Multinational versus National Firms on Capital Adjustment Costs: A Structural Approach

Abstract

This paper provides an alternative perspective on the firm-level empirical analysis of the relation between foreign ownership and capital demand adjustment in host countries. The author estimates a dynamic structural model of investment on a sample of 4672 Belgian firms for the period [2003][2004][2005][2006][2007][2008][2009][2010], permitting him to distinguish the 'ownership status' of firms. He considers a dynamic discrete choice model of a general specification of adjustment costs including convex and non-convex components. The author uses the method of simulated moments in order to estimate the structural parameters. His results indicate that multinationals' affiliates face lower capital adjustment costs than national firms. Open-Assessment E-Journal, 9 (2015-16). http:// dx.doi. org/10.5018/economics-ejournal.ja.2015-16 www.economics-ejournal.org 1 IntroductionThe impact of the multinational firms (MNFs) on the world economy has been rapidly escalated over the last decades. Governments all over the world are concerned about Foreign Direct Investment (FDI) flows, especially in European countries where a substantial share of productive activities is under foreign control. Thus, there is a widespread fear in the European Union (EU) that foreigners are gaining too much economic control over the countries. Capital markets have become increasingly global over the last 20 years and the impact of globalization on them is a central issue in the political economy and corporate finance literature. However, there are contradictory beliefs as global integration of markets can be seen as having two directly opposite effects on the cost of equity capital. On the one hand, the removal of barriers to foreign investment means that the risk premiums on securities are falling because the risk of these securities can be shared among more investors -and more efficient spreading of risks among investors with globally diversified portfolios means lower required returns and higher stock prices. On the other hand, the increasing integration of both capital markets and real business activity resulting from continued overseas expansion by multinationals, implies a greater degree of synchronization among various international capital markets -that is, a greater tendency for all markets to move together. Such greater correlation among national capital markets means reduced benefits to investors from global diversification; hence, a higher cost of capital.In a recent debate on the effects of the growing international integration on the capital market, attention has been drawn to evaluate the impact of trade on investment and capital demand elasticity. However, there might be other paths through which globalization influences the capital market. Such a path may be the effect on capital adjustment costs, since higher adjustment costs trigger lessvolatile responses of investment to any exogenous shock to capital demand.There are good reasons to expect that MNFs are potentially more flexible in adjusting their capital. First, M...

A Microeconometric Analysis of the Springboard Subsidiary: The Case of Spanish Firms

“…One concept that is closely linked to absorption capacity is that of intangible assets (Harris and Moffat, 2013). Intangible assets are defined as the knowledge incorporated into intellectual assets and absorption capacity is defined simply as the ability to exploit knowledge-obtained both internally and externally-that is incorporated into intangible assets (Harris and Moffat, 2013;Cohen and Levinthal, 1990;Lapatinas, 2015). A firm's intangible assets are a key element of its competitiveness, since they improve its capacity to combine internal and external sources of knowledge to exploit business opportunities as a distinctive competency of the firm and expand into new markets (Eustace, 2000;Dunning, 1988;Barney, 1991;Delios and Beamish, 2001).…”