Foreign Retail Entry under Domestic Rivals

Transcription

1 Foreign Retail Entry under Domestic Rivals Kyung-In Hwang University of Nottingham Midwest International Trade Conference 2017

2 Motivation Oligopolistic competition between Tesco(FDI) and Emart(Korean firm). Started opening stores since 1996 Emart first opened stores mostly in the Seoul Metropolitan area (pop, income ). Tesco prioritized opening stores in the southeast of Korea. Emart (Domestic firm) FDI s strategic market entry in host-country markets? Tesco (Foreign firm)

3 Motivation How do strategic interactions affect FDI s market entry? What if there are domestic rival firms in host-country markets? We have seen many oligopolistic industries where multinational enterprises are major players. US Car(14,%): GM 17, Ford 14, Toyota 14, Chrysler 13, Honda 9 Indian Mobile Network(16,%): Airtel 28, Vodafone 23, IDEA 17 From the FDI literature, the answer is less clear. Typical FDI theories assume that host-country markets are perfectly competitive. Little empirical work on FDI s strategic entry Under imperfectly competitive market, multinational enterprises (MNEs) can t act in a vacuum. Domestic rivals will have a profound impact on FDI s entry.

4 This paper Show empirical evidences that links MNEs to strategic entry Challenge: how to identify strategic interaction between MNEs and domestic firms? Use game-theoretical model to structurally estimate the strategic aspect Reduced-form IV estimation reaffirms it Investigate whether asymmetric information affects FDI s strategic entry FDI literature typically assume asymmetric information between foreign and domestic firms Foreign firms have superior knowledge on technology or managerial know-how. Domestic firms know the local demand well. Little empirical work to show the aspect by data

5 Overview of findings Using county-level data on large discount stores operated by Tesco(FDI) and Emart(Korea), (Reduced-form estimation) I find a causal negative impact of domestic rival s presence on foreign retail entry. (Structural model estimation) I build a static entry game model where both retailers make strategic decision. Based on the equilibrium expression derived, I estimate structural parameters of the model. (Ellickson and Misra 11) Both firms enter strategically. Asymmetric info. plays a crucial role in FDI s strategic entry. A game of incomplete information: strategic interaction matters. A game of complete information: strategic interaction disappears.

6 Related literature Strategic entry in FDI: Knickerbocker 73, Head, Mayer and Ries 02, Hoenen and Hansen 09 This paper differs from the literature in that I consider within-country oligopolistic markets. Empirical game estimation: Jia 08, Holmes 11, Ellickson and Misra 11, Aguirregabiria and Vincentini 16 This paper is the first to estimate an entry game between FDI and domestic firms. Entry (or location) decision in service FDI: Goldberg and Grosse 94, Kolstad and Villanger 08, Jones and Wren 16 Due to lack of data, few paper empirically study service FDI.

7 Background FDI liberalisation in Korean retail industry ( 96-) Tesco is the only FDI (Carrefour(exited, 06), Walmart(exited, 06)) Two dominant Retailers: Emart(Korean) vs Tesco(FDI) The 1st and the 2nd biggest retailers: 9.6 vs 7.8($bn) Two firms account for 20.4% in total sales of retail industry. They operate multiple large discount stores: 130 vs 120

8 Data A market is defined as a county (251) Data on large discount stores (KOCA) Entry status of Emart and Tesco across Korean counties County-level market characteristics (KOSTAT) Korea s retail Census (5-year interval) aggregate key variables at the county level (HHI, total entries and exits, avg wages, etc.) I also use demographical data (population, etc.) I construct a county-level panel data for 2001, 2005 and 2010.

9 Reduced-Form Estimation The regression specification is as the following: FDI mt = α + βhome mt + γ X mt + µ m + ε mt where: FDI mt, Home mt are foreign and domestic indicators ( {0, 1}). Xmt is market(m)-wave(t) specific controls. µm is the market specific unobservable. I estimate it in two ways Linear probability model Probit model

10 Endogeneity and IV Home mt is endogenous Despite adding a number of controls, there may exist unobserved factors affecting both foreign and domestic entries. Adverse causality arises if both firms make strategic entry choices. I exploit the instrument variable (IV) strategy. IV: distances from Emart(Homemt ) stores to the closest Emart distribution center Large retailers open stores in regions closer to DC, because of economies of density (Holmes, 2011) Linear probability model - 2SLS Probit - bivariate probit model (Heckman 77, Maddala 86)

11 Reduced-Form Evidences The impact of domestic(emart) presence on Foreign(Tesco) entry (1) (2) (3) (4) (5) (6) OLS IV Probit Probit OLS with FE with FE Probit with RE with IV Domestic presence * * * *** (0.048) (0.061) (0.153) (0.164) (0.447) (0.124) ln Population 0.100*** *** 1.073** (0.024) (0.185) (0.183) (0.144) (0.421) (0.405) ln Total retail entry 0.239*** 0.287*** 0.346*** 1.693*** 4.068*** 2.083*** (0.036) (0.062) (0.071) (0.221) (0.916) (0.298) ln Total retail exit *** ** ** *** *** *** (0.035) (0.051) (0.051) (0.184) (0.565) (0.305) ln Average wage (0.009) (0.009) (0.009) (0.055) (0.116) (0.061) ln Average employment * (0.041) (0.066) (0.064) (0.193) (0.472) (0.252) Herfindahl index (0.271) (0.349) (0.353) (1.690) (3.989) (2.308) Lotte presence (0.060) (0.064) (0.069) (0.182) (0.436) (0.186) county FE(or RE) Y Y Y Additional market char. Y N R-squared Log-likelihood First-stage F stat

