Centralized decision strategy in ownership investments and export policy

Abstract

AbstractThis research explores the optimal export policy of a domestic industry characterized by numerous multinational enterprises (MNEs) co-existing with cross-border ownership investments in foreign firms and exports to a foreign country. We demonstrate that the optimal export policy depends on whether MNEs make centralized or decentralized decisions in ownership investments. With decentralized decision-making, the optimal export policy can be either a subsidy or a tax, while with centralized decision-making, it is a tax. Furthermore, we examine how the optimal trade policy responds to the optimal strategy of centralized decision-making by MNEs. Our results show that under certain circumstances, the optimal trade policy is an export subsidy, and MNEs prefer to voluntarily relinquish centralized decision-making, even when they have the option to control the production levels of foreign partner firms.KEYWORDS: Centralized decisiondecentralized decisioncross-border ownershipstrategic trade policyJEL classifications: F12F13F23 Disclosure statementNo potential conflict of interest was reported by the author(s).FundingWe are grateful to seminar participants at NTU TradeWorkshop for their valuable comments, leading to substantial improvements of this paper. The usual disclaimer applies.Notes1 Please see the website for the more details: https://asia.nikkei.com/NAR/Articles/China-s-Geely-Group-Acquires-9.7-Stake-In-Daimler-Via-Open-Market-Purchases.2 Farrell and Shapiro (Citation1990) analyze horizontal mergers in a Cournot oligopoly, Gilo, Moshe, and Spiegel (Citation2006) spotlight the importance of asymmetric costs, Ishikawa, Sugita, and Zhao (Citation2009) take technology transfer into account, and Cho, Kim, and Lee (Citation2022) consider a free licensing strategy with passive ownership and investigate the interaction with an ex-post privatization policy.3 Please refer to Kawabata (Citation2010), Ghosh and Saha (Citation2015), Fanti and Buccella (Citation2016), Choi, Lee, and Lim (Citation2017), Tsao et al. (Citation2019), etc.4 There are several papers that employ a similar definition of financial interest, referring to the right to receive the stream of profits generated by the firm from its operations and investments, such as Das (Citation1997), Wang and Wang (Citation2011), and Cho, Kim, and Lee (Citation2022).5 Spencer and Jones (Citation1991; Citation1992) look at trade policies in a vertically-related market from the viewpoint of importing and exporting countries, respectively, noting that the policy implication may not be the same.6 If the two goods are homogeneous, then a domestic MNE will stop either exports or CBO investment.7 We have xh∗=−(1−r)(m+n)−(1−rk)−s(m+n+1)−n[(2−r2k)+(m+n)(1−r2)]−(m+1)>0 and yh∗=yf∗=rn(1+s)−(n+1)−n[(2−r2k)+(m+n)(1−r2)]−(m+1),where yh∗>0 if r≤r¯≡n+1n(1+s) for any s.8 The first two terms of the foreign ownership effect in (6) also imply the cannibalization between the good produced by an MNE and the good produced by its partner firm. However, such internal cannibalization is fuelled by shareholding. Therefore, we define these two terms as the components of the foreign ownership effect.9 We define ds/dk=G(r,k,m,n). We have G = 0 when r = 0 or r = 1 for any (k, n, m). Since (dG/dr)|r = 0 > 0 and (dG/dr)|r = 1 < 0 for any n and m, this shows that G is always positive when r ∈ [0,1). Therefore, we have ds∗/dk > 0.10 We are very grateful to a reviewer for raising this point.11 For more details, please refer to the on-line appendix.