The recent comeback 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. What are some unintended consequences of trade barriers in strategic economic sectors? I study the anti-dumping and countervailing Duties (AD-CVD) implemented by the Obama Administration in 2012 against the imports of solar panels from China. Leveraging the variation given by the policy's discriminatory nature, which assigns differential rates to Chinese firms in the same industry, I 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 for greenfield investment do not carry over to cross-border mergers and acquisitions. I find a reduction in the number of projects of 50% in 2013 and 2014. I use location choice models to test different hypotheses for FDI location. I find evidence of production fragmentation in Asia after the imposition of the duties, mostly to countries that end up becoming exporters of solar panels to the US, showing support for the export-platform hypothesis. 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 doesn't flow from rich to poor countries is a relevant but not at all new question. As such it has gotten many answers since it was first posted by Lucas in 1990. The literature has shown that institutional quality is a key factor in explaining this paradox. But how do investors find out about the quality of a country's institutions? Investor-State Dispute Settlement (ISDS), an institutional arrangement present in Bilateral Investment Treaties (BITs), should work as a mechanism where institutional quality gets revealed. Having a ''case" would imply a negative reputational shock and the country's future foreign direct investment (FDI) should diminish, even more if the country loses it. Since most disputes occur in the context of a BIT, which functions as a commitment device, the overall result should also include this effect. I test this hypothesis and identify both the reputational and the 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 by the commitment device effect that increases these flows by USD 95 million. My analysis of heterogeneous effects shows that negative results are driven by a subsample of countries with a large history of disputes. This shows that the 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.