12 Empirical model of the market entry Outline of the model Why structural model estimation? It aims to fully account for strategic interactions by building and estimating a entry game. It also intends to evaluate whether asymmetric information affects FDI s strategic interactions. I model a 2 2 game (Ciliberto and Tamer 09) Players {FDI, Home}, Action {Enter, Don t Entry} It s an one-shot game to focus on the simultaneous moving Firms compete only within a market. (it s not a network game) Profit functions are just following the IO literature. π im = α i + X mβ + Z imγ i + δ i Y im + ε im, i {F, H} Incomplete information: i doesn t know ε i but knows F (ε i )

13 Empirical model of the market entry Bayesian Nash Equrilibrium Each retailer forms a belief about its competitor s action Then firm chooses an action that maximizes expected profits given the belief, yielding Y Fm = 1(α F + X mβ + Z Fmγ F + δ F P Hm + ε Fm 0) Y Hm = 1(α H + X mβ + Z Hmγ H + δ H P Fm + ε Hm 0) where P im implies i s belief over firm i s action (The conditional choice probabilities represent each firm s strategy.) Bayesian Nash Equilibrium (BNE) should satisfy the system of the equations below: where φ( ) depends on F( ) P Fm = φ(α F + X mβ + Z Fmγ F + δ F P Hm) P Hm = φ(α H + X mβ + Z Hmγ H + δ H P Fm)

14 Structural Estimation Two-step Approach (1st Step) To estimate the structural parameters in the model, I exploit the two-step approach by Hotz and Miller (1993) This method exploits the structure of incomplete information. The first step is to obtain firm s belief(expectation) about the competitor s action. ( P Hm ˆ, Pˆ Fm ) This is based on the assumption that, at the true equilibrium, the beliefs are simply functions of covariates. Obtain the predicted beliefs by regressing with the data. We don t know the functions (no economic primitives) use non-parametric regression.(kernel estimation)

15 Structural Estimation Two-step Approach (2nd Step) The 2nd stage is to construct MLE which is nested by the estimated beliefs ( P ˆ Hm, Pˆ Fm ) from the 1st stage. I plug the estimated beliefs into the RHS of BNE equations like, Pim = φ(α i + X mβ + Z imγ i + δ i ˆP im ), The MLE is defined as M ˆθ MLE = arg max θ m=1 i {F,K} Y im ln (P im)+(1 Y im ) ln (1 P im)

16 Structural Model Estimation Results Competition Effect(δ i )) Structural Parameter Estimates (1) (2) Effect of Domestic Entry on FDI Entry *** *** (0.278) (0.361) Effect of FDI Entry on Domestic Entry *** *** (0.369) (0.248) Firm-Market specific Effect(γ i ) Distance from FDI(Tesco) Distribution Centre (0.002) (0.002) Constant for FDI Entry *** ** (5.591) (10.391) Distance from Domestic(Emart) Distribution Centre (0.002) (0.002) Constant for Domestic Entry *** ** (5.517) (10.240) Market specific variables(x m) Y Y Additional market characteristics Y N Log-likelihood

17 Role of Asymmetric Information To test whether asymmetric info plays a role in FDI s entry Estimate the same entry game model where information is now completely known, using Berry (1992) Incomplete Information Complete Information Home FDI FDI Home Home FDI FDI Home δ i *** *** (0.278) (0.369) (0.345) (0.335) Under perfect information setting, there s no strategic entries. Strategic choices occurs only under the incomplete game Given that reduced-form evidences deliver a true causality of domestic rivals on FDI s entry, Incomplete information setting corresponds well to the reality

18 Concluding Remarks Summary Strategic interactions matters in foreign retail entry. Asymmetric info plays a key role in FDI s strategic entry. Further to work Dynamic entry game Exploit store-level profit data Counterfactual analysis

19 APPENDIX

20 Background

21 Bivariate Probit Model In principle, IV (2SLS) is based on linear specifications Instead, two-step GMM or minimum chi-square estimators can be used in binary choice models. Yet, these methods are useless in the binary choice model with dummy endogenous variables. In this paper, I adopt Bivariate Probit Model methodology proposed by Heckman(1977) and Maddala(1986) FDI mt = 1(α 1 + β 1 Home mt + γ 1 X mt + ε 1mt 0) Home mt = 1(α 2 + δiv mt + γ 2 X mt + ε 2mt 0) where IV mt is the instrument variable.

22 Kernel estimation; Multiple equilibria Kernel estimation Let W i m (X m, Z im ). The first-step Kernel estimator is M ˆP im (W i s=1 m) = Y is K( W m i w s i ) b M s=1 K( W m i W s i ) b where K( ) is a kernel function, b is the bandwidth. BNE exists by Brower s fixed point theorem. One can directly identify BNE & structural parameters by the successive approximation. It can t address the multiplicity issue. (Tamer, 2003) Two-step approach is a robust estimation to multiple equilibria. Unique equilibrium is played in data (Ellickson& Misra,2011) Thus, the second-step estimate, P im, is able to effectively condition on the equilibrium played by data.