Knowledge appropriability, firm size, and growth

Empirical evidence shows that the number of patents per R&D dollar declines with firm size. In this paper, we propose a Schumpeterian growth model that accounts for this evidence. We analyze an economy with firms that engage in cost-reducing innovation resulting from the accumulation of both codified and tacit knowledge: the former occurs through the purchase of patents, while the latter is the result of R&D conducted in-house by firms. We study the relation between knowledge appropriability and market structure, and we show that a shift from patents to in-house research occurs as firm size gets larger. Since innovation statistics concentrate mainly on patents, this process of research reallocation results into an under-estimation of innovative activity and is responsible for the declining ratio of patents to R&D expenditure. Survey data on UK-based firms provide support to our results.     

GROWTH, R&D AND WELFARE: THE ROLE OF PUBLIC POLICY

This paper analyzes the normative side of an R&D growth model in which market structure and growth are jointly determined in the equilibrium of a one‐sector economy under monopolistic competition. We find that a distortion in the allocation of R&D, namely the presence of technological spillovers between firms, generates two market failures: insufficient growth and excessive entry of firms. We show that this result is driven by the interplay between market structure and growth. A simple tax/subsidy scheme to support the efficient solution is proposed.     

Anti-competitive conduct, in-house R&D, and growth

Incumbent firms have two basic possibilities to improve their competitive position in the product market: Investment in R&D and the creation of entry barriers to the disadvantage of potential rivals, e.g. through lobbying activities, campaign contributions, bribes or the adoption of incompatible technologies. This paper proposes a simple oligopoly model which raises the possibility that such anti-competitive conduct and R&D investment are complementary activities for incumbents. Consequently, an institutional framework or technological possibilities which encourage anti-competitive conduct, although impeding entry of potential rivals and accentuating standard oligopoly distortions, may foster R&D-based growth and welfare. However, this outcome is less likely if entrants exert technological spillover effects, e.g. through foreign direct investment. Stronger protection of intellectual property rights, although triggering anti-competitive conduct and thereby impeding market entry as well, is more likely to foster economic growth.     

Schumpeterian competition in heterogeneous oligopolies

The modeling of Schumpeterian competition as a process of innovation, imitation and selection was first presented by Nelson/Winter (1982) in a simulation study and further analyzed in a similar but general analytical formulation by Iwai (1984a, 1984b). Their results concerning the relations between the combination of the different forces of Schumpeterian competition and market structure respectively the distributions of profits are interesting, but restricted to competitive markets. Comparing rules of thumb and satisficing for the Ramp;D decisions the present study analyzes the process of Schumpeterian competition in a heterogeneous oligopoly. Firstly, the authors find for the Ramp;D-concentration relation results contrary to the traditional interpretation of Schumpeter. Secondly, Iwai’s (1984a, 1984b) qualitative results hold in this less restrictive modeling.     

Horizontal innovation-based growth and product market competition

The influence of the intensity of competition in the product market on economic growth is analyzed by developing an endogenous growth model with horizontal innovation. Product market competition is measured by (1 − Lerner index) and depends on both the share of factor inputs in total income and the degree of substitutability across goods. We find that the shape of the relationship between competition and growth can change dramatically according to which proxy of competition is used. We explain our results in terms of the interplay between the resource allocation and the profit incentive effects.     

Economic growth, labor market and demographic patterns

This study addresses the dynamic interaction between income growth, patterns of demographic variables, and characteristics of the labor market. We attempt to provide an endogenous explanation for the origin and nature of long-run sustained oscillations in the population and in economic variables. First, we develop an economic growth model containing unemployment. The resulting dynamics reveal that the emergence of irregular sustained oscillations is related to the lack of sensitivity in wage growth to changes in the employment rate. Next, labor force growth is endogenized in the basic model through micro-founded fertility choices of individuals. By introducing the endogenous fertility rate into the basic model, we generate a demographic transition. Next, consistent with Malthusian cycle literature, the inevitable time lag between individual reproductive decisions and subsequent market needs, in conjunction with a highly specialized labor force, appear to be the primary source of such long-run oscillations. Finally, the model predicts that raising the age of entry into the labor force increases economic growth.     

International credit and welfare: A paradoxical theorem and its policy implications

This paper considers a developing nation that faces a foreign exchange shortage and hence its demand for foreign goods is limited both by its income and its foreign exchange balance. Availability of international credit relaxes the second constraint. We develop a simple model of strategic interaction between lending institutions and firms, and show that the availability of international credit at concessionary rates can leave the borrowing nation worse off than if it had to borrow money at higher market rates. This ‘paradox of benevolence’ is then used to motivate a discussion of policies pertaining to international lending and the Southern government's method of rationing out foreign exchange to the importers.     

Political democratization, economic liberalization, and growth volatility

This study empirically investigates the effects of political and economic liberalization on growth volatility using a difference-in-difference method for a sample of 158 countries over the 1970-2005 period. The results show that, when examined separately, economic liberalization leads to a significant reduction in volatility while democratization is not followed by a decrease in growth volatility. For countries that undertake only one liberalization, opening up the economy to international trade reduces volatility in growth; becoming a democracy, on the other hand, seems to increase macroeconomic instability. For countries that implement both political and economic liberalizations, no statistically significant effect on volatility is detected. These results serve to provide additional support for the policy recommendation that developing countries should liberalize their economy first and then consider political liberalization.     

