خصوصی سازی، سرمایه گذاری مستقیم خارجی استراتژیک و رفاه کشور میزبان

Recent evidence shows that developing countries and transition economies are increasingly privatizing their public firms and at the same time experiencing rapid growth of inward foreign direct investment (FDI). We show that there is a two-way causality between privatization and greenfield FDI. Privatization increases the incentive for FDI, which, in turn, increases the incentive for privatization compared to the situation of no FDI. The optimal degree of privatization depends on the cost difference of the firms, and on the foreign firm's mode of entry.

Empirical evidence shows that many developing and transition economies are privatizing state-owned enterprises across several sectors and also experiencing significant inflow of foreign direct investment (FDI). In an earlier study on Latin America, Baer (1994) notes that the presence of foreign capital has increased as the presence of state has declined. It is documented in UNCTAD (2002) that along with a combination of several reform measures such as improved investment climate, openness to trade and FDI, macroeconomic stability, etc., privatization has increased FDI inflow over the 1990s. Using annual data of eight Asian and nine Latin American and Caribbean countries for 1990–1999, Gani (2005) shows that privatization is positively correlated to FDI. Focusing on the Central and Eastern European countries (CEECs), Merlevede and Schoors (2005) show that privatization history positively affects FDI. It has been found that, during 2000–2003, China accounted for almost 90% of the privatization proceeds1 in East Asia and the Pacific and it is, at the same time, the biggest FDI recipient in the region. India also shares a similar story on FDI and privatization proceeds. Other regions, such as Latin America, Europe and Central Asia, also recorded the same trend of FDI and privatization proceeds.2 While the empirical evidence suggests a positive correlation between privatization and FDI, the causality between these two is not immediate. To the best of our knowledge, there is no theory which helps us to understand whether privatization is the cause or consequence of FDI. We develop a simple open-economy mixed oligopoly model to understand the causality between privatization and greenfield FDI. We find complementarity between these two. We show that privatization increases the incentive for greenfield FDI, and the possibility of greenfield FDI increases the optimal degree of privatization if the degree of privatization that is required to attract FDI is not very high. If the degree of privatization that is required to attract FDI is very high, the host-country may not prefer to induce FDI through privatization. In this situation, the optimal degree of privatization is the same with and without FDI. Thus, our analysis suggests that reforms allowing FDI and reducing state ownership can help to increase welfare by complementing each other. The cost difference between the firms, the fixed cost of undertaking FDI and the demand parameter play important roles in determining the optimal degree of privatization. We also show that partial privatization is the optimal strategy of the host-country. In other words, neither complete privatization nor complete nationalization maximizes the host-country welfare in the presence of foreign competition. This result is in line with Maw (2002), which shows that partial privatization of the public firms are mostly observed in transition countries while their economies are increasingly open to foreign competitions.3 The reasons for our results are as follows. Nationalization of the domestic firm serves as a credible commitment to increase output beyond the profit-maximizing level. Thus, in an imperfectly competitive market, nationalization acts as a disciplining device by increasing the industry output. However, if the foreign firm is more cost efficient than the domestic firm, nationalization creates production inefficiency by reducing the output of the foreign firm. If the degree of nationalization reduces, it reduces the domestic firm's weight on social welfare, and induces the foreign firm to increase its output by creating a more level playing field of competition. However, since the foreign firm's cost is lower under FDI compared to exporting, the foreign firm's gain from privatization is higher under the former, thus increasing the incentive for FDI. While privatization reduces the output of the domestic firm, it increases the output of the foreign firm, which is more cost efficient than the domestic firm. The optimal degree of privatization balances these effects, and makes partial privatization as the optimal strategy of the domestic country. If privatization induces FDI, it increases the benefit of privatization by inducing the foreign firm to choose a more cost-efficient production strategy. Hence, unless the degree of privatization which is required to attract FDI is not very high, the FDI attracting role of privatization increases the incentive for privatization compared to the situation with no FDI. However, if the degree of privatization which is required to attract FDI is very high, the negative effect of privatization due to the lower output of the domestic firm becomes the important factor, which eliminates the incentive for attracting FDI through privatization. In this situation, the degree of privation remains the same with and without the possibility of FDI. Therefore, while privatizing in the presence of FDI, a government needs to balance the loss of the disciplining effect of nationalization and the gain in cost efficiency due to FDI. The remainder of the paper is structured as follows. The next section reviews the related literature. Section 3 describes the basic model. The effects of privatization on the incentives for FDI and welfare are shown in Section 4. Section 5 concludes.

