Transcript Firm-Level Responses to Political Risk

Firm-Level Responses
to Political Risk
Nate Jensen
Washington University in St. Louis
Overview

Politics and Multinational Firms
1. Influence of Firms on U.S. Politics
2. Political Risk and Firms in LDCs
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Theory
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Empirics
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Risk is Endogenous: Firms structure operations to minimize
risk and maximize political influence
Firm-level data of all U.S. foreign investments from 19891999
Future Research
Influence of MNCs on Politics
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Lobbying and Campaign Contributions
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Revolving door, corruption and personal
investments.
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Ansolabehere et al (2003)
Faccio (Forthcoming)
Geographic location of firms
Busch and Reinhardt (1999, 2005)
 McGillivray (1999, 2005)
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Influence of Political Risk on
Investment Decisions
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Economic models of FDI over-predict
investment in LDCs.
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Lucas 1990
Consensus that high levels of political risk
reduce investment.
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Blonigen 2005
My Contribution
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Political Risk is Endogenous
Firms make strategic entry decisions
 The form of entry affects the risk environment for
MNCs
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Example: Monsanto’s investment in Brazil
Democracy and Political Risk
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Democratic Regimes: Theory
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Veto players
Information
Audience Costs
Empirics
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Leads to more FDI inflows
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Lowers the risk premium on political risk insurance
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Busse 2004, Busse and Hefeker 2005, Harms and Ursprung 2002,
Jensen 2003, 2006
Jensen 2006
Fewer expropriations/nationalizations
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Li 2006
Hypotheses
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H1 and H2: Firms invest in smaller and more
liquid operations in authoritarian regimes relative
to democratic regimes.
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H3: Firms structure operations in ways that
align with the preferences of domestic
politicians.
Firm-Level Data
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Confidential Data from the U.S. Bureau of
Economic Analysis (survey every 5 years)
Full universe of 20,000+ investments per year
(Foreign Affiliates) of 3,000 U.S. parent companies
 Includes data on the structure of the investment and
operations
 Confidentiality assures data quality
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Empirical Analysis
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OLS Regressions with Robust Standard Errors
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Battery of parent-firm and industry dummy
variables to control for parent firm and industry
factors that affect firm operations.
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Economic controls and political regimes as key
independent variables.
Preliminary Results
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Democratic institutions are associated with more
assets, sales, and gross product.
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In countries with left executives, firms employ
more workers.
40000
50000
60000
70000
80000
Substantive Impact of Democracy on
Assets (Thousands $)
-10
-5
0
POLITY2
95% CI
5
Fitted values
10
Conclusions
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Firms minimize the size of their operations in
less democratic regimes.
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Firms increase their level of employment in
countries with leftist governments.
Future Research: Theory
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Focus on how electoral institutions affect
political risk.
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FDI produces localized benefits
Broaden the mechanisms through which firms
can influence politics.
Taxes, local purchases, technology transfer, wages
 Constraints on firms (Oil and Mining)
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Future Research: Analysis
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Multilevel modeling
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Industries have different responses to political risk
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Test how changes in institutions and partisanship affects
operations
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Estimate the impact of firm strategies on profitability
and the cost of capital.
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World Bank Firm Level Survey
Supplemental Slides