MarketAccessandTechnology
AdoptioninthePresenceofFDI
HiroshiMUKUNOKI
GakushuinUniv.
RIETIConference,Jan.28,2013
1
Introduction
• Background
• Theincreasedcontributionofdevelopingcountriesto
bothworldexports 24.2%in1990 42.8%in2011 andoutwardFDIs 4.9%in1990 22.6%in2011 .
• Theimprovedaccessforthosecountriestoforeign
markets!
• Aresearchquestion
• Doesimprovedmarketaccessdrivethetechnological
upgradingofexportingandFDIfirms?
2
Introduction
Theexistingempiricalstudies:
Tradeliberalization
 LileevaandTrefler 2010 :moreproductinnovationandhigher
rateoftechnologyadoption.
 Bustos 2011 :adoptionofmoreadvancedtechnology.
 Aw,Roberts,Xu 2011 :moreinvestmentsinR&D.
OutwardFDIs
 KimuraandKiyota 2006 :thepositiveimpactonproductivity.
 Hijzen,Inui,andTodo 2007 :nosignificanteffect.
 BitzerandGorg 2009 :negative effect.
 BarbaNavaretti,etal. 2010 :positiveeffectonItalianfirms,but
nosignificanteffectonFrenchfirms.
Theempiricalresultsaremixed.
3
Introduction
Theproductivityeffectofimprovedmarketaccesswould
dependonthefirms’choicesbetweenexportingandFDI.
 Therehavebeenlimitedanalysesofhowimprovedmarket
accessaffectsfirm’stechnologychoices,giventhatfirms’
supplymodesareendogenouslydetermined.
e.g.,Saggi 1999 ,PetitandSanna‐Randaccio 2000 ,Xie 2011 .
Thispapertriestoprovideanewinsightintothe
literaturebyusingasimpleoligopolymodel.
 Theeffectsofimprovedmarketaccessareexaminedin
termsofbothtradeliberalizationandliberalizationofFDI.
4
Introduction
A quickpreviewofthemodel
• Afirm’stechnologychoiceisanalyzedinasimpledynamic
modeloftechnologyadoption.
• Twoforeignfirmsproducethesamegoodandsupply
themtothedomesticmarket.
• Oneofthetwoforeignfirmshasnotadoptedanadvanced
technologyanddeterminesthetimingoftechnology
adoption.
• Thecostoftechnologyadoptionexogenouslydeclines
overtime.
• Thereareno technologicalspillovers.
Ourfocusisimprovedmarket access,notimproved
accesstosuperiortechnologyorknowledge.
5
Introduction
Thefeaturesofthemodel
Adynamicset‐uphassomeadvantagesoverastaticmodelof
tradeandFDIwithendogenousR&D.
① Bothexanteandexpost locationchoicesaffecttechnology
upgrading.
Saggi 1999 ,Petit&Sanna‐Randaccio 2000 ,Xie 2011
Exante
locations
Thispaper
Production
Technology
Helpman,Melitz,Yeaple 2004
Expost
locations
6
Introduction
Thefeaturesofthemodel
② Wecanexplorenotonlywhetherimprovedmarketaccess
enhancestechnologyadoption,butalsowhetheritspeeds
up thetimingoftechnologyadoption.
 Evenifanewtechnologywouldbeadoptedinthelong
run,governments’policiesmaychangethespeedwith
whichfirmsadoptit.
③ Adynamicmodelallowsustoconsidertime‐dependent
policiessuchastemporaryimportprotectionsor
conditionalprotections.
cf.MiyagiwaandOhno 1995
7
Introduction
MainResults Asingleforeignfirm
Two foreignfirms
Liberalization ofFDI
speedsupTA.
eitherspeedsupordelaysTA.
The fastesttimingof
TAisrealizedwhen
thefixed costforFDIis
sufficientlylow.
thefixed costforFDIisnotso
lowandnotsohigh.
Tradeliberalization
Thefastesttimingof
TAisrealizedwhen
eitherspeedsupordelaysTA
tariffiseliminatedboth
beforeandafterTA.
tariff isnotsolowandnotso
high.
TA:TechnologyAdoption
Strategicinteractionamongfirmsinlocationchoiceschanges
theeffectsofimprovedmarketaccessontechnologyadoption.
8
Introduction
Relatedpapers
Endogenoustechnologyadoptioninthecontextofinternational
trade.
• MiyagiwaandOhno 1995 :Temporaryprotection.
• Crowley 2006 :Safeguardandantidumping.
• EderingtonandMcCalman 2008,2009
:Endogenousfirmheterogeneity.
• Mukunoki 2012 :Preferentialtradeagreements.
Noneofthemhasinvestigatedtechnologyadoptionofaforeign
firmwhenitslocationisendogenouslydetermined.
cf.MiyagiwaandOhno 1995 :Technologyadoptionofthe
domesticfirm inthepresenceofaforeignfirm’sFDI.
9
Themodelwithasingleforeignfirm
Choosingthetimingof
technologyadoption
FirmX
Thedomesticcountry
Tariff
Consumers
Exporting
HorizontalFDI
FirmX
Fixedcost
10
Themodelwithasingleforeignfirm
• Nodomesticfirmsinthedomesticcountry.
