Foreign Debt,Foreign Direct Investment and Volatility

We investigate how foreign debt and foreign direct investment (FDI) affect the growth and welfare of a stochastically growing small open economy. First, we find that foreign debt influences the growth of domestic wealth by lowering the cost of capital, while FDI affects the country's welfare by providing an additional source of permanent income. Second, a decline in domestic investment may improve domestic welfare as FDI replaces the gap. Even when the welfare deteriorates, its magnitude is mitigated, leaving more room for discretionary fiscal policy. Third, a fiscal policy aimed to stabilize domestic output fluctuations needs to be conducted not to crowd out the welfare benefit of FDI too much. Fourth, an economy with both types of foreign capital experiences wider welfare swings by external volatility shocks than the one with foreign debt alone, while the welfare effects from domestic volatility shocks are mitigated. The welfare effects of fiscal shocks are much smaller with both types of foreign capital. Lastly, the first-best labor income tax covers the government absorption by the labor's share of total output, and the capital income tax covers the rest. Investment is penalized or subsidized depending on the social marginal cost-gain differential.     

Pampered Bureaucracy,Political Stability and Trade Integration

This paper examines the effect of trade integration and comparative advantage on one of a country's institutions, which in turn influences its economic efficiency. The environment we explore is one in which a country's lower classes may revolt and appropriate wealth owned by a ruling elite. The elite can avert revolution by incentivizing a potentially productive middle class to sink their human capital into a relatively unproductive bureaucracy. Thus the bureaucracy serves as an institution through which the elite can credibly commit to make transfers to the rest of society, but in the process this reduces economic efficiency. Trade integration alters the relative value of the elite's wealth. This alters the lower classes’ incentive to revolt on the one hand and the elite's incentive to subsidize participation in the inefficient bureaucracy on the other. Therefore, the interaction between a country's comparative advantage and an inefficient economic institution determines whether trade integration increases or reduces economic efficiency. The econometric findings support the model's main prediction.     

Who gains from capital market integration? Tax competition between unionized and non‐unionized countries

The welfare effects of capital market integration are examined under a model of tax competition with two asymmetric countries. The asymmetry is expressed through the labour market: one country has a perfect labour market whereas the other country's labour market is unionized. Our results indicate that the welfare effects of capital market integration differ depending on whether governments are active or passive in attracting capital. In the absence of active governments, capital market integration benefits the country with a competitive labour market whereas it harms the unionized country. Capital market integration benefits both countries if governments are active and compete for mobile capital using taxes/subsidies.     

FDI Policy,Greenfield Investment and Cross‐border Mergers

This paper examines a multinational's choice between greenfield investment and cross‐border merger when it enters another country via foreign direct investment (FDI) and faces the host country's FDI policy. Greenfield investment incurs a fixed plant setup cost, whereas the foreign firm obtains only a share of the joint profit from a cross‐border merger under the restriction of the FDI policy. This trade‐off is affected by market demand, cost differential, and market competition, among other things. The host country's government chooses its FDI policy to affect (or alter) the multinational's entry mode to achieve the maximum social welfare for the domestic country. We characterize the conditions shaping the optimal FDI policy and offer intuitions on FDI patterns in developing and developed countries.     

The Choice of an Optimal Exchange Rate System for a Small Country Under the three Good and three Country Model

The purpose of this paper is to analyze the problem of the choice of an optimal exchange rate system for a small country in terms of insulation from foreign real and monetary disturbances and in terms of minimizing the output variance around desired output. We employ a simple open macroeconomic model which can represent a small country's economy where the production of domestic output is dependent upon the intermediate goods from the rest of the world and where there are a variety of controls over foreign exchange and capital flows by a monetary authority. [420]     

Capital structure,asset utilization,profitability and growth in the Greek manufacturing sector

