Essays on Multinational Entry and Organizational Choice
Open AccessThis thesis explores the impact of multinational activity on the organizational choice of domestic firms from two perspectives. Part I provides theoretical studies on the impact of new foreign multinational entry on domestic organizational choice. Part II focuses on the empirical relationship between current foreign multinational presence and domestic vertical integration in host countries. Part I consists of two essays. Chapter 2 explores the boundary response of domestic firms faced with increased openness to new foreign multinational entry into a same industry with domestic firms in a host country. Based on the firm boundary model used in the classical international trade literature, I introduce the channel of the effect from new foreign multinational entry to boundary response. Here, bargaining over revenue share plays an important role in response to a change in number of firms in the industry following new foreign multinational entry. The endogenous allocation of joint revenue between a firm and a supplier is affected by the number of firms after entry. This channel induces endogenous severity of a two-sided hold-up problem in the process of organizational choice of domestic firms, as derived from incomplete contracting framework. Because the prevalence of domestic vertical integration or outsourcing depends on which inputs between the firm's inputs and intermediate inputs in each sector are used more intensively for final-good production in the industry, this essay captures the cross-sectoral difference in effects of new foreign multinational entry. Chapter 3 studies the boundary response of domestic firms faced with increased openness to new foreign multinational entry into an upstream industry (intermediate-input market) in a host country. I develop a theoretical framework to study the impact of new foreign multinational entry on the wholesale price of intermediate inputs as a key market condition in the host country and explore how the intermediate-input prices affect the organizational choice of domestic firms between domestic vertical integration and outsourcing. Focusing on the case of new foreign multinationals vertically integrating with existing local suppliers in a host country, I find that new foreign multinational entry can raise the intermediate-input prices and facilitate the firms' choice of domestic vertical integration. The central decision process of firms in these two essays in Part I is how firms and suppliers allocate their joint revenue in an imperfect-competition economy---that is, by bargaining over revenue share (chapter 2) or payment for intermediate inputs at wholesale prices (chapter 3). Since these models include some form of distortion in the production process under outsourcing and the severity of distortion changes through new foreign multinational entry, it becomes imperative for firms to choose one organizational form over the other. Part I presents my theoretical effort to explore how new foreign multinational entry changes the allocation of revenue and how this affects firms' choice of organizational form. Part II consists of a single empirical essay. In chapter 4, I provide an empirical analysis of the relationship between prevalence of foreign multinational firms and organizational form of domestic firms in host countries. Considering the increased foreign multinational presence in host countries and the pattern of firms' boundaries as examined in theoretical studies, I show a positive association between the number (ratio) of domestic firms engaged in vertical production linkage in domestic countries and number (ratio) of foreign multinational firms in host countries. I test this relationship using the number (ratio) of foreign multinational firms in the same industries with domestic firms and the number (ratio) of foreign multinational firms in upstream industries.
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