• Timeisacontinuousvariabledefinedon.
• TheFirmX’sinstantaneousprofitfromsellingthegood:
• FirmXhasnotadopteda newtechnologybyand
itsunitcostofproductionisgivenby.
• Thenewtechnologyreducestheunitcostto.
11
Themodelwithasingleforeignfirm
• AtechnologyadoptionismodeledbasedonReinganum
1981 andFudenbergandTirole 1985 .
•
:Aone‐timefixedcostincurredtoFirmXifitadoptsthe
newtechnologyattimet.
• Thefixedcostisdecreasingin.
•
for.
• Thefixedcosthitsthelowerboundat.
•
andfor.
12
Theequilibrium
Stage3:Productmarket
• Theequilibriuminstantaneousprofitisgivenby
Stage2:ChoicebetweenexportingandFDI
• FDIincursthefixedcostperperiod.
• FirmX’scurrentchoicedoesnotaffectthefutureprofits.
 Themaximizationofinstantaneousprofitineachperiodis
consistentwiththeintertemporalprofitmaximization.
• TheoperatingprofitunderFDI:
• ThegainsfromundertakingFDI:
13
Figure1:ChoicebetweenexportingandFDI
(Asingleforeignfirm)
Pre‐adoptionchoice
Post‐adoptionchoice
E :Export
I :FDI
14
Theequilibrium
Stage1:Technologyadoption
• Thepre‐adoptionprofit independentof :
• Thepost‐adoptionprofit independentof :
• T :thetimingoftechnologyadoption.
• ThediscountedsumofFirmX’sprofits:
• BydifferentiatingthisequationwithrespecttoT ,wehave
• Thenewtechnologyisneveradoptedifholds.
15
Theequilibrium
Stage1:Technologyadoption cont’d
• IfFirmXadoptsthenewtechnologyatsomepointintime,
theoptimaltimingoftechnologyadoption,,isdetermined
by
• LHS themarginalgains :
Byadoptingthenewtechnologyatthecurrentperiod,FirmX
canearnhigherprofit.
• RHS themarginalcost :
Bypostponingthetechnologyadoptionuntilthenextperiod,
FirmXsaves
astheinterestrate,andalsogainsfromthe
declineintheadoptioncostby
.
16
Figure2:Theoptimaltimingoftechnologyadoption
17
Thecomparisonofgainsfromtechnologyadoption
Region
The equilibrium
location
1
2
3
 InRegion2,FirmX’stechnologyadoptiontriggersitsFDI.
18
Theeffectsoftradeliberalization
andliberalizationofFDI
E :Export
I :FDI
19
Figure3:LiberalizationofFDI
(ASingleForeignFirm)
20
Results
Proposition1
Giventhetarifflevel:
LiberalizationofFDIneverdelaystheequilibrium
timingoftheforeignfirm'stechnologyadoption.
Thefastesttimingoftechnologyadoptionisrealized
whenF reachesthelevelwithwhichFirmXalways
undertakesFDI.
21
Figure4:TradeLiberalization
(ASingleForeignFirm)
22
Results
Proposition2
GiventhefixedcostforFDI:
TradeliberalizationofFDIeitherspeedsupordelaysthe
equilibriumtimingoftheforeignfirm'stechnology
adoption.
Thefastesttimingoftechnologyadoptionisrealizedwhen
thetariffiseliminated,oritishighenoughtoinducethe
foreignfirm’sFDIinallperiods.
Ifthelowerboundofthefixedcostforadoption,is
high,thenewtechnologymaynotbeadoptedinsomecases.
Corollary1
Ifthenewtechnologyisadopted,itisalwaysadoptedwhen
theforeignfirmisfreefromtariffinbothbeforeandafter
technologyadoption.
23
Themodelwithtwoforeignfirms
Thedomesticcountry
HorizontalFDI
FirmY
FirmY
Tariff
Consumers
FirmX
Tariff
HorizontalFDI
Choosingthetimingof
technologyadoption
FirmX
Fixedcost
24
Themodelwithtwoforeignfirms
• Anotherforeignfirm,FirmY,producesthesamegood.
• FirmYhasalreadyadoptedthenewtechnologyat.
• TheFirmY’sinstantaneousprofitfromsellingthegood:
• Thetotalsupply:
• A lineardemandisassumedforsimplicity.
25
Themodelwithtwoforeignfirms
Thetimingofthegame.
Therearethreestagesineachperiod.
• Stage1:FirmXdecideswhetheritadoptsthenew
technology ifithasn’tadoptedituntiltheprevious
period .
• Stage2:FirmsXandYsimultaneouslychoosetheir
supplymodesbetweenexportingandFDI.
• Stage3:ThetwofirmsengageinaCournot
competitioninthedomesticmarket.
26
Theequilibrium
Stage3:Productmarket competition
• Theequilibriuminstantaneousprofitsaregivenby
• Inexporting,thesametariffisappliedtobothfirms:
 Theymightlocateinthesameforeigncountry.
 TheMFNprincipleofGATT/WTO.
