Preferential Trade Agreements and Firm Internationalization

• In Event: Poster Session: International Political Economy I

Abstract

Whenever firms internationalize, they must select an entry mode, comprised of wholly-owned subsidiaries, joint ventures, licensing agreements, and exports. As a ubiquitous and consequential decision, it is vital to understand how international institutions affect this choice. I use firm-level transactions data to estimate preferential trade agreements’ (PTAs) impact on firms’ market-entry mode decisions, in aggregate and at the sector-level. I both disaggregate foreign direct investment into different entry modes and analyze whether PTAs’ sector-specific chapters have differential sectoral effects. I argue that PTAs, as a signal of policy commitment, lower firms’ perceptions of policy risk and facilitate high-risk entry modes. Firms’ entry mode strategies depend partially on host-country external uncertainty, which includes policy risk. Institutions that decrease this uncertainty, like PTAs, should positively affect firms’ propensity to select high-risk entry modes. I test my hypotheses with multilevel logistic regression on the near universe of mergers and acquisitions (M&As) and joint ventures in up to 146 non-OECD countries (1990-2017), supplemented with firm-level ownership data from the Vietnam Provincial Competitiveness Index. Analyses indicate that the more PTAs a country has ratified, the higher the probability that firms choose M&As over joint ventures. After establishing this aggregate-level association, I disaggregate PTAs, which vary in their sectoral provisions, to analyze their sectoral effects. I theorize that PTA chapters that primarily cover certain sectors are an especially strong signal and risk- reducing institution for firms in those sectors. I find that the presence of services chapters is more strongly associated with the probability of selecting a M&A among services firms as compared to non-services firms, while the equivalent relationship between sanitary and phytosanitary chapters and agricultural firms is weaker but apparent. By considering how PTAs affect firm internationalization, in aggregate and across sectors, this paper nuances our understanding of how international institutions impact cross-border economic exchanges.

Author

• Kai Stern, University of North Carolina - Chapel Hill