Foreign Direct Investment and Political Uncertainty

Recent developments in the general equilibrium theory of multinationals emphasize the importance of multilateral considerations. Yet, existing explanations and corresponding estimations of FDI patterns have largely limited political and institutional investment impediments to a bilateral framework. Through the application of spatial econometric techniques, I demonstrate that the presence of both domestic and regional political uncertainty generate real options effects that lead to the delay or redirection of foreign direct investment. The magnitude and direction of these effects is conditional upon the host country regime type and the predominant multinational integration strategies in the region. Comparing these results with FDI of U.S. origin, I find evidence for divergent investment behavior by U.S. multinationals during regime changes in partner countries. Additionally, I find no evidence that multinationals from developing countries are more likely to complete cross-border deals in environments characterized by greater political risk or political uncertainty.

Essays on Uncertainty, Imperfect Information, and Investment Dynamics

Understanding how imperfect information affects firms' investment decision helps answer important questions in economics, such as how we may better measure economic uncertainty; how firms' forecasts would affect their decision-making when their beliefs are not backed by economic fundamentals; and how important are the business cycle impacts of changes in firms' productivity uncertainty in an environment of incomplete information. This dissertation provides a synthetic answer to all these questions, both empirically and theoretically. The first chapter, provides empirical evidence to demonstrate that survey-based forecast dispersion identifies a distinctive type of second moment shocks different from the canonical volatility shocks to productivity, i.e. uncertainty shocks. Such forecast disagreement disturbances can affect the distribution of firm-level beliefs regardless of whether or not belief changes are backed by changes in economic fundamentals. At the aggregate level, innovations that increase the dispersion of firms' forecasts lead to persistent declines in aggregate investment and output, which are followed by a slow recovery. On the contrary, the larger dispersion of future firm-specific productivity innovations, the standard way to measure economic uncertainty, delivers the ``wait and see" effect, such that aggregate investment experiences a sharp decline, followed by a quick rebound, and then overshoots. At the firm level, data uncovers that more productive firms increase investments given rises in productivity dispersion for the future, whereas investments drop when firms disagree more about the well-being of their future business conditions. These findings challenge the view that the dispersion of the firms' heterogeneous beliefs captures the concept of economic uncertainty, defined by a model of uncertainty shocks. The second chapter presents a general equilibrium model of heterogeneous firms subject to the real productivity uncertainty shocks and informational disagreement shocks. As firms cannot perfectly disentangle aggregate from idiosyncratic productivity because of imperfect information, information quality thus drives the wedge of difference between the unobserved productivity fundamentals, and the firms' beliefs about how productive they are. Distribution of the firms' beliefs is no longer perfectly aligned with the distribution of firm-level productivity across firms. This model not only explains why, at the macro and micro level, disagreement shocks are different from uncertainty shocks, as documented in Chapter 1, but helps reconcile a key challenge faced by the standard framework to study economic uncertainty: a trade-off between sizable business cycle effects due to changes in uncertainty, and the right amount of pro-cyclicality of firm-level investment rate dispersion, as measured by its correlation with the output cycles.

Essays on Financial Constraints, R&D Investments, and Competition

This dissertation consists of two chapters of theoretical studies that investigate the effect of financial constraints and market competition on research and development (R&D) investments. In the first chapter, I explore the impact of financial constraints on two different types of R&D investments. In the second chapter, I examine the impact of market competition on the relationship between financial constraints and R&D investments. In the first chapter, I develop a dynamic monopoly model to study a firm’s R&D strategy. Contrary to intuition, I show that a financially constrained firm may invest more aggressively in R&D projects than an unconstrained firm. Financial constraints introduce a risk that a firm may run out of money before its project bears fruit, which leads to involuntary termination on an otherwise positive-NPV project. For a company that relies on cash flow from assets in place to keep its R&D project alive, early success can be relatively important. I find that when the discovery process can be expedited by heavier investment (“accelerable” projects), a financially constrained company may find it optimal to “over”-invest in order to raise the probability of project survival. The over-investment will not happen if the project is only “scalable” (investment scales up payoffs). The model generates several testable implications regarding over-investment and project values. In the second chapter, I study the effects of competition on R&D investments in a duopoly framework. Using a homogeneous duopoly model where two unconstrained firms compete head to head in an R&D race, I find that competition has no effect on R&D investment if the project is not accelerable, and the competing firms are not constrained. In a heterogeneous duopoly model where a financially constrained firm competes against an unconstrained firm, I discover interesting strategic interactions that lead to preemption by the constrained firm in equilibrium. The unconstrained competitor responds to its constrained rival’s investment in an inverted-U shape fashion. When the constrained competitor has high cash flow risk, it accelerates the innovation in equilibrium, while the unconstrained firm invests less aggressively and waits for its rival to quit the race due to shortage of funds.

Interest Representation as a Clash of Unequal Allies

Organized interests do not have direct control over the fate of their policy agendas in Congress. They cannot introduce bills, vote on legislation, or serve on House committees. If organized interests want to achieve virtually any of their legislative goals they must rely on and work through members of Congress. As an interest group seeks to move its policy agenda forward in Congress, then, one of the most important challenges it faces is the recruitment of effective legislative allies. Legislative allies are members of Congress who “share the same policy objective as the group” and who use their limited time and resources to advocate for the group’s policy needs (Hall and Deardorff 2006, 76). For all the financial resources that a group can bring to bear as it competes with other interests to win policy outcomes, it will be ineffective without the help of members of Congress that are willing to expend their time and effort to advocate for its policy positions (Bauer, Pool, and Dexter 1965; Baumgartner and Leech 1998b; Hall and Wayman 1990; Hall and Deardorff 2006; Hojnacki and Kimball 1998, 1999). Given the importance of legislative allies to interest group success, are some organized interests better able to recruit legislative allies than others? This question has received little attention in the literature. This dissertation offers an original theoretical framework describing both when we should expect some types of interests to generate more legislative allies than others and how interests vary in their effectiveness at mobilizing these allies toward effective legislative advocacy. It then tests these theoretical expectations on variation in group representation during the stage in the legislative process that many scholars have argued is crucial to policy influence, interest representation on legislative committees. The dissertation uncovers pervasive evidence that interests with a presence across more congressional districts stand a better chance of having legislative allies on their key committees. It also reveals that interests with greater amounts of leverage over jobs and economic investment will be better positioned to win more allies on key committees. In addition, interests with a policy agenda that closely overlaps with the jurisdiction of just one committee in Congress are more likely to have legislative allies on their key committees than are interests that have a policy agenda divided across many committee jurisdictions. In short, how groups are distributed across districts, the leverage that interests have over local jobs and economic investment, and how committee jurisdictions align with their policy goals affects their influence in Congress.