PROPOSAL. RESERCH QUESTION 2) Which are the relative merits of public incentives at the ex post stage? Which are the direct effects?

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2 PROPOSAL RESERCH QUESTION 1) Considering that incentives are not assigned and asked randomly, Who participates in outward FDI financial incentives? (Self-selection, de jure and de facto selection criteria) RESERCH QUESTION 2) Which are the relative merits of public incentives at the ex post stage? Which are the direct effects?

3 AGENDA 1. Motivation and Main Objective 2. Related Literature 3. Research Question and Hypothesis 4. Dataset 5. The Model and the Variables 6. Empirical results 7. Concluding Remarks

4 Literature 1/3 Process evaluation verifies whether or not a support programme is delivered as intended to the target subjects (Scheirer, 1994) It is a complex process involving distinct actors: governmental bodies public agencies firms Understanding the role of each participant is a key factor in implementing incentive structures (Schilder, 2000; Mudambi, 1999). The allocative problem can be decomposed into 5 steps: eligibility, awareness, application, acceptance, enrolment (Heckman and Smith, 2004)

5 Literature 2/3 Understanding the process of participation in each step is important for at least three reasons (Heckman and Smith, 2004): 1. To identify the sources of inequality in the allocation and to reveal the m existence of unexpected barriers to participation itself 2. To reveal useful information about the functioning of support programmes 3. Information on participation processes strong affects program evaluation Threats to validity Selection bias (Self selection and Agency selection) Causality (Omitted variable bias)

6 Literature 3/2 Literature review few studies analyse participation processes at the firm level as the outcome of agency selection processes even less attention is paid to the application behaviour of firms (Blanes and Busom, 2004; Colombo et al., 2007) many studies include variables for participation status, this is always relating to the control of the selection bias in order to study the effects (Tanayama, 2007)

7 RESEARCH QUESTION SELF_ SELECTION SELECTION

8 Research questions and hypothesis 1/2 RESEARCH QUESTIONS Who participates in outward FDI financial incentives? Which are the determinants of self selection procedure? Assuming that firms are aware of the existence of an incentive and that eligibility rules are not too restrictive, the decision of apply to financial subsidies depends on the expected benefits of participation compared to monetary and non-monetary costs. - Firms can reduce the cost of internationalisation process, overcome their financial constraint, can share the risk of the foreign project with institutions and can gather the needed information to reduce uncertainty and risks. - Administrative burden and the effort of filling and promoting an application can generate significant application cost.

9 Research questions and hypothesis 2/2 HYPOTHESES: Incentives are not assigned and asked at random HP 1 Managerial skills and funding experience induce self-selection by reducing application costs. HP 2 Financial constraints and the risk associated to the foreign project affect the propensity to apply for a public incentive by increasing the benefits of participation

10 Economic rationale The outward internationalisation of firms is an increasingly important target of public intervention in most OECD countries since internationalisation is acknowledged both as a determinant of growth and competitiveness for home countries and a driver of the development for host country HCMs are launched to mitigate information and co-ordination failures in the international investment process - to reduce economic and political risks, - to overcome uncertainties, and - to alleviate any shortfalls in resources and capabilities

11 Dataset 1/2 SIMEST, founded in 1990 (Law 100/1990), is a public-private partnership controlled by the Ministry of International Trade and Commerce FINEST, founded in 1992 (Law 19/1991), it collaborates with companies located in the North East of Italy. Its main shareholders are the Regional Governments of Friuli and Veneto, the Province of Trento and Simest. Law 100/1990 and Law 19/1991 capital loans at interest rates below the market rate that are not paid back in case of failure of the foreign project. The agencies can directly acquire up to 25% of the equity of a foreign venture, for a maximum of 8 years priority is given to SMEs investing in Eastern EU and projects in the same sector of their parent company FDIs that entail the divestment of R&D, sales or production activities in Italy (Law 80/2005) are excluded

12 Dataset 2/2 QUANTITATIVE DATA SOURCE 1. Simest and Finest balance sheets, information about the assignment of incentives to Italian firms, from Reprint, a census of outward and inward FDI in Italy since Database AIDA, developed by Bureau van Djick, structural and financial data for Italian public limited companies THE SAMPLE INCLUDES TWO GROUPS OF FIRMS the benefiting firms (i.e., those that have received the incentive to grow internationally) (501 firms, 50% of population) the not benefiting firms (i.e., firms that internationalised their activities in the same period, in the same foreign countries, but without participation by public agency) (831 firms, 10% of population)

