Curses or Blessings: How Low Asset Mobility Helps Foreign Firms Gain Government Support

Abstract

Low asset mobility is often seen as undermining the bargaining power of foreign investors. This article advances an alternative view that emphasizes the positive effects of low asset mobility. I argue that governments favor foreign firms with lower mobility because their commitment to stay is always more credible. I present a formal model to illustrate how (1) governments’ preference for economic gains and (2) investment competition intensity determine the political effect of asset mobility. I empirically evaluated my theoretical predictions using two studies in China. First, leveraging a change in enterprise income tax law in 2008, I used a difference-in-differences design to examine the effect of ex post asset mobility on government treatment. Second, I fielded an original survey of foreign firms’ employees in China to test the theoretical mechanisms. My findings suggest that, on average, governments favor immobile foreign firms over their mobile peers. This study showed that the role of asset mobility in government–investor bargaining is more nuanced in this era of globalization.

Keywords: Asset Mobility, FDI, China