Trade liberalization and volatility: Evidence from Indian firms

I look at the impact of trade liberalization on sales growth volatility of firms. Exploiting India’s externally imposed trade reform to identify trade liberalization effects, I find that while a fall in the tariff on the final product produced by the firm is associated with an increase in volatility in Indian manufacturing firms, a fall in the tariff on intermediate inputs is associated with a decrease in volatility, with the latter effect dominating the former. I hence propose an additional channel for gains from trade liberalization to the ones documented in the literature.     

Domestic trade protection in vertically-related markets

We consider trade policy in a setting where home country firms are fully dependent on vertically-integrated foreign firms for supplies of a key input. We find that vertically-integrated firms' strategic considerations play an important role and that, in particular, a tariff on final goods may either increase or decrease the domestic price of final goods. The import of final goods is always taxed to extract and shift rents from foreign firms, while the import of intermediate goods can be either taxed or subsidized. The market structure is shown to be an important consideration when making trade policy.     

Productivity effects of international outsourcing: evidence from plant-level data

Abstract.  We investigate the impact of international outsourcing on productivity using plant-level data for Irish manufacturing. Specifically, we distinguish the effect of outsourcing of materials from services inputs. Moreover, we examine whether the impact on productivity is different for plants being more embedded in international markets through exporting or being part of a multinational. Our results show robust evidence for positive effects from outsourcing of services inputs for exporters, either domestic or foreign owned. By contrast, we find no statistically significant evidence of an impact of international outsourcing of services on productivity for firms not operating on the export market.     

Effects of foreign equity participation on recipient firm exports

We offer new evidence on the role of foreign investment in domestic firms’ export decisions, both at intensive and extensive margins, using balance sheet data from a panel of manufacturing firms in India. In contrast to the existing literature, we analyse the effect of foreign investment at different levels, where the levels correspond to percentages of foreign equity. We use a selection procedure to control for the potential self-selection of firms into export participation. Though we do find that foreign investment increases a domestic firm’s likelihood to export, firms with majority foreign equity are found to serve domestic market more, once the self-selection is accounted for.     

Product sophistication and spillovers from foreign direct investment

Foreign direct investment (FDI) in developing countries is often associated with higher economic growth due to knowledge and technology spillovers to local firms. One way that FDI speeds up growth is by facilitating the manufacturing of more sophisticated products by local firms. So far, there is a lack of firm‐level evidence how the presence of multinational firms affects the product sophistication of firms in a developing country. The aim of this paper is to fill this gap. We compile an extensive firm–product‐level data set of Indian manufacturing firms, which we complement with information on product sophistication and spillovers from FDI. We then explore different channels through which spillovers from multinationals to local Indian firms foster the manufacturing of sophisticated products. We find evidence that spillovers through supplier linkages strongly increase the manufacturing of sophisticated products in India.     

Does services liberalization affect manufacturing firms’ export performance? Evidence from India

This paper investigates the relationship between the reform of energy, telecommunications and transport services in India in the mid-1990s and manufacturing firms’ export performance. The empirical analysis relies on exogenous indicators of regulation of Indian services sectors and detailed firm-level data from India in the 1994–2004 period. I find that the reform of upstream services sector has increased the probability of exporting and export sales shares of firms producing in downstream manufacturing industries. The results suggest that the effect of services liberalization on manufacturing firms’ export performance is stronger for initially more productive firms. These empirical findings are robust to alternative econometric specifications that control for other reforms, industry, firm characteristics and that deal with potential reverse causality concerns.     

Does trade stimulate product quality upgrading?

This paper investigates whether increased import competition leads firms to engage in incremental innovation reflected in product quality upgrading using Chilean manufacturing firm‐product data and measuring product quality with unit values (prices). We identify causal effects of import competition using an effective trade barrier measure – transport costs – as instruments for import penetration ratios across industries. Transport costs have a negative and significant effect on product quality. The evidence suggests that estimated unit value increases capture product quality upgrading, imports’ competition effects drive quality upgrading, and benefits depend on firms’ industrial specialization. Easier access to intermediate inputs also fosters quality upgrading.     

The innovation and performance impacts of venture capital investment on China’s small- and medium-sized enterprises

This study examines the impacts of venture capital (VC) on performance and innovation of China’s small- and medium-sized enterprises (SME). Using unbalanced panel data of 2699 VC-backed and non-VC backed firms in China’s pilot over-the-counter equities market, namely the National Equity Exchange and Quotation (NEEQ) market, during 2005–2014, we find that venture capital financing not only spurs innovation in the Chinese market, but also exhibits significantly positive impact on financial performance. Empirical evidence reveals that syndication of venture capital investment as well as the reputation of venture capitalists helps to create value for VC-backed firms. However, no evidence is found that foreign VC-backed firms perform better than domestic VC-backed ones. The results are robust to a variety of specifications. Our findings imply that the VC financing is an effective channel to promote the development of SMEs at China’s multi-layer capital market and syndicated VC investments and venture capitalists with high reputation shall be encouraged to play a bigger role in nurturing innovation and entrepreneurship in the future.     