Effects of longevity and dependency rates on saving and growth: Evidence from a panel of cross countries

While earlier empirical studies found a negative saving effect of old-age dependency rates without considering longevity, recent studies have found that longevity has a positive effect on growth without considering old-age dependency rates. In this paper, we first justify the related yet independent roles of longevity and old-age dependency rates in determining saving and growth by using a growth model that encompasses both neoclassical and endogenous growth models as special cases. Using panel data from a recent World Bank data set, we then find that the longevity effect is positive and the dependency effect is negative in savings and investment regressions. The estimates indicate that the differences in the demographic variables across countries or over time can well explain the differences in aggregate savings rates. We also find that both population age structure and life expectancy are important contributing factors to growth.     

Effective property rights, conflict and growth

This paper shows how the interaction between conflict and growth can give rise to a nonmonotone relationship between property rights and social welfare. This interaction is illustrated in a model of endogenous growth in which equilibrium diversion of resources is the cost of securing effective property rights. A symmetric equilibrium allocation associated with more secure property rights and faster growth can be Pareto dominated by one associated with poorer property rights and slower growth. Faster growth can exacerbate the problem of diversion whenever property rights are sufficiently poor. These results call for caution before a society decides to pursue economic growth independently of the institutional structure of property rights. Furthermore, if this structure is inappropriate piecemeal reform might not be in the interest of society, and a substantial reform might be necessary if it is to be welfare-improving.     

Inflation,inflation uncertainty and growth: Are they related?

We examine the relationship between inflation uncertainty, inflation and growth using annual historical data on industrial countries covering in many cases more than one century. Proxying inflation uncertainty by the conditional variance of inflation shocks, we obtain the following results. (1) There is significant evidence for the positive effect of inflation uncertainty on inflation supporting the Cukierman–Meltzer hypothesis. (2) There is mixed evidence on the causal effect of inflation on inflation uncertainty. (3) There is strong evidence that inflation uncertainty is not detrimental to output growth.     

Currency substitution,inflation, and welfare

Currency substitution affects the mapping between social welfare and inflation by altering the underlying money demand function and influencing interest rates. In order to explore the essence of this effect, I build a model with working capital under which foreign currency is substituted with the less liquid components of domestic money. The framework closely mimics the actual pattern of currency substitution across varying rates of inflation and enables the study of an additional channel that works through the impact of currency substitution on interest rates. It is found that there is a threshold inflation rate, which turns out to be 44% under baseline calibration, below which currency substitution decreases welfare and vice versa. A practical implication is that, at inflation rates lower (greater) than the threshold, the potential welfare gains from disinflation to a near-zero inflation rate are higher (lower) if there is currency substitution than otherwise.     

Spillovers and the competitive pressure for long-run innovation

This paper discusses the impact of oligopolistic product markets for innovation and growth, highlighting a novel, fundamental role of spillovers. We develop a model of endogenous growth with non-tournament R&D, where spillovers raise the relative R&D efficiency of laggards. A key feature is that the rate of innovation and the market configuration (i.e. the distribution of market shares) are jointly determined. Our results emphasize the role of spillovers in sustaining the competitive pressure that is fundamental for long-run innovation and economic growth.     

Competition and inter-firm credit: Theory and evidence from firm-level data in Indonesia

Using firm-level data we investigate the relationship between trade credit and suppliers' market structure and find a ∩-shaped relationship between competition and trade credit, with a discontinuous increase in credit provision between monopoly and duopoly. This “big jump” arises because monopolists are more likely to not offer any trade credit than firms in competitive environments. Our model exploits the fundamentally different nature between cash and trade credit sales, arguing that firms are unable to commit ex ante to a trade credit price. We show that monopolists will often sell only on cash, while credit is always provided in competitive environments.     

Investor protection and income inequality: Risk sharing vs risk taking

This paper studies the relationship between investor protection and income inequality. In the presence of market frictions, better protection makes investors more willing to take on entrepreneurial risk when lending to firms, thereby improving the degree of risk sharing between financiers and entrepreneurs. On the other hand, by increasing risk sharing, investor protection also induces more risk taking. By increasing entrepreneurial risk taking, it raises income dispersion. By reducing the risk faced by entrepreneurs, it reduces income volatility. As a result, the relationship between investor protection and income inequality is non monotonic, since the risk-taking effect dominates at low levels of investor protection, while risk sharing becomes stronger when more risk is taken. Empirical evidence from up to sixty-seven countries spanning the period 1976–2004 supports the predictions of the model.     

The “V-factor”: Distribution,timing and correlates of the great Indian growth turnaround

We analyze a panel of output series for India, disaggregated by 15 states and 14 broad industry groups. Using principal components (Bai, 2004; Bai and Ng, 2004) we find that a single common “V-factor” captures well the significant shift in the cross-sectional distribution of state-sectoral output growth rates since the 2nd half of the 1980s. The timing of the turnaround implied by the V-factor is more closely related to the pattern of policy reforms than has been found in previous research. Regression-based analysis also provides some insights into the uneven distribution of the turnaround across Indian states.     

Credit constraints,inequality and the growth gains from trade

This paper tests the hypothesis that, in the presence of credit constraints, higher wealth inequality affects negatively the growth gains from trade liberalisation. Variations in the growth rate of value added–decomposed in the growth rate of the number of establishments and the growth rate in average size–of manufacturing industries in 34 developing countries before and after trade liberalisation are used to study the effects of inequality on the difference in growth under liberalised and nonliberalised regimes. The results show that the number of firms in industries with high dependence on external finance in countries with higher inequality grow significantly slower, in both statistical and economic terms, than in industries with low dependence on external finance in countries with lower inequality following a trade liberalisation relative to the closed-economy period.