El desarrollo de los polímeros sintéticos

The relation between FDI and market concentration can be used as a starting point for examining the relationship between inward FDI and market structure (UNCTAD, 1997a).

The traditional literature claims that FDI tends to reduce concentration and increase competition in host country industries.²⁵ The studies on developed countries, such as Australia (Brash, 1966), Canada (Safarian, 1969), France (Fishwick, 1982), the United

24 See Utton (2003) for details.

25 See Vernon (1977) and Caves (1982) for surveys.

Kingdom (Steuer et al., 1973) and the United States (Knickerbocker, 1976), reported no positive association between FDI and market concentration. But this conclusion has long been challenged by some scholars who argued that its empirical verification was made only with reference to developed countries. For developing countries, which have a very different industrial structure from their developed counterparts, the entry of MNCs may have different effects and increase concentration instead. There has been ample empirical evidence to support the hypothesis that the level of FDI and MNC activity is positively associated with the level of market concentration in developing countries. The evidence from Brazil (Newfarmer, 1980; Willmore, 1989; Newfarmer and Marsh, 1992), Central America (1976), Guatemala (Willmore, 1976), Malaysia (Lall, 1979; Kalirajan, 1991) and Mexico (Newfarmer and Mueller, 1975; Connor, 1977; Blomström, 1986a) reported a significant correlation between participation of foreign firms and high level of industrial concentration. Some developed countries are also among the countries in which the level of FDI is positively associated with the level of market concentration.²⁶

This evidence could be interpreted to indicate a correlation between MNC activity and industrial concentration in domestic markets. The models tested for a relation between FDI and market concentration have typically involved a cross-sectional equation with a measure of FDI as one of the determinants of concentration.²⁷ The positive correlation found is indeed a first step for analysing the structural effects of inward FDI. But these empirical studies usually did not answer the question whether MNCs raise concentration only by introducing new technology and managerial know-how, or they are an independent source of concentration after other factors that are commonly thought to determine concentration have been taken into account. Many factors have been identified in the industrial organisation literature to determine concentration. These factors include market size, market growth, economies of scale, capital intensity, advertising intensity, and so on.²⁸ In developing countries, inward FDI may not only influence concentration via these industrial parameters, but also, in addition to this, may have an independent impact on market structure. Perhaps the most thorough study on the effects of FDI on concentration is Lall (1979)’s study of Malaysia (see also Newfarmer and Marsh, 1981). Lall found that FDI increases concentration not only by introducing new processes and products and by raising the capital intensity of production, but also does so independently of the variables controlling this. Blomström (1986a) did similar work for Mexico. He used more comprehensive data than Lall and found virtually the same conclusion that MNC presence is an independent source of concentration after other factors have been controlled for.

However, a problem remains: as an independent source of concentration, how FDI cause higher industrial concentration independently?

One basic problem of the empirical studies of the relation between FDI and market concentration is that the association of FDI with concentration does not clearly define the causal relationship between the two variables. Does FDI cause higher industrial concentration or is it attracted to concentrated market? If FDI cause higher industrial concentration, how does FDI do so, not by introducing new processes and products and by raising the capital intensity of production, but as an independent determinant? For the first question, Caves et al. (1980) found that MNCs create a supply of new entrants that would otherwise be deterred by economies of scale and other entry barriers (see Subsection 4.2.3).

26 See e.g. Dunning (1958), Steuer et al. (1973) and Davies et al. (1996) for the United Kingdom.

27 Driffield (2001) introduced a new model based on concentration change.

28 See Curry and George (1983) for a survey.

If MNCs cause concentration, they may decrease competition; if they are merely attracted to concentrated markets, they may increase competition. This can be largely clouded by the complexities of simultaneous changes in the number of competitors, technologies and market size. The traditional static approach cannot tackle these complexities.

