Quota removal and firm-level offshoring: Theory and evidence

Recent literature indicates that offshoring can effectively increase firm productivity and improve product quality. Therefore, global value chains have increased in importance. In this paper, we investigate the impact of export growth on firm-level offshoring. Removal of the quota on textile and clothing products in importing countries boosts China's exports of quota-restricted products. This removal offers a quasi-natural experiment. Using a difference-in-differences approach, we find that export growth induced by the quota removal increases the extensive and intensive margins of firm-level offshoring. The impact is more pronounced on domestic firms and firms that are engaged in ordinary trade. Our findings suggest additional gains from trade liberalization: trade liberalization not only boosts exports, but also enhances firm productivity and product quality through encouraging firm-level offshoring.     

Trade liberalization and unemployment: Theory and evidence from India

A widely held view among the public is that trade liberalization increases unemployment. Using state and industry-level unemployment and trade protection data from India, we find no evidence of any unemployment increasing effect of trade reforms. In fact, our state-level analysis reveals that urban unemployment declines with trade liberalization in states with flexible labor markets and larger employment shares in net exporter industries. Moreover, our industry-level analysis indicates that workers in industries experiencing greater reductions in trade protection were less likely to become unemployed, especially in net export industries. Our results can be explained within a theoretical framework incorporating trade and search-generated unemployment and some institutional features of the Indian economy.     

Asymmetric effects of financial development on South-South and South-North trade: Panel data evidence from emerging markets

Using bilateral trade data in total and technology-and-skill-intensive manufactured goods for 28 developing countries that account for 82% of all developing country manufactures exports between 1978 and 2005, this paper explores the effects of financial development on the pattern of specialization in South-South and South-North trade. The empirical results using dynamic panel regressions and comprehensive sensitivity tests suggest that financial development in the South has an economically and statistically significant positive effect on the share of total and technology-and-skill-intensive manufactures exports in GDP, and total exports in South-South trade. In contrast, no such significant or robust effect of financial development is found in South-North trade. Overall, the positive effect of financial development is found to be asymmetric favoring South-South significantly more than South-North trade. In addition, financial development is found to be increasing technology-and-skill-intensive manufactured goods exports significantly more than total manufactured or merchandise goods exports.     

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.     

Remittances and savings from international migration: Theory and evidence using a matched sample

The central question of this paper concerns the implications of remittance flows for migrants and their origin households in the country of origin. This paper represents the first attempt to present a disaggregated view of international remittance flows using a matched sample of international migrants and their origin families. I investigate two types of remittances: transfers to the home family and savings in the country of origin. The empirical evidence provides support for the altruistic model of transfer behavior. Wealthier origin families tend to receive lower transfers, other things being equal. However, remittances sent to finance origin country investments are positively associated with origin household wealth. The estimation strategy addresses two common problems that arise in investigating remittance behavior: omitted variable bias and the measurement of origin household resources.     

Descent rules and strategic transfers. Evidence from matrilineal groups in Ghana

Traditional descent systems can roughly be divided into patrilineal and matrilineal. In the latter, a man's heir is not his own child but rather his sister's son. The paper examines the implications of this social norm for the pattern of inter-vivos transfers using household level data from rural Ghana, where the largest ethnic group is traditionally matrilineal. In particular, it tests the predictions of a model of strategic behavior according to which children should respond to the threat of disinheritance by increasing transfers to their parents during lifetime to induce a donation of land before the default (matrilineal) inheritance is enforced. I find that the credibility of customary norms enforcement, as proxied by the presence of a nephew in the father's household, significantly increases the probability of receiving transfers from children for Akans but not for the other groups. The effect is specific to nephews and not to other co-resident boys. This pattern of behavior can affect asset accumulation decisions across generations.     

Corruption in a model of vertical linkage between formal and informal credit sources and credit subsidy policy

The present note develops a model of vertical linkage between the formal and informal credit markets highlighting the presence of corruption in the distribution of formal credit. The existing dominant moneylender, the bank official and the new moneylenders move sequentially. The existing moneylender acts as a Stackelberg leader and unilaterally decides on the informal interest rate. We show that there may arise a case where an increase in the supply of formal credit results in an increase in the informal interest rate under reasonable parametric restrictions. This shows that apart from (i) asymmetric information on the part of informal sector lenders (Bose, 1998), (ii) an increase in the probability of default of all informal sector lenders (Hoff and Stiglitz 1997), and the (iii) possibility of informal lenders to collude (Floro and Ray 1997), the presence of corruption in the distribution of formal credit might be another factor responsible for the policy of vertical linkage to break down.     