27
Theequilibrium
Stage2:ThechoicesbetweenexportingandFDI
 ThegainsfromFDIwhentherivalfirmchooses
exporting.
FirmX:
Firm Y:
 ThegainsfromFDIwhentherivalfirmchoosesFDI.
FirmX:
FirmY:
28
Theequilibrium
 TheTwofirms’FDIsarestrategicsubstitutes.
 BeforeFirmXadoptsthenewtechnology ,theFirm
Y’sgainsfromFDIarehigherthantheFirmX’sgains.
 Assumeholds.
FirmYalwayshasanincentivetoundertakeFDIwhenever
FirmXundertakesFDIifFirmYdoesn’t.
Withoutthisassumption,eitherFirmXorFirmYbecomes
theFDI‐firmwhiletheotherfirmchoosesexportingwhen
holds.
29
Theequilibrium
FirmX’schoicebeforeitstechnologyadoption
FirmX’schoiceafteritstechnologyadoption
FirmY’schoiceaftertherival’sadoption
FirmY’schoicebeforetherival’stechnologyadoption
E :Export
I :FDI
30
Figure5:ChoicesbetweenexportingandFDI
(Twoforeignfirms)
E :Export
I :FDI
31
Thecomparisonofgainsfromtechnologyadoption
 TheFOCtoderivetheoptimaltimingoftechnologyadoptionis
identicaltothatinthesingle‐firmmodel.
Region
The equilibrium
location
I
II
III
IV
V
• InRegionII,thetechnologyadoptionblockstherival’sFDI.
• InRegionIII,itmaytriggersFirmX’sFDIwhilecrowdingoutthe
rival’sFDI.
• InRegionIV,ittriggersFirmX’sFDIwithoutthecrowding‐out
effect.
32
Figure6:LiberalizationofFDI
(TwoForeignFirms)
33
Results
Proposition3
Giventhetarifflevel:
LiberalizationofFDIeitherspeedsupordelaysthe
equilibriumtimingofFirmX'stechnologyadoption.
Thefastesttimingoftechnologyadoptionisrealized
withapositivefixedcostforFDI.
34
TheIntuitionbehindtheResult
• Areductionofthefixedcostbasicallypromotesbothfirms’
FDIs.
• ItpromotesFirmY’sFDImoreinthepre‐adoptionperiods,
duetothetechnologygap.
• Therival’sFDIreducesFirmX’sgainsfromtechnology
adoptionbecauseitintensifiestheproductmarket
competition.
IfFissufficientlyreducedsuchthatFirmYalwayschooses
FDIwhileFirmXdoesn’tinthepre‐adoptionperiods
RegionsIIIandIV ,thegainsfromtechnologyadoption
maybecomelowerthanthosebeforetheliberalizationof
FDI RegionI .
35
TheIntuitionbehindtheResult
• IfFisreducedsuchthatFirmY choosesFDIinthepre‐
adoptionperiodsbutstilllargeenoughtoblockbothfirms’
FDIsinthepost‐adoptionperiods RegionII ,
thereductionofFgivesFirmXanextragainfrom
technologyadoption,sinceitblockstherival’sFDI.
• Iftherival’sFDIisreplacedbyitsownFDI RegionIII ,the
gainsfromadoptionbecomeevenhigher.
ThegainsfromtechnologyadoptioninRegionsIIandIII
becomehigherthanthosewhenbothfirmsalways
undertakesFDI RegionV .
36
Figure4:TradeLiberalization
(TwoForeignFirms)
or
37
Results
Proposition4
GiventhefixedcostforFDI:
Tradeliberalizationeitherspeedsupordelaysthe
equilibriumtimingofFirmX'stechnologyadoption.
Thefastesttimingoftechnologyadoptionisrealizedwitha
positivetariff.
Ifthelowerboundofthefixedcostforadoptionishigh,the
newtechnologymaynotbeadoptedinsomecases.
Corollary2
Thereisacasewheretheforeignfirmneveradoptsthenew
technologywhenitisfreefromtariffinallperiods,butadopts
thenewtechnologywhenitfacestariffatleastinsomeperiods.
38
SummaryandConclusion
Thefirststudytoexplorehowtradeliberalizationand
liberalizationofFDIaffectsthetimingoftechnologyadoption,
givenfirms’locationsareendogenouslydetermined.
 Intheabsenceofstrategicinteractionbetweenforeignfirmsin
locationschoices,freetradeorpromotingFDIisthebestpolicyto
acceleratetechnologyadoption.
 Inthepresenceofthestrategicinteraction,thefastesttimingof
technologyadoptionisrealizedwhenatariffandthefixedcostfor
FDIareintheintermediatelevel.
Tentative policyimplication:
• Anex‐ante improvementofmarketaccessdoesnot
necessarilypromoteandspeeduptechnologyadoption.
• Policiesshouldbedesignedsuchthattechnologyadoption
leadstoanex‐post improvementofmarketaccessofthe
adoptingfirm.
39
Worksinprogressandpossibleextensions
 Welfareanalysis
PreferentialliberalizationoftradeandFDI
• Licensingcontracts
• Technologyadoptiongamesbetweentwofirms.
Endogenoustechnologygaps
40