How did you become interested in the role of investments for development?
My interest for understanding the behaviour of multinationals, foreign direct investments (FDIs) and industrial policies started during my undergraduate studies, and this interest became even stronger once I started working at the World Economic Forum. However, for my PhD thesis I narrowed down my focus with firm-level investments as leitmotif. I therefore explored multiple avenues in parallel, defined three research questions, and let data availability determine the exact angle of each of the three essays composing my thesis study. I had decided to conduct an empirical research on FDIs, working with firm-level data, which are notoriously difficult or very expensive to access. Luckily, one firm-level database, “Orbis”, was available at the Graduate Institute’s Library. I also needed to get access to other databases, which took several other explorations and attempts. I then defined the final research questions by linking the data I gained access to with current policy questions.
Can you describe these research questions and your findings?
The first question is: Does intangible asset intensity exacerbate profit shifting? The idea is to test statistically – using econometric analysis – if a firm with high intangible asset intensity (e.g. Google) books more profits in tax havens than “traditional” companies (e.g. an oil company). I prove statistically that multinationals with high intangible asset intensity do book more profits in low tax countries than other multinationals. I also find that it is intangible intensity, rather than belonging to a sector (e.g. high tech), that is the main driver of this behaviour.
The second question is about the effects of FDIs on host countries: How do these effects propagate through domestic and foreign value chains? Again, the methodology uses micro-FDI data, input-output tables, and econometric analysis. I find that FDIs have a positive effect on the downstream industries’ added value. This means that their main contribution to development happens through technology transfers that benefit all “client” industries directly and indirectly (the clients of the clients).
The third question is about the impact of exchange rate depreciation and credit tightening on firms’ investments in a highly dollarised economy (Peru). Here, I have worked with the central bank of Peru to create a statistical model using detailed Peruvian firm-bank matched data. I find that since Peruvian companies hold a high share of USD-denominated corporate debt, when a depreciation occurs, the cost to service the debt increases, causing a reduction in firms’ investments. This is not new, but it adds one more case to the “balance sheet effect” literature. I also find that some companies faced at the same time an increase of debt costs and credit tightening, and consequently reduced their investments even more. This matters for the timing of policies in banking regulations that affect credit supply.
What could be the policy implications of your findings?
The findings of the first essay contribute to the debate about how to reform the taxation of multinational companies. Based on my findings, the international tax structure should be updated to reflect the increasing role that intangible assets are playing in production today along the following lines: (a) do not target a specific segment or group of companies; (b) move beyond “arm’s length principles” and work towards “apportionment” systems to determine what part of global profits is taxable in which location.
The findings of the second essay are relevant for FDI attraction policies. They suggest that targeting one specific industry or company does not produce the desired industrial restructuring outcomes. Instead, sensible industrial policies should consider the full value chain, combining attraction of suppliers of the target industry with open trade policies towards country-industries where an international value chain is already in place.
The findings of the third essay suggest that companies in developing countries with high debt in foreign currency should be incentivised and accompanied with ad hoc programmes to hedge against currency risk.
And what are you doing now?
When I started my PhD I was already working as an economist at the World Economic Forum. I am continuing my activity there, while working on the publication of some of my doctoral essays in a journal.
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Roberto Crotti defended his PhD thesis in Development Economics in September 2020. Professor Martina Viarengo presided the committee, which included Professor Ugo Panizza, thesis supervisor, and Associate Professor Agustín S. Bénétrix, Department of Economics, Trinity College Dublin, Ireland.
Full citation of the PhD thesis:
Crotti, Roberto. “Essays in Firms’ Investments.” PhD thesis, Graduate Institute of International and Development Studies, Geneva, 2020.
Good to know: members of the Graduate Institute can download the PhD thesis from this page of the Institute’s repository.
Interview by Nathalie Tanner, Research Office.
Banner picture: excerpt from an image by eamesBot/Shutterstock.com.