefit from Services FDI? – Evidence from Six New EU Member States
J. Damijan, Crt Kostevc, Philipp Marek, Matija Rojec
IWH Discussion Papers,
No. 5,
2015
Abstract
This paper focuses on the effect of foreign presence in the services sector on the productivity growth of downstream customers in the manufacturing sector in six EU new member countries in the course of their accession to the European Union. For this purpose, the analysis combines firm-level information, data on economic structures and annual national input-output tables. The findings suggest that services FDI may enhance productivity of manufacturing firms in Central and Eastern European (CEE) countries through vertical forward spillovers, and thereby contribute to their competitiveness. The consideration of firm characteristics shows that the magnitude of spillover effects depends on size, ownership structure, and initial productivity level of downstream firms as well as on the diverging technological intensity across sector on the supply and demand side. The results suggest that services FDI foster productivity of domestic rather than foreign controlled firms in the host economy. For the period between 2003 and 2008, the findings suggest that the increasing share of services provided by foreign affiliates enhanced the productivity growth of domestic firms in manufacturing by 0.16%. Furthermore, the firms’ absorptive capability and the size reduce the spillover effect of services FDI on the productivity of manufacturing firms. A sectoral distinction shows that firms at the end of the value chain experience a larger productivity growth through services FDI, whereas the aggregate positive effect seems to be driven by FDI in energy supply. This does not hold for science-based industries, which are spurred by foreign presence in knowledge-intensive business services.
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Corporate Governance Structures and Financial Constraints in Multinational Enterprises – An Analysis in Selected European Transition Economies on the Basis of the IWH FDI Micro Database 2013 –
Andrea Gauselmann, Felix Noth
IWH Discussion Papers,
No. 3,
2015
Abstract
In our analysis, we consider the distribution of decision power over financing and investment between MNEs’ headquarters and foreign subsidiaries and its influence on the foreign affiliates’ financial restrictions. Our research results show that headquarters of multinational enterprises have not (yet) moved much decision power to their foreign subsidiaries at all. We use data from the IWH FDI Micro Database which contains information on corporate governance structures and financial restrictions of 609 enterprises with a foreign investor in Hungary, Poland, the Czech Republic, Slovakia, Romania and East Germany. We match data from Bureau van Dijk’s AMADEUS database on financial characteristics. We find that a high concentration of decision power within the MNE’s headquarter implicates high financial restrictions within the subsidiary. Square term results show, however, that the effect of financial constraints within the subsidiary decreases and finally turns insignificant when decision power moves from headquarter to subsidiary. Thus, economic policy should encourage foreign investors in the case of foreign acquisition of local enterprises to leave decision power within the enterprise and in the case of Greenfield investment to provide the newly established subsidiaries with as much power over corporate governance structures as possible.
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Post-transition Regions as Locations for Foreign Direct Investment of Multinational Enterprises
Andrea Gauselmann
Hochschulschrift, Juristische und Wirtschaftswissenschaftliche Fakultät der Martin-Luther-Universität Halle-Wittenberg,
2014
Abstract
Multinationale Unternehmen investieren im Ausland, um von standortspezifischen Vorteilen zu profitieren und ihre eigene Wettbewerbsfähigkeit zu verbesser. Gleichzeitig tragen sie zu einer Steigerung der Produktivität und einem wirtschaftlichen Aufholprozess am ausländischen Standort bei. Sie fungieren in diesem Sinne als Treiber für technologische und wirtschaftliche Entwicklung. Das Ziel der Dissertation ist es, einen Beitrag zur aktuellen Forschung zu leisten, indem untersucht wird, durch welche Determinanten ausländische Investoren bei der Standortwahl in den europäischen Post-Transformationsregionen beeinflusst werden, welche Motive sie bei ihrer Investition verfolgen, wie sie die Qualität der Standortfaktoren vor Ort beurteilen und unter welchen Bedingungen ein Austausch von Wissen und Technologie zwischen den ausländischen Tochterunternehmen und den Akteuren der einheimischen Wirtschaft stattfindet.
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Determinants of Knowledge Exchange Between Foreign and Domestic Enterprises in European Post-transition Economies
Andrea Gauselmann
Journal Economia e Politica Industriale (Journal of Industrial and Business Economics),
No. 4,
2014
Abstract
The aim of this paper is to contribute to the literature on internationalised research and development by investigating determinants of knowledge and technology transfer between foreign subsidiaries and the local economy in European post-transition economies. This inquiry leads to a better understanding of determinants that influence this knowledge and technology exchange. Applying a logit model, we find that, in particular, the foreign subsidiary’s corporate governance structure, its embeddedness in the multinational enterprise’s internal knowledge base, its own technological capacity, the growth of the regional knowledge stock and the regional sectoral diversification are all positively associated with the transfer of knowledge. Subsidiaries’ investment motives and the relative weight of the sector of investment in the region’s economy appear to be of less importance. The analysis focuses on European post-transition economies, using the example of five selected Central Eastern European countries and East Germany. We exploit a unique dataset, the IWH FDI Micro database, which contains information on one thousand two hundred forty-five foreign subsidiaries in this region.
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The Regional Distribution of Foreign Investment in Russia: Are Russians more Appealing to Multinationals as Consumers or as Natural Resource Holders?
K. Gonchar, Philipp Marek
Economics of Transition and Institutional Change,
No. 4,
2014
Abstract
This article conducts a plant-level study of the factors affecting foreign direct investment (FDI) inflow to a large opening economy endowed with specific factor advantages. We conclude that the distribution of FDI in Russian regions depends on market access and can be most notably described by the knowledge-capital framework. Factor endowments built by natural resources are more successful in explaining the location decisions of export–platform affiliates. The impact of natural resources depends on how the availability of these resources is measured. The results reject the crowding out effects of resource FDI and prove co-location mode, when service investments are attracted to resource-rich regions. Labour cost advantages better explain the preferences of non-trading service affiliates.
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