What are the consequences for the composition of FDI The answer depends on the

What are the consequences for the composition of fdi

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entry. What are the consequences for the composition of FDI? The answer depends on the degree of local uncertainty and the availability of local managers. If local managers are available, it will bias the composition of FDI towards firms with lower value of good projects (low θ H ). If local managers are not available, it will bias the composition of FDI towards firms with higher value of good projects. Consequently, unstable economies that lack a pool of local managers will benefit more from investing in primary education if their goal is to attract firms at the technological edge. This section constitutes a first attempt to address issues of composition-quantity biases in developing countries FDI educational related policies. Matching the model’s predictions with cross country data on entry, industry composition of FDI flows, local uncertainty and subsidiaries 27
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managerial choices is next in our research agenda. 4 Discussion In this section we summarize and discuss the theoretical results derived from the model that we bring to the data. Regarding the relation of expatriates and technology transfer the following results are relevant: Result 1: Assume that the transfer team is big enough, namely assume J > (1 + 2( θ H θ L ) θ L ) . Then, the CEO effort in the transfer stage is higher when he leads by example than when he leads by sacrifice. Furthermore, this difference is increasing in θ H . Result 2: The expected value of the transfer stage, E ( T e | LE ) when the expatriate leads by example is increasing in θ H and in p H . Further, δE ( T e | LE ) δθ H δp H > 0 Result 3: Headquarters expected cost of credibly transmitting the information when they rely on a local manager is increasing in p h and in θ H . Result 4: If the subsidiary CEO is local, the transfer expected value is lower than when the subsidiary CEO is an expatriate that leads by example. 38 According to these results, multinationals employing expatriates engage in more technological transfer, and more so in technology intensive industries. The mechanism behind this result is as follows. Transferring technology involves sending information about the value of the technology, as well as the effort of a team of local workers, among them the subsidiary CEO, in receiving and making effective the use of this technology. Because the effort of workers in the transfer stage is complementary to how good the technology is, sending information on its value will be costly and more so for firms in technology intensive industries. Expatriates, familiar with the technology, can use their own effort to signal the value of this technology, that is lead by example. This is a cheaper way to communicate information on the value of the technology than signaling giving gifts from the headquarters, that is lead by sacrifice. This is so because the expatriate internalizes part of the cost and boost the transfer stage team’s overall effort, given that he has an extra 38 In the appendix we derive the case when the expatriate manager can only lead by sacrifice and compare the cost of transmitting information.
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  • Spring '17
  • JAMES FENSKE

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