13 The variables Variable Description D_Incentive Dummy var taking value of 1 if the firm used the incentive in t 0 SME Dummy var taking value 1 if turnover is less than 50 millions euros in t 0-1 Large_firms Dummy var taking value 1 if turnover is more than 100 millions euros in t 0-1 Log_sales Logarithm of firm sales in t 0-1 (euros) Overall_experience Logarithm of firm age in t 0-1 (years) Funding_experience Dummy var taking value 1 when the firm got a subsidy at least once in the past Financial_constraints Ratio between debt and total assets in t 0-1 Country_risk Country risk rating on a scale from 1 to 5 Internat_experience Logarithm of the number of FDIs held in t 0-1 Greenfield Dummy var taking value 1 if the foreign project is a greenfield FDI Majority East_Europe Diff_industry Dummy var taking value 1 if the FDI is majority-owned by the parent company Dummy var taking value 1 when the FDI destination country is in EastEurope Dummy var taking value 1 when FDI is not in the same sector as parent firm Cohort_2002_2008 Dummy var taking value 1 when the FDI is realised between 2002 and 2006 Industry dummies Dummy var taking value 1 for different industries

14 Empirical results 1/4 Hypothesis 1: Managerial skills and experience induce selfselection by reducing the application cost

15 Empirical results 2/4 Hypothesis 2: Financial constraints and the risk associated to the foreign project affect the propensity to apply for a public incentive by increasing the benefits of participation

16 Control variables Empirical results 4/4

17 Conclusion CONCLUSION : Differences in participation status caused by firm self-selection are due to: application costs, financial constraints and perceived risk Application costs: firm size is a BARRIER Improperly structured incentives may generate unsatisfactory responses by firms that self-select in applying, generating adverse selection (firm size, growth and spillovers) Solution: To reduce the application costs Financial constraints and lack of FDI experience: ADDITIONALITY

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20 Agenda

21 RESEARCH QUESTION SELF_ SELECTION SELECTION

22 Hypothesis

23 Methodology

24 The Model

25 Results: information asymmetry

26 Results: no information asymmetry

27 Conclusions

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29 (Presentation from Papers published in: Journal of Small Business Management, Applied Economics Letters and European Review of Industrial Economics and Policy)

30 AGENDA 1. Motivation and Main Objective 2. Related Literature 3. Hypothesis 4. Methodology 5. Dataset 6. The empirical model 7. The primitive and dependent variables 8. Empirical Results 9. Concluding Remarks: Main Findings and Open Issues

31 MOTIVATION and MAIN OBJECTIVE Internationalisation is a fundamental concern for policy makers: Outward FDI are necessary to make domestic firms competitive in the global economy (Oxelheim and Ghauri, 2004; Brewer et al., 1997) Outward investment incentives have been directly to 3 firm s area: information and technical assistance, investment insurance, fiscal incentives and financial support (UNCTAD, 1998). Methodical analysis of outward internationalisation policy is lacking (Guisinger, 1992; Oxelheim and Ghauri, 2004) The conceptual framework relies on the institutionalist approach: (North, 1990, 2005): outward internationalisation depends not only on the home country s economic characteristics, but also on its institutional environment (Henisz, 2004). Enforcement mechanisms (Dunning and Zhang, 2007; Sethi et al., 2002), are important ingredients of national and international competitiveness of firms.

32 LITERATURE 1/2 INSTITUTIONS are a set of rules, compliance procedure, and moral and ethical behavioural norms designed to constrain the behaviour of individuals in the interest of maximizing the wealth or utility of principals (North, 1990, 1994, 2005) THEY ARE MADE UP OF: Formal constraints (e.g. rules, laws, constitutions) Informal constraints (e.g. norms of behaviour, conventions, self-imposed codes or conduct) Enforcement characteristics (e.g. incentives) INCENTIVES are formal enforcement mechanisms (Dunning and Zhang, 2007), they are any measurable economic advantage afforded to specific enterprises by a government (Brewer, 1997; World Investment Report, 1998). FINANCIAL INCENTIVES TO OUTWARD FDI aim at overcoming firm s financial constraints and at compensating the firm for uncertainty and risk related to the foreign unfamiliar context and to the firms liability of foreigness.

33 LITERATURE 2/2 ECONOMIC RATIONALE for Outward FDI (e.g. Barba Navaretti 2004, Lim 2005, Lipsey, 1997) ADVANTAGES To compensate for non business risk and uncertainty To overcome SME s financial constraints To correct the market s failure To benefits from spillovers To cover the wedge between private and social returns DISADVANTAGES Do benefits will exceed the costs? (Potential economic distortion, discriminatory policy, financial and administrative costs) Positive externality and spillover: yes or not? Less crucial role in determining FDI No studies are devoted to public policy evaluation

34 HYPOTHESIS Although the literature on public policy evaluation has recently noteworthy grown, no empirical studies concerning the evaluation of incentives to firms internationalisation, have been put forward so far We aim at testing the direct impact of public incentives upon the firms growth at the ex post stage: HYPOTHESIS: outward public incentives have positive effects on home firms growth because: they reduce the uncertainty on FDI and they overcome the financial constraint faced by the firms