The central issue is pertaining to the channels through which MNCs influence market structure. Do MNCs increase concentration through their mode of entry (M&As or greenfield), their behaviour, or scale barriers with large-scale investment relative to market size? The nature of MNC behaviour in host markets is associated with their ownership advantages or their possession of a unique combination of proprietary assets. According to Hymer’s theory (see Section 3.4.4), firms operating in those markets usually possessed some intangible assets, such as proprietary technology, differentiated product and managerial know-how. The asset package of MNCs is the basis of their competitive advantages. The firm-specific advantages of MNCs and the transfer of such advantages may raise impediments to entry for local firms or make competition too strong for existing local firms and thus have an independent and positive influence on concentration (Blomström, 1986a). The fact that MNC possesses specific ownership advantage may also result in specific business practices of them. For example, since short-term loss is not too serious a problem for a foreign subsidiary of a MNC, local competitors may be driven out of business by entering into the price-cutting war started by the foreign competitor. As Newfarmer (1980) noted for the Brazilian electrical industry, MNCs may purchase domestic firms on especially favourable terms because of their strong command over technology and input markets. This kind of conduct may drive domestic competitors out of business, therefore influencing market structure. Foreign entry may also reduce concentration if entry into concentrated industries is easier for MNCs than for domestic firms.²⁹ There is phenomenon of defensive investment, in which firms in an industry gravitate abroad together as each fears the other will gain a competitive edge (Knickerbocker, 1973). By studying the pharmaceutical industry in Brazil, Evans (1977) demonstrated that MNCs create miniature replicas through their investment in subsidiaries and thus tend to reduce concentration.

The time dimension of the concentration effects of inward FDI has been addressed by the two-stage model developed by Dunning (1975). This model suggested that the structural effects of MNC entry will occur in two conceptually distinct stages. The first, at-entry effect encompasses the direct consequences of FDI on market structure. The second, post-entry effect concerns the reaction of competitors, including international rivals, other foreign affiliates and domestic firms. This approach highlights the core of the time dimension of the structural effects that FDI could pose on domestic industries.

However, the dynamic process of the structural change in industries catalysed by inward FDI and the transitional process between these two distinct but continuous stages remain largely overlooked by the literature (see Section 4.3 for an effort of theoretical extension).

The at-entry impact of foreign entry depends on pre-existing market structure and entry mode. For new entry to reduce industrial concentration, entry must be via greenfield investment and must not displace an existing firm. Greenfield investment will add to the number of firms engaged in the production of a good or service and, in case that the production is for sale in the country market, to the number of sellers in the market. An exception would be when sales through the establishment of a foreign affiliate simply replace sales through exports by the parent firm or another affiliate of the MNC (UNCTAD,

29 For evidence see Gorecki (1976).

1997a). This suggests that initial direct effect of greenfiled investment is normally to reduce – or at least leave unchanged – concentration. However, if an entrant’s scale of production and sales were significantly large than that of incumbent firms in the local market, it would immediately secure a large share of the market, thereby increasing concentration. By contrast, FDI through M&A leaves the number of firms unchanged. If the M&A results in increased sales for the newly created foreign subsidiaries, entry through M&A would increase concentration. Entry via M&A is restricted by the availability of local firms to entering MNCs. Entry has to be via greenfiled investment when the investment is in this industry in which no local producers are present. M&A obviously cannot be a factor in the newly emergent industries where no local producer is present (UNCTAD, 1997a).

Whatever its entry mode, inward FDI can influence market concentration in the relevant market in host country, that is, the post-entry effect. The actual impact of MNC participation on product market concentration depend on a number of factors (UNCTAD, 1997a): 1) the number and size of MNC operations relative to local firms and other competitors in domestic markets, 2) the reaction of domestic firms to MNC entry and operations, 3) the competitive performance of MNCs relative to that of domestic firms and its effects on indigenous firms in terns of their long-term survival and strengthening of their capabilities, and 4) the behaviour of MNCs and other firms in the market. Empirical studies suggested that, in developed countries, these factors work, on balance, to reduce concentration or leave it unchanged. The average size of foreign subsidiaries of MNCs often tends to be larger than that of domestic competitors, according to empirical studies on developed as well as developing countries (see Dunning, 1993). The after-entry strategies of MNCs could expand their foreign affiliates and widen the gap (Frischtak and Newfarmer, 1994). There is considerable evidence to suggest that, because of their competitive advantages, MNC affiliates are often more efficient and productive than local firms (UNCTAD, 1995; UNCTAD, 1997a). But, over time, the competitive advantages of foreign affiliates may be eroded and domestic firms may enter and increase their market shares. There are empirical studies (e.g. Well, 1993) suggested this phenomenon. However, this process still has not been conceptualised in a manner that could capture the essence of this evolutionary process and, therefore, help policy makers understand the evolution of industries (see Subsection 4.4.3 for an effort to fill this gap).