STRATEGIC TRADE-POLICY AND WELFARE - THE EMPIRICAL CONSEQUENCES OF CROSS-OWNERSHIP

Foreign equity ownership is shown empirically to weaken significantly, and occasionally reverse, common strategic trade policy results. Existing levels of U.S. cross-ownership, for example, reduce the average optimal export subsidy by 47% relative to the Brander and Spencer (Journal of International Economics, 1985, 18, 83-100) value. In industries with particularly high cross-ownership and relatively small imputed labor rents, optimal subsidies fall to less than one-seventh of their former level. Previous studies, which overlook high rates of cross-ownership, overstate the effectiveness of strategic policies most sharply in sectors with above-average expected profitability, scope for strategic investments, and barriers to rent dissipation.