Though many developing and transitional economies are privatizing state-owned firms and also experiencing inflow of FDI, the existing theoretical literature did not capture both these aspects together. We take up this issue in this paper, and show the interaction between privatization and greenfield FDI. We show that there is complementarity between privatization and greenfield FDI. Privatization increases the incentive for FDI, which, in turn (generally), increases the incentive for privatization. However, it is not necessary that a country would always prefer to privatize up to a point that attracts FDI. If the degree of privatization that is required to attract FDI is sufficiently high, the host-country may not find it beneficial to attract FDI through privatization. Instead, it will privatize up to the point at which the host-country welfare is maximized under exporting by the foreign firm. We show that whether or not the degree of privatization affects the foreign firm's mode of production, partial privatization is the optimal strategy of the host-country. Both the cost difference between the firms and the effect of privatization on the foreign firm's production strategy play important roles in determining the privatization policy. There are, however, some important remarks need to be made. First, in our analysis, we have focused on the effect of privatization on the foreign firm's production strategy but abstracted our analysis from entry of the host-country firms. Privatization may attract host-country firms by reducing the output of the public firm, thus leaving more residual demand for the potential host-country firms. Higher competition in the host-country market due to host-country firms’ entry reduces the residual demand for the foreign firm and may adversely affect the foreign firm's incentive for FDI. Hence, the effects of domestic-entry on the foreign firm's incentive for FDI following privatization and the corresponding welfare implications will be similar to the effects of cost reduction in the public firm, which has been discussed in Section 4.3. Second, we have considered production decision of a single foreign firm, thus ignoring competition for FDI. If there are multiple foreign firms, which serve the host-country either through FDI or through export irrespective of the privatization policy of the host-country, while firm M in our analysis chooses its mode of production, our qualitative results will remain.14 Privatization will increase the outputs of all foreign firms. However, since only firm M decides on exporting and FDI and the marginal cost of firm M is higher under exporting than under FDI, firm M's benefit due to privatization is higher under FDI than under exporting, thus increasing the incentive for FDI under privatization. Further, the possibility of FDI will increase the incentive for privatization since it will induce firm M to choose a more cost-efficient production option, unless the degree of privatization (which asks for sacrificing the disciplining effect of nationalization) that is required to attract FDI is not very high. The presence of other foreign firms in the market will only affect the equilibrium values by affecting the residual demand for firm M. A more interesting situation arises if many foreign firms decide on exporting and FDI. In this situation, a foreign firm's production decision creates a strategic effect on other foreign firms’ plant location decision, along with the effects shown in this paper. Since this problem requires a complete analysis and is outside the scope of this paper, we leave it for future research. Third, following the literature on privatization and the practice of many countries, we have assumed that the shares of the public firm are sold to the domestic investors. However, there are situations where, in the case of privatization, the foreign firms buy shares of the domestic public firms. Hence, foreign acquisition of the public firm can be an area for future research. Acquisition of the domestic public firm by the foreign firm may be viewed as the foreign firm's strategy to eliminate competition in the domestic market. Since the market becomes more attractive for investment after privatization, the foreign firm may have higher incentive for greenfield FDI compared to the situation where acquisition by the foreign firm is prohibited in the privatization policy. Finally, as a first step in explaining the relationship between privatization and FDI, we follow the tradition of the mixed oligopoly literature and ignore agency problems in the firms. In the presence of agency problems, privatization may affect the organizational structure of the public firm, and may have significant impacts on the contracts between the agents, which may have important implications on the outputs, profits and welfare.15 We intend to take up these and the related issues in our future research.