Two essays in international trade

Abstract

The first chapter of the thesis studies the impacts of trade liberalization on mergers and acquisitions (M&As) based on Chinese data (1998-2007). The type of M&A activities we focus on is domestic backward vertical integrations in which a domestic upstream firm is acquired by a domestic downstream firm. In the analysis we take China’s accession to the WTO (2001) as a quasi-natural experiment for exogenous trade liberalization. We find that a decrease in tariffs on the upstream industry’s out-puts reduces vertical integrations, but a decrease in tariffs on the upstream industry’s inputs increases vertical integrations. The result is obtained using the difference-in- differences technique and robust to various specifications of the model and measurement. We build a hold-up model with an upstream supplier and a downstream buyer to provide insights to the empirical finding: the existence of underinvestment is the key to understand the impacts of tariff reductions on firms’ organizational choices. The second chapter of the thesis investigates whether Foreign Direct Investment (FDI) inflows ameliorate or deteriorate export quality of indigenous domestic firms within the same industry. Relying on the FDI regulation change upon China’s accession into WTO that generates plausibly exogenous variations in FDI inflows across manufacturing industries, we find a significant negative effect. Firms facing more FDI presence within the industry tend to export lower quality products. This finding is robust to a battery of validity and robustness considerations. Further tests show that firms adjust their quality by adding new products with lower quality. The pervasive demand squeezing effects of FDI firms in both domestic and international markets might explain this quality adjustment pattern of domestic firms.