Two essays on conglomerate group affiliation and foreign direct investment
Description
Foreign market entry strategy involves choices about which markets to enter and how to enter them. In most of the Foreign Direct Investment (FDI) literature it was always of the interest to determine what are the decisions of the foreign investing firm choice of ownership structure and from the point of view of the local firms what, are the characteristics that define the way they may react to this new entry The main objective of the current study is to analyze the role of conglomerate groups in emerging economies when firms face economic stress, like instability on regulations that affect project cash flows or like the entrance of new aggressive competitors on the market As recognized in many other studies, one set of risks arises from public expropriation hazards that are a function of the ability of the host country's institutional environment to credibly commit to a given policy or regulatory regime. Empirical research has shown this hazard to have an impact on ownership levels The first part of this study is a theoretical model that describes how Multinational Firms face moral hazard risk from their counterpart and political risk from the host country when they decide to go abroad in a Joint Venture alliance. We found that, when the Multinational Firm is dealing with a bad type Domestic Firm, the problem of asymmetric information causes a rent transfer from the Multinational Firm to the Domestic Firm and not from the project to investors. We also found that the greater the level of hazard expropriation, the lower the participation of the Multinational Firm on the final cash flow, except for the case where the Multinational Firm has the negotiation power and there is a high level of local investment protectionism. In that case, the Multinational Firm increases its participation in the final cash flow Another challenge for the foreign direct investment (FDI) literature because of its rareness is the expansion of Spanish banks in Latin America in the mid 90s. It was one of the most striking changes experienced by retail banking markets in Latin America The second part of this study is an empirical model that wants to determine how incumbent banks in Colombia, Mexico and Chile faced the hostile entrance of Banco Santander on their bank market. We found that banks may better fight the entrance of Banco Santander if they belong to a Financial Conglomerate (FC). Additionally, with respect to the effect that has firm size on the incumbent reaction, we found that size characteristic appeared significant with a negative sign. This negative sign may be explained by the fact that large banks lost their loan market share, on the contrary, medium and small banks responded fighting for their market position