Three essays on foreign direct investment

My doctoral thesis contains three essays, each focusing on a different aspect of foreign direct investment (FDI). Chapter one presents a theoretical model which offers guidance to a developing country's government on choosing the optimal FDI organizational form, either equity joint ventures (EJVs) or wholly foreign owned enterprises (WFOEs) based on the government's uncertainty as to the true level of foreign technology. Combining a mechanism design and a signaling theory approach to optimal regulation, the model demonstrates how optimal tax policies enable a FDI recipient government to target tax benefits toward legitimate FDI, while at the same time discouraging “sham” FDI. The finding is that when a host government has less uncertainty as to the true level of FDI technology, national welfare is higher under WFOEs than under EJVs. Otherwise, if the host government has more uncertainty as to the true level of FDI technology, then promoting EJVs enhances national welfare more than WFOEs.; Essay two studies the benefits that FDI can bring to a nation. It extends the literature on FDI by examining the resilience of investment by foreign affiliates (FAs) during the Asian financial crisis. Using firm-level survey data, I compare the investment stability of FAs and indigenous firms (IFs) across two dimensions. One dimension is whether FAs' investment was more financially constrained than IFs' during the crisis. The second dimension is the sensitivity of the FAs' (IFs') investment to internally generated funds across time. I found that FAs were less financially constrained, and, therefore, were able to invest more than IFs during the crisis. The sensitivity of FAs' investment to internally generated funds was reduced while the IFs' was intensified during the crisis.; Essay three of my thesis examines whether a developing host country's investment in technology upgrading (ITU) will positively attract FDI and how this attraction changes overtime. Based on Chinese provincial data, I documented that FDI inflows to China positively related to Chinese ITU. This relationship is stronger before 1990 but then declines after 1990. This finding can be due to the Chinese government's restriction on FDI organizational forms prior to 1990.