35 METHODOLOGY 1/3 The fundamental need for public policy evaluation is to answer the causal question as to whether the observed outcomes are effectively caused by the public policy (Marschak, 1956) a = E(Y1i,t+p Ti=1) - E (Y0i,t+p Ti=1) E(y D=1) - E(y D=0) = E(y1 D=1) - E(y0 D=0) E(y1) - E(y0) Selection bias (Self selection and Agency selection) Causality (Omitted variable bias)

36 METHODOLOGY 2/3 Is the control group a truly mirror of the benefiting firms? For non experimental design several methods have been proposed in literature: matching methods, difference in difference and treatment effect models (Blundell and Costa Dias, 2000; Heckman, 2001) TREATMENT EFFECT MODEL Basic idea: to estimate two regressions simultaneously The first: a probit regression predicting the probability of receiving the incentive The second: a linear regression for the outcome as a function of the incentive variable, controlling for observable confounders

37 TREATMENT EFFECT MODEL METHODOLOGY 3/3

38 DATASET: Italian and European public policy Outward FDI programmes of EU countries, since early 1990s EXPORT OBJECTIVES INSTRUMENTS Law Decree 143/98 Law 227/97 Law Decree 143/98 Law 24/03 Law 35/03 Law 394/81 Law 100/90 Law Decree 143/98 Law 35/05 Law 19/91 Law Decree 143/98 Law 35/05 Ministerial Decree 136/00 Law 304/90 Venture Capital Funds Italian promotion programmes, at 2006 Export Feasibility studies, technical assistance Export Guarantees Trading FDI outside the EU Productive FDI in EU Productive FDI outside the EU Productive FDI in DCs FDI Productive FDI Guarantees Tenders outside the UE

39 DATASET: Italian financial incentives SIMEST is the development finance institution charged with supporting and promoting Italian companies activities outward the EU. It is an hybrid structure (a public-private partnership) controlled by the Ministry of International Trade and Commerce PUBLIC FINANCIAL INCENTIVE (LAW 100/90): SIMEST can acquire up to 25% of a foreign company s equity capital, the duration of equity shares is in principle up to a maximum of 8 years DESTINATION COUNTRY: particularly in Eastern Europe, no EU ELIGIBLE INVESTORS: all companies, partnerships, cooperatives, consortiums and business associations, priority is given to initiatives by SMEs. All sector. TIME OF IMPACT: start up (outward FDI) and developmental (Italian firm) SELECTION RULE: Simest examines proposed investments after having acquired information on the investment project and its partners

40 DATASET: Sources QUANTITATIVE DATA SOURCE Simest s balance sheets, which provide the information about assignments of incentives to Italian firms, throughout the period ; Database Reprint, which provides a census of outward and inward FDI in Italy, since It is yearly updated, and it is sponsored by the Italian Institute for Foreign Trade. AIDA (Bureau van Djick), which provides balance sheet data for Italian firms. COVERAGE Population of eligible firms and population of benefiting firms Our empirical analysis, relies on two groups of firms: the benefiting firms (i.e. 237 firms that have received the incentive to grow internationally ) and the control group (i.e. 307 firms that internationalised their activities in the same period, in the same foreign countries, but without participation by Simest)

41 THE EMPIRICAL MODEL (Dj): endogenous binary treatment, it is a dummy variable that equals 1 if the firm has received the incentive, and zero otherwise (FIRM_GROWTHj): continuous, fully observed variable identifying the effects, it is measured by the rate growth (between t0-1 and t0+2, where t0 is the year of the foreign initiative) (FIRMj): independent firm s structural variables and financial constraints (PROJECTj): independent project s variables D j = FIRMj + PROJECTj + j (FIRST STAGE: Incentive assignement equation) Dj = 1 if D j > 0 Dj = 0 otherwise FIRM_GROWTHj = Dj + FIRMj + PROJECTj + uj (SECOND STAGE: Valuation equation)

42 THE VARIABLES Benef. Firms Not Benef. Firms OUTCOME VARIABLE Firms growth: Turnover of the Italian headquarter two years after the FDI as percentage of the turnover one year before Benef. Firms Not Benef. Firms Sign. Sales_defl_t *** Sales_defl_t *** (SalesDt2-SalesDt1)/SalesDt1 2,9 0,8 **

43 THE VARIABLES

44 RESULTS

45 RESULTS

46 RESULTS

47 CONCLUDING REMARKS: Limits and Main Findings LIMITS Impossibility to assess the effects of public incentives on social welfar We do not have information on firms that applied for the incentives but did not get it (e.g. Merito et al., 2007). It was impossible to identify the employed policy screening rule. MAIN FINDINGS First, at the best of our knowledge the paper is the first formal evaluation Second, treatment effect model confirms the positive effects of public financial incentive that can be registered in the short term Third, important differences can be detected among the attitude towards the use of public financial incentive (Significantly different characteristics not only in terms of size, but also in term of financial constraints and project characteristics)

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