دولتمردان و حمایت از تولیدات داخلی: اقتصاد سیاسی آزادسازی ورود خارجی

This paper investigates the influence of incumbent firms on the decision to allow foreign direct investment into an industry. Using data from India's economic reforms, the results show that firms in concentrated industries are more successful at preventing foreign entry, state-owned firms are more successful at stopping foreign entry than privately-owned firms, and profitable state-owned firms are more successful at stopping foreign entry than unprofitable state-owned firms. The pattern of foreign entry liberalization supports the private interest view of policy implementation and suggests that it may be necessary to reduce the influence of state-owned firms to optimally enact reforms.

Liberalizing international capital flows can increase economic growth (Bekaert, Harvey, and Lundblad, 2005). Yet, many countries restrict inflows of foreign investment. Recent evidence suggests that incumbent firms that receive preferential treatment may oppose policy changes that threaten their favored status.1 In particular, Rajan and Zingales, 2003a and Rajan and Zingales, 2003b and Stulz (2005) argue that entrenched incumbent firms have an incentive to oppose the liberalization of international capital flows if liberalization limits their ability to extract monopoly rents. This paper investigates incumbent firm influence on the decision to liberalize foreign direct investment. Specifically, we examine the Indian government's decision to selectively reduce foreign direct investment barriers in a subset of industries after a balance-of-payments crisis in 1991. The corporate sector in India is characterized by the concentrated control of assets by state- and family-owned firms, much like in the rest of the world (La Porta, Lopez de Silanes, Shleifer, and Vishny, 1999). We adopt a political economy approach to ask the following questions: Did incumbent firms influence the government's decision to liberalize foreign direct investment in some industries and not others? If so, which incumbent firms had the most to lose from foreign entry and the ability to oppose it? To investigate these issues, we use a rich firm-level data set that provides detailed balance sheet and ownership information for more than 2,100 firms that account for over 70% of India's industrial output. The data are classified into state-owned, group-owned, and privately owned firms. We investigate whether pre-liberalization characteristics such as industry structure and the ownership of incumbent firms can explain the government's decision to selectively open some industries to foreign entry.

A large theoretical and empirical literature characterizes foreign direct investment as the “good cholesterol” in international capital flows (Hausmann and Fernandez-Arias, 2000; Albuquerque, 2003). Yet many governments delay or fail to liberalize foreign direct investment. Political economy explanations suggest that governments make suboptimal choices when policymakers face pressures other than that of welfare maximization (Olson, 1965; Stigler, 1971; Peltzman, 1976). In democracies, for instance, private interests may lobby the government to maintain their status or to secure concessions in the face of big changes (Dahl, 1961; Tocqueville, 1835). In 1991, the federal government of India granted automatic approval for foreign direct investment of up to 51% in 46 of 96 three-digit industrial categories. The liberalization of foreign direct investment is likely to invoke considerable opposition from domestic firms and presents an ideal opportunity to examine the effect of domestic incumbents on the policy process. Our results suggest that the concentrated control of industrial assets and output by a few firms, as well as the identity of incumbent firms, has a statistically significant influence on the pattern of entry liberalization. Specifically, the government is more likely to retain foreign entry barriers in concentrated industries and in industries with substantial state-owned presence. The results also suggest that incumbent firms seek to protect monopoly profits because the likelihood of foreign entry liberalization is significantly lower in concentrated industries that are profitable and in industries with profitable state-owned firms. In the last decade, many economies have implemented economic and financial sector reforms, including stock market liberalization, privatization, and the liberalization of foreign direct investment. There is a large literature that evaluates the effects of these reforms on firm performance and economic growth. Thus, the question arises whether these reforms are random, as assumed by much of the literature, or are an outcome of incumbent firm characteristics as shown in this paper.