Effect of the global financial meltdown on India’s aggregate export volumes

ABSTRACT

This paper sets up a demand-supply model to analyse India’s export performance (in terms of volumes rather than values) between 2000Q1–2014Q4. The main objective is to determine the impact of the financial meltdown of 2008 on India’s export performance. During the meltdown period, decline in price by India’s competitors in the international market resulted in (1) loss of competitiveness of India’s export goods and (2) a complete breakdown of the price mechanism affecting India’s export demand. Though export supply was not significantly affected by the meltdown episode we find evidence that exporting firms turned towards the domestic market to cope with the loss in export. The meltdown episode began to significantly affect India’s export demand and supply equations from 2009Q3. The demand and supply equations after that period became so unstable that ‘nothing worked’ for India’s exporters as they tried to counter the decline in export. Hence there was ample reason for them to panic and seek the government’s help. Government policies aimed at boosting export demand did have a positive impact on India’s export performance. Government policies to boost export supply had no impact except being palliative for the exporters at their moment of crisis     

Effects of Islamic religiosity on bilateral trust in trade: The case of Turkish exports

Using a rich firm level data set for Turkish manufacturing, we test whether sharing similar religious beliefs with potential contracting parties drives a firm’s first time entry into export markets. We exploit variation in the practice of Islam across Turkish NUTS3 regions and we find that firms located in regions characterised by stronger religiousness are more likely to enter export destinations with a higher share of Muslims among their population. This result is robust to the control for past trade, common language, cultural and migration ties as well as for selective trade policy in favour of politically connected religious business groups. In particular, religious proximity eases export entry for producers of “trust intensive” goods, it favours subsequent foreign market entries and reduces the export exit probability. All in all, our evidence supports an export enhancing effect of religious proximity working through export sunk costs reduction rather than through similarity in preferences.     

Input-trade liberalization and firm export decisions: Evidence from Argentina

Trade openness contributes to the diffusion of the modern technologies embodied in imported intermediate goods, which play a central role in the economic growth of developing countries. This paper investigates the micro-economic effects of input-trade liberalization. Previous work has found positive effects of access to foreign inputs on firm performance. If the availability of imported intermediate goods yields firm productivity gains, we would also expect a positive effect of input-trade liberalization on firm export decisions. This paper contributes to this literature by looking at the relationship between changes in input tariffs and within-firm changes in export status. Using detailed firm-level data from Argentina, I demonstrate that the probability of entering the export market is higher for firms producing in industries that have experienced greater input tariff reductions. These empirical findings are robust to alternative specifications that control for other trade-policy reforms, and industry and firm characteristics.     

On the relationship between intermediate input imports and export quality in China

This paper studies the connection between intermediate input imports and firms’ export quality using firm‐level data from 2000 to 2007. Our regression results show that intermediate input imports promote manufacturing firms’ export quality through ‘variety effects’ and ‘innovation effects’, though the effects are significantly different among firms with different characteristics, and the magnitude of these effects differs across import sources and the quality of imported intermediate inputs themselves. Moreover, we find that a good institutional environment is conducive to the strengthening of the positive influence of intermediate input imports on export quality. Furthermore, the dynamic decomposition demonstrates that the reallocation effect is the key force through which imported inputs boost industrial aggregate quality growth. Taken together, these results suggest that product upgrading facilitated by quality embedded in imported intermediate inputs, a good institutional environment and market share reallocation help Chinese firms to improve the quality of their export products.     

Employment,job turnover,and trade in producer services: UK firm‐level evidence

Abstract We provide the first firm‐level evidence of the impact of the trade in producer services (‘offshoring’) on the labour market. Using a new data set from the UK that measures trade in services at the firm level, we find no evidence that importing intermediate services is associated with job losses or greater worker turnover. Using regression to control for observable differences between firms that import service inputs and those that do not, we show that firms that start importing intermediate services experience faster employment growth than equivalent firms that do not. This seems likely to be the result of positive demand shocks, which cause a simultaneous increase in employment, output, and use of imported service inputs.     

Market size and entry in international trade: Product versus firm fixed costs

This paper develops a theoretical framework to infer the nature of fixed costs from the relationship between entry patterns in international markets and destination market size. If fixed costs are at the firm level, firms take advantage of an intrafirm spillover by expanding firm‐level product range (scope). Few firms enter with many products and dominate international trade. If fixed costs are at the product level, an interfirm spillover reduces the fixed costs to export for all firms producing the product. The resulting entry pattern consists of many firms exporting different varieties of the same product. Using cross‐country data on firm and product entry, I find empirical evidence consistent with product‐level costs. More firms than products enter in larger markets offering their consumers lower prices and a greater variety of goods within the product category.     

The Effects of Trade Liberalization in a Vertical Structure

Despite the importance of international trade on intermediate goods, the literature did not pay much attention to this aspect in determining the effects of trade liberalization in the presence of a labor union. We take up this issue here and show the effects of trade liberalization on the final goods and/or the intermediate goods, where the domestic firm pays unionized wage and imports intermediate goods. We show that trade liberalization on the intermediate goods (final goods) increases (decreases) the unionized wage, labor union's utility and domestic profit. Trade liberalization on both the final goods and intermediate goods may either increase or decrease the domestic unionized wage, labor union's utility and domestic profit depending on the input coefficients and the initial tariff levels. Our qualitative results are robust with respect to the intermediate goods market structure, the pricing strategy of the intermediate goods producers and the union's objective function.     

Why does China protect its labour‐intensive industries more?*

China's tariff structure favours labour‐intensive sectors, and this is at odds with traditional theory of comparative advantage. The paper argues that tariffs in China are a mechanism for protecting technology‐backward domestic – especially state‐owned enterprises (SOEs) from competition technology‐advanced foreign enterprises producing in China. With relatively integrated labour markets and cross‐firm technology differences, SOEs’ subsistence is supported by subsidized credit and limited access of foreign firms’ local production to tariff‐protected domestic markets. Labour market integration and capital subsidies increase the relative cost of labour in SOEs compared to their foreign competitors, hurting more domestic firms in industries that use labour more intensively. Restrictions to FIEs’ (foreign‐invested enterprises) access to tariff‐protected product markets, which protect more labour‐intensive industries, compensate for the greater cost disadvantage of SOEs in labour‐intensive sectors.     

Regional foreign direct investment and technology spillover: evidence across different clusters in India

This paper examines whether there exist productivity spillovers from foreign direct investment (FDI) to domestic firms at the regional level, using firm-level panel dataset covering 22 manufacturing industries in India from 2000 to 2012. In order to estimate the productivity spillovers from FDI at the regional level, we select 10 industrial clusters across 4 regions in India. In estimating productivity, we control for a possible simultaneity bias by using semi-parametric estimation techniques. We find that local firms benefit from horizontal and vertical FDI, but the benefits from the latter are found to be substantially stronger. The absorptive capacity of domestic firms is highly relevant to harvest the spilled technology from foreign-owned firms. Furthermore, we find that domestic firms belonging to high-technology industries benefit more from FDI at the regional level. We also find that market concentration is a crucial conduit for firm innovation, technological upgradation, and having a direct effect on local firm total factor productivity.     

MIGRATION AND AGGLOMERATION WITH KNOWLEDGE SPILLOVERS*

In this paper, a Grossman–Helpman–Romer‐type endogenous growth model is developed that incorporates two regions and mobile workers. While the linkage between final goods firms and intermediate goods firms is strong, the linkage between innovation activities and manufacturing activities is weak in our paper. It is possible for the economy to reach either full agglomeration, partial agglomeration, or segmented agglomeration. We find that mobile workers acquire the highest welfare under full agglomeration. However, under segmented agglomeration, the welfare of skilled workers is not necessarily the lowest.     

Knowledge spillovers,absorptive capacity and total factor productivity in China’s manufacturing firms

Applying the stochastic frontier framework, this study explores the diffusion and absorption of technological knowledge in China’s manufacturing firms, based on a panel of more than 10,000 local and foreign-invested firms over the period 1998–2001. Our empirical approach allows us to distinguish between technological progress (TP) and technical efficiency (TE) in analysing whether R&D, exports and the presence of foreign direct investment simultaneously enhance TP through knowledge spillovers in a single framework and whether different types of domestic absorptive capacity moderate external knowledge spillovers in relation to TE. The results show that there are positive inter-industry productivity spillovers from R&D and foreign presence, whereas evidence of intra-industry productivity spillovers from FDI to Chinese firms is less robust. We find evidence that absorptive capacity is one of the key determinants to quantitatively explain intra-industry differences in productivity of local Chinese firms. The findings have important policy implications.     

Import to invest: Impact of cultural goods on cross-border mergers and acquisitions

Existing studies have demonstrated the necessities of formal institutions and negativity of cultural distance in international investments. Surprisingly, China’s exponential increase of cross-border mergers and acquisitions (M&As) and its low-quality institutions and distinct cultural norms contradict these studies. This paper aims to tackle this puzzle by examining the role of cultural imports in cross-border M&As. Our empirical evidence suggests that the trade of cultural goods significantly increases the volume and realized economic gains of M&As from importing to exporting countries. Our results are robust to alternative measures and an instrumental variable approach. On exploring potential channels, we find that imported cultural goods could drive cultural convergence between countries and also mitigate the adverse effect of cultural distance on merger outcomes. We further show that cultural imports could help firms in overcoming contractual barriers at target countries. This paper provides practical implications for cross-border investments in the current world with intensified cultural conflicts.