Labour unions and leverage: evidence from firm-level union data

ABSTRACT

Using firm-level labour union data from Japan, this paper investigates the effect of labour unions on firm leverage. We find that as union coverage increases, both the level of and extent of change in leverage decreases. These relations remain robust when a firm falls into deficit. We also find that firms with higher union coverage have a higher interest coverage ratio. In addition, we find that firms with higher union coverage are less likely to choose issuing debt compared to issuing equity when they face financial distress. Our results imply that significant employee influence enhanced by labour unions increases fixed costs, crowds out the firm’s debt capacity and consequently reduces the firm’s leverage.     

Determinants of ICT adoption: evidence from firm-level data

We analyse factors driving inter- and intra-firm diffusion of Information and Communication Technologies (ICT) using data from Irish manufacturing firms over the period 2001 to 2004. We find that the path of ICT diffusion has been uneven across firms, industries and space, which is consistent with the theory of new technology adoption. Our results suggest that firms that are larger, younger, fast growing, skill-intensive, export-intensive and firms located in the capital city region have been relatively more successful in adopting and using ICT. We find positive technology spillovers from firms that have adopted ICT located in the same industry and region.     

Resource abundance, growth and welfare: A Schumpeterian perspective

This paper takes a new look at the long-run implications of resource abundance. It develops a Schumpeterian model of endogenous growth that incorporates an upstream resource-intensive sector and yields an analytical solution for the transition path. It then derives conditions under which, as the economy's endowment of a natural resource rises, (i) growth accelerates and welfare rises, (ii) growth decelerates but welfare rises nevertheless, and (iii) growth decelerates and welfare falls. Which of these scenarios prevails depends on the response of the natural resource price to an increase in the resource endowment. The price response determines the change in income earned by the owners of the resource (the households) and thereby the change in their expenditure on manufacturing goods. Since manufacturing is the economy's innovative sector, this income-to-expenditure effect links resource abundance to the size of the market for manufacturing goods and drives how re-source abundance affects incentives to undertake innovative activity.     

Designing credit agent incentives to prevent mission drift in pro-poor microfinance institutions

Credit agents in microfinance institutions (MFIs) must be given incentives to acquire information on potential borrowers and select them in accordance with the MFI's objectives. We show that while giving incentives has no cost in for-profit MFIs, it is costly in pro-poor MFIs: When repayment and wealth are positively correlated, a pro-poor MFI cannot obtain the selection of poor clients in the proportion it wishes with incentives based solely on repayment. It then becomes necessary to audit the share of very poor borrowers selected by an agent in order to provide the latter with adequate incentives. When audit costs are large, pro-poor MFIs may have to forego selection on wealth — and use other targeting devices such as working in impoverished geographical locations. Driven by donor concerns with ‘mission drift’ away from the poor, audits on the wealth status of clients have been introduced at the level of MFIs. We show that introducing pro-poor incentives requires extending such audits to the level of credit agents.     

Employment protection and productivity: evidence from firm-level panel data in Japan

Recent developments in the literature on Employment Protection Legislation (EPL) have revealed that changing the stringency of employment protection can lead to extensive consequences outside the labour market, by affecting firms’ production decisions or workers’ commitment levels. This article provides the first empirical evaluation of the comprehensive effect of restrictions on firing employees in Japan, by exploiting the variations in court decisions. We find that judgements lenient to workers significantly reduce firms’ total-factor productivity growth rate. The effect on capital is mixed and inconclusive, although we obtain modest evidence that an increase in firing costs induces a negative scale effect on capital inputs.     