Greece's accession to the European Union (EU) has affected its economy and its manufacturing sector. Large-size enterprises (LSEs) form a small but vital part of Greek manufacturing and constitute a major component of the country's stock market. According to finance theory, the capital structure of a firm affects its capital cost and market value. This paper, by using dynamic panel data techniques, investigates the determinants of capital structure of LSEs in the Greek manufacturing sector. The findings suggest that asset utilization, gross and net profitability and total assets growth have a significant effect on the capital structure of LSEs. This has straightforward policy implications. Following recent economic developments, Greek firms are exposed to a stronger competition in the EU and global markets, but also to new opportunities. In order to improve their capital structure, Greek manufacturing LSEs need to achieve higher asset utilization and profit margins through economies of scale attained mainly by higher exports. Moreover, governmental measures aiming to support LSEs' efforts should focus their impact on alleviating taxation, reducing bureaucratic burdens, minimizing market imperfections and subsidizing applications of new technology.     

FDI and Outsourcing in a Service Industry: Welfare Effects of Liberalising Trade and Investment

This study examines a foreign firm's entry decision and its effects on the host country's welfare in a model with a composite good in which both commodity and service generate utility for consumers. Along with the commodity it produces, a producer can provide the service by itself or outsource the service. The result shows that the incentive for foreign direct investment (FDI) in the service sector increases under liberalising trade in the final‐good market. Moreover, there exist policy combinations of trade and investment liberalisation, whereby the domestic firms' profitability is traded off with the host country's social welfare when the foreign firm provides a service through FDI or through outsourcing, respectively. Finally, the welfare after simultaneously liberalising trade and investment is not necessarily greater than that under autarky.     

Standards policy and international trade: Multilateralism versus regionalism

We develop a simple model of policy coordination on domestic standards and examine whether domestic standards policy can lead to regional and multilateral harmonization of standards under the principle of national treatment. This paper focuses on mandatory product and process standards affecting the characteristics of a final good that control negative consumption externalities (e.g., vehicle emissions control and safety standards, restrictions on the use of pesticides for agricultural goods, and safety standards for electrical products). Only the products that meet a country's national standards are allowed to circulate in that country's market. Raising standards reduces negative externalities caused by consumption of a traded good but increases firms’ costs. We use the core as the solution concept. A standards regime is considered to be in the core if it is not blocked by any coalition within countries. The main finding is that a multilateral agreement on standards that maximizes world welfare is only in the core if externalities are local or slightly transboundary. Otherwise, only a regional agreement on standards is in the core. As extensions, we consider many and asymmetric number of firms, asymmetry in market size, fixed costs for different standards, and a multilateral agreement on different standards.     

How trade and capital restrictions affect the probability of a balance of trade disturbance

Free market economists argue that national authorities avoid restrictions on the free movement of goods, services and financial capital between countries. Yet, countries continually choose to restrict the flow of capital both into and out of the country. Why is this done? Is it done to protect the domestic banking system, to control the domestic money supply, to manage the exchange rate, to provide stability for internal markets or to avoid wide swings in the availability of capital? Are these controls effective in precluding wide swings in a country's international trade balance? This article uses panel data in a logit model to analyse policy choice with respect to an international trade and/or investment regime. The goal is to identify choices effective in reducing the likelihood of a severe Balance of Trade Disturbance (BTD) and determine if the appropriate choice is related to per capita income (pci).     

Nontraded Goods,Capital Taxes,and Temporary Immigration in a Small Open Economy

This paper extends the standard (one-good, two-factor) model of international capital and labor mobility by incorporating a nontraded good within a small capital-exporting, labor-importing country. It examines, from this country's perspective, the effects of capital taxes and temporary immigration on the nominal wage, and on welfare, and derives the optimal policy toward capital. It demonstrates, among other things, that (i) the optimal policy toward capital may be a tax on its domestic rate of return, depending on the factor intensity of the nontraded good and on the relationship between capital and labor in production, and (ii) the distinction between temporary and permanent immigration is important in evaluating its effects on various economic variables. [F20, F22]     

Gender Effects of Trade Openness in Sub-Saharan Africa

ABSTRACT

More than thirty years into the modern era of globalization, scholars are now in a position to evaluate the distributive effects of the policy shifts that have led to greater economic integration. One region of the world for which little robust empirical evidence exists on gendered employment effects is Sub-Saharan Africa (SSA). To identify whether there is an impact of economic and trade structure on women's relative access to work, this contribution empirically explores these issues for thirty-eight SSA countries, and for two subgroups. Panel data for the period 1991–2010 is examined using fixed effects, random effects and two-stage least-squares estimation techniques. Findings suggest that trade liberalization has gendered employment effects, with the direction depending on the structure of the economy. However, the more robust finding is that a country's infrastructure has played a determining role in gendered labor market outcomes in SSA since the early 1990s.     

International R&D Spillovers,Absorptive Capacity and Relative Backwardness: A Panel Smooth Transition Regression Model

We investigate how a country's absorptive capacity and relative backwardness affect the impact of international R&D spillovers on domestic Total Factor Productivity (TFP). To account for nonlinearities, we adopt a Panel Smooth Transition Regression approach, where a country's TFP elasticity to the foreign R&D stock is allowed to change smoothly across various identified extreme values, and the change is related to observable transition variables: human capital (capturing the country's absorptive capacity) and relative backwardness. The results suggest that absorptive capacity is positively associated with international R&D spillovers. In contrast with previous results, relative backwardness is instead found to have a negative and significant impact on international knowledge spillovers.     

Tipping the (Im)balance: Capital inflows,financial market structure,and banking crises

An emerging consensus among scholars and policy‐makers identifies foreign capital inflows as one of the primary determinants of banking crises in developed countries. We challenge this view by arguing that external imbalances are destabilizing only when banks face substantial competition from securities markets in the process of financial intermediation. We assemble a dataset of banking crises covering the advanced industrialized countries from 1976 to 2011 and find evidence of a conditional relationship between capital inflows, a well‐developed securities market, and the incidence of banking crises. We further explore the impact of capital inflows on banks’ actual risk taking as indicated by their capital adequacy levels and measures of insolvency risk. Our results demonstrate that prudential capital cushions tend to decline with the combination of capital inflows and prominent securities markets. We highlight the political decisions—often made during the early days of a country's financial development—that determine the relative prominence of banks vs. non‐bank financial institutions and conclude with policy recommendations.     

DEMOCRACY AND DE FACTO EXCHANGE RATE REGIMES

This paper explores the relationship between a country's political regime type and its de facto exchange rate fixity. It argues that more democratic regimes should be associated with less de facto fixity because the median voter is likely to be a domestically oriented producer with a monetary preference for domestic policy autonomy, requiring more a more flexible exchange rate regime. Focusing on a broad sample of country–years in the post‐Bretton Woods era defined by international capital mobility, the statistical results show that not only are more democratic regimes negatively associated with de facto fixity using three different operational measures for this dependent variable, but that this negative relationship gets stronger as the median voter is more likely to be a domestically oriented producer and as societal groups are more able to influence public policy.     

China's Capital and ‘Hot’ Money Flows: An Empirical Investigation

We examine time‐series characteristics of China's capital flows during 1998–2014. More specifically, we employ Kalman filtering state‐space models to gauge the relative importance of permanent and transitory components in China's overall foreign direct investment (FDI), equity, bond, other investment and bank credit flows. Our results show that only in the case of FDI are both gross inflow and net flow dominated by a permanent stochastic level, suggesting that this source of capital is largely permanent. Incorporating covariates into the state‐space models, we find that a larger difference between onshore and offshore renminbi interest rates encourages capital inflows that are dominated by a transitory component. Greater global risk perception, proxied by S&P 500's volatility index, in contrast, discourages them. These covariates imply that capital control may not be effective in stemming volatile and speculative flows. Our results on bilateral capital flows between China and the USA also suggest that these flows are less persistent and more volatile during 1998–2014 than previously found based on 1988–1997 data. Our results bear important policy implications as China engages in further reforms in its domestic financial system and greater integration with the world financial system.     

