Financial crises and the evolution of credit reallocation: Evidence from Korea

This paper examines the evolution of credit reallocation from a geographical location perspective using data from Korean non-financial firms 1984 to 2013. Employing a Bayesian dynamic latent factor model, I decompose local credit reallocation rates into national, region-specific, and idiosyncratic allocation components. This paper uncovers evidence that the national factor, which explains the movement of credit reallocation across 14 administrative districts, intensified after the 1997 financial crisis and played a major role in driving local credit reallocation rates. Furthermore, district-specific factors, which exhibit heterogeneous patterns across districts, also account for a significant portion of credit reallocation fluctuations, which is attributable to districts' heterogeneous geographical properties and dominant industries. Importantly, district-specific factors are the main driver for reallocation dynamics for small firms, suggesting that small firms' financing is more affected by local financial market conditions, whereas the national factor explains more of large firms' debt financing.     

Vertical Integration,Firms’ Entry,Exit, Strategic Shifts,Age, and The Productivity Growth in Korea's Core Growth‐Leading Industries

This study attempts to measure the impact of firms’ entry, exit, strategic shifts, and age on the productivity growth of Korea's three core growth‐leading industries and their vertical integration with capital share (VI) firms and non‐VI (NVI) firms in view of the 2008 global financial crisis and the institutional push by the Korean Government. A stochastic frontier production model was applied to firm‐level panel data from 2006 to 2011 for Korea's automobile, electronics and general machinery industries. The results show that exogenous shocks to the market triggered large‐scale resource reallocations from firms with declining productivity to firms with less declining or rising productivity, and market share reallocation between VI firms and NVI firms. The Korean Government's institutional push