Financial factors and the margins of trade: Evidence from cross-country firm-level data

Using a large cross-country, firm-level database containing 5000 firms in 9 developing and emerging economies, we study how financial factors affect both firms' export decisions and the amount exported by firms. First, our results highlight the importance of the impact of firms' access to finance on their entry decision into the export market. However, better financial health neither increases the probability of remaining an exporter once the firm has entered, nor the size of exports. Second, we find that financial constraints create a disconnection between firms' productivity and their export status: productivity is only a significant determinant of the export decision if the firm has a sufficient access to external finance. Finally, an increase in a country's financial development dampens this disconnection, thus acting both on the number of exporters and on the exporters' selection process. These results contribute to the literature documenting the role of fixed costs and of the extensive margin of trade in total trade adjustment, and provide micro-level evidence of the positive impact of financial development on trade found by previous literature.     

Corporate taxes, growth and welfare in a Schumpeterian economy

I take a new look at the long-run implications of taxation through the lens of modern Schumpeterian growth theory. I focus on the latest vintage of models that sterilize the scale effect through a process of product proliferation that fragments the aggregate market into submarkets whose size does not increase with the size of the workforce. I show that the following interventions raise welfare: (a) granting full expensibility of R&D to incorporated firms; (b) eliminating the corporate income tax and/or the capital gains tax; (c) reducing taxes on labor and/or consumption. What makes these results remarkable is that in all three cases the endogenous increase in the tax on dividends necessary to balance the budget has a positive effect on growth. A general implication of my analysis is that corporate taxation plays a special role in Schumpeterian economies and provides novel insights on how to design welfare-enhancing tax reforms.     

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.     

Competition under credit rationing: theory and evidence from rural China

We present a duopoly model of financial competition to describe the conditions under which competition leads to greater bank effort when repressed financial systems ration credit. The model features an entrant that freely sets its interest rate, and an incumbent that must charge a rate below that which is market clearing. Both players may exert costly effort to inform themselves about borrower types. Using data on rural financial institutions in China, we test empirically the effects of competition on deposit growth, loan portfolio composition, repayment rates, and other effort measures, finding positive effects of competition on effort and financial performance.     

The Impact of Telecommunication Technologies on Competition in Services and Goods Markets: Empirical Evidence

In this paper, we empirically show that a more intensive use and wider adoption of telecommunication technologies significantly increases the level of product market competition in services and goods markets. Our results are consistent with the view that the use of telecommunication technologies can lower the costs of entry and search. These findings are robust to various measures of competition and a wide range of specification checks.     

Firm investment and financial conditions in the euro area: evidence from firm-level data

We explore whether the sensitivity of firm-level investment to cash flow, typically associated with an external financing premium, is time-varying and in particular whether it varies with overall financial conditions. We find that financial conditions have indeed played a significant role in corporate investment decisions over recent years, rendering financing constraints even more binding. This finding appears to be robust to a number of control variables and robustness tests. Moreover, the impact of credit conditions is not uniform across firms, but rather it varies depending on firm size and leverage, with constrained firms being substantially more likely to condition their investment decisions on overall credit conditions. Our results cast new light on the interplay between financial and real cycle downturns and underline the need for monetary, fiscal and macroprudential policy to be countercyclical with respect to financial conditions.     

Foreign subsidiaries as a channel of international technology diffusion: Some direct firm level evidence from Belgium

The use of foreign direct investment as a channel of international spillovers is by now fairly established in the empirical literature on innovation and growth. It is often argued that subsidiaries of foreign multinational enterprises are a mechanism through which technological know-how flows across borders. For foreign subsidiaries to be channels of international spillovers, these subsidiaries need to source know-how internationally and transfer their know-how to the local economy. Using direct firm level evidence from the Belgian Community Innovation Survey on the occurrence of technology transfers, we find that foreign subsidiaries are indeed more likely to acquire technology internationally. But after controlling for the superior access to the international technology market that foreign subsidiaries enjoy, we find that these firms are not more likely to transfer technology to the local economy as compared to local firms.     

R&D,productivity, and exports: Plant-level evidence from Indonesia

This study examines the relation between productivity and exports in Indonesian manufacturing firms by taking account the endogenous choice of R&D. We first examine the determinants of R&D activity and find that exporting activity contributes positively to plants' R&D activity, while multinational corporate do not have a higher R&D propensity. The simultaneous estimates on the interrelation of R&D, productivity, and export show that R&D has a positive impact on both productivity and exports, suggesting the importance of R&D to Indonesian economic growth. It suggests also a two-way causality between productivity and exports, implying the coexistence of self-selection and learning-by-exporting effects in Indonesian manufacturing sector.