Institutions and firm ownership structure:evidence from Central and Eastern Europe

FDI plays a key role in development, particularly in resource-constrained transition economies of Central and Eastern Europe with relatively low savings rates. Gains from technology transfer play a critical role in motivating FDI, yet potential for it may be hampered by a large technology gap between the source and host country. While the extent of this gap has traditionally been attributed to education, skills and capital intensity, recent literature has also emphasized the possible role of institutional environment in this respect. Despite tremendous interest among policy-makers and academics to understand the factors attracting FDI (Bevan and Estrin, 2000; Globerman and Shapiro, 2003) our knowledge about the effects of institutions on the location choice and ownership structure of foreign firms remains limited. This paper attempts to fill this gap in the literature by examining the link between institutions and foreign ownership structures. To the best of our knowledge, Javorcik (2004) is the only papers, which use firm-level data to analyse the role of institutional quality on an outward investor’s entry mode in transition countries. Our paper extends Javorcik (2004) in a number of ways: (a) rather than a cross-section, we use panel data for the period 1997-2006; (b) rather than a binary variable, we use the percentage foreign ownership as continuous variable; (c) we consider multi-dimensional institutional variables, such as corruption, intellectual property rights protection and government stability. We also use factor analysis to generate a composite index of institutional quality and see how stronger institutional environment could affect foreign ownership; (d) we explore how the distance between institutional environment in source and host countries affect foreign ownership in a host country. The firm-level data used includes both domestic and foreign firms for the period 1997-2006 and is drawn from ORBIS, a commercially available dataset provided by Bureau van Dijk. In order to examine the link between institutions and foreign ownership structures, we estimate four log-linear ownership equations/specifications augmented by institutional and other control variables. We find evidence that the decision of a foreign firm to either locate its subsidiary or acquire an existing domestic firm depends not only on factor cost differences but also on differences in institutional environment between the host and source countries.

Innovation, ownership and profitability

There is lots of evidence that innovating firms are persistently more profitable than non-innovators, but little agreement on why this is the case. It may be because innovators are somehow able to protect their new products from the competition which normally erodes profits, or because innovating firms have superior capabilities and are able to introduce multiple innovations over time. And very little is known about the relationship between innovation, external ownership and profitability, despite the fact that foreign-owned firms are frequently highly innovative and very profitable. This paper considers the relationship between innovation, ownership and profitability for a panel of manufacturing plants in Ireland and Northern Ireland. We consider the link between innovation and profits separately for innovators and non-innovators, and for indigenous innovators and non-innovators and externally-owned plants. We also consider the determinants of innovation over the distribution of plant-level profitability, and find that the determinants of profitability – including innovation and external ownership – are quite different for low and high-profitability plants. We find support for the view that innovators and non-innovators have different profitability determinants, and that externally-owned plants have their profitability determined in a quite different way from indigenous enterprises. For indigenous non-innovators only the sector matters. Profitability in these enterprises is dictated largely by the industry they are in, with plants having virtually no means of differentiating their profitability from the norms of the industry. By contrast, indigenously-owned innovators are able to differentiate their profit performance from industry norms to some extent. Absolute size matters (negatively) and they get a strong boost from product innovation, but having a high market share does not matter for the profitability of indigenously-owned innovators. Externally-owned plants have a quite different set of profitability determinants from both of these groups. What matters for these plants is not the boost they get from innovating (there is none) but instead their position in the domestic market – a high market share boosts profitability. In policy terms our results suggest both optimistic and cautionary messages. On the positive side our results suggest that efforts to promote innovation activity among indigenously-owned plants are likely to have significant longer term benefits through their capability effects. For the development agencies in Ireland this is a reassuring result. On the more negative side, the lack of any relationship in our models between the innovation activities of externally-owned plants and their (profitability) performance raises potential concerns. This finding may reflect the lack of linkages between externally-owned plants and their Irish resource base, in turn raising some worrying issues about the ‘embeddedness’ of much FDI into Ireland and therefore its ‘stickiness’ in the face of Ireland’s increasing high relative cost base.

Cost economies, efficiency and productivity growth in the Chinese banking industry:evidence from a quarterly panel dataset

This article examines cost economies, productivity growth and cost efficiency of the Chinese banks using a unique panel dataset that identifies banks' four outputs and four input prices over the period of 1995-2001. By assessing the appropriateness of model specification, and making use of alternative methodologies in evaluating the performance of banks, we find that the joint-stock commercial banks outperform state-owned commercial banks in productivity growth and cost efficiency. Under the variable cost assumption, Chinese banks display economies of scale, with state-owned commercial banks enjoying cost advantages over the joint-stock commercial banks. Consequently, our results highlight the ownership advantage of these two types of banks and generally support the ongoing banking reform and transformation that is currently taking place in China.