The mobility of highly skilled human capital in Taiwan

Most economists agree that a country's economic growth depends on human capital, physical capital, technology, and several other minor inputs. Human capital is the basic wealth of every country. Highly skilled workers are the most important component of human capital. Human capital can have a positive spillover effect on society. When talented young people leave their native country to work elsewhere, this brain drain inhibits the country's economic growth. Several factors contribute to brain drain. These can be classified roughly into three categories: economic, academic and personal. Economic factors play the most important role. From the early 1960s to the late 1980s, Taiwan suffered a brain drain when many people who had earned advanced degrees in western countries chose to leave Taiwan to work elsewhere. In this study's statistical analysis, I show that Taiwan's economy is based in past on an effective labour force and explain why Taiwan's economy has grown over the past 30 years. With the improved economy in the 1990s, young people are increasingly choosing to return to or remain in Taiwan to work and live. As Taiwan's economy improves, its highly skilled labour market becomes more competitive.     

Sovereign Debt Capacity and the Distribution of Domestic Wealth: A Common Agency Model*

This paper proposes a stylized two‐period, two‐country model illustrating the role of distribution of domestic wealth in determining a country's level of access to international lending. We model sovereign debt redemption policy in a common agency framework. Within this framework, policy is the outcome of the interaction between government and local and foreign interest groups with conflicting preferences on debt repayment. Our main result is that in full lobby competition, when all interests are represented, the only equilibrium solution is repudiation and the consequent inability of government to access international capital markets. Conversely, when the ability to lobby depends on wealth, governments can access international credit up to a given maximum external debt capacity, determined by the skew in the distribution of domestic wealth.     

How China is Reorganizing the World Economy*

We analyze the impact of China's integration into the global economy on other countries, Asian countries in particular. We first examine how the growth of China's exports is affecting the exports of other countries in Asia and the rest of the world. Our innovation is to distinguish exports of capital goods, consumer goods, and intermediates and to disaggregate textiles and consumer electronics, the most visible sectors where China's presence is felt. We next look to the impact of China on direct foreign investment flows. Here our innovation is to distinguish vertical and horizontal foreign direct investment (FDI) and to consider how they are affected by supply‐chain relationships. We then look more closely at factors influencing the articulation of these supply chains, the fragmentation of production, and the emerging international division of labor, focusing on two industries, electronics and autos, that exhibit very different responses. The results suggest that countries specializing in the production and export of components and raw materials feel positive effects from China's growth, while countries specializing in the production of consumer goods feel negative effects. Similarly, countries that compete with China for horizontal FDI find it more difficult to attract foreign investment as a result of that country's emergence, while countries that are potentially attractive destinations for vertical FDI find it easier to attract foreign investment as a result of trade links, especially in components and intermediates, that allow them to take advantage of supply chains involving their large and dynamically growing neighbor.     

Which stock exchanges are more attractive? The competition analysis of listing and trading performance

With the globalization of capital markets, stock exchanges around the world have faced their most challenging era since 2005. While the traditional role of the stock exchange should evolve by enforcing competitive advantage, as the heart of modern capital markets, stock exchanges give rise to both capital demand outflows and capital supply inflows, and both of these have to be taken into consideration. What is it that makes some stock markets more attractive than others from the viewpoint of firms as well as from the viewpoint of investors? This paper focuses on the stock exchanges' performance from an international perspective by combining both the listing competition and trading competition aspects using data for the world's 45 largest stock exchanges. The exchange-specific performances that both take and do not take a country's specific financial regulatory regime into consideration are evaluated. In addition, a competition matrix is designed to help the managerial authorities of stock exchanges around the world to position themselves within the industry.     

The role of foreign capital in domestic manufacturing productivity: empirical evidence from Asian economies

The paper empirically examines the relative contribution of foreign and domestic machinery and equipment on manufacturing productivity in seven Asian economies. A Cobb-Douglas production function is used to test whether foreign machinery is more productive than domestic machinery. The study is based on a pooled cross-sectional time-series model, including seven countries - Hong Kong, Singapore, South Korea, Malaysia, Indonesia, the Philippines and India - for the years 1975 to 1990. The results support the hypothesis that a country's stage of development, skill-level of its labour force, and the technology embodied in capital play a crucial role in determining the relative impact of foreign and domestic capital on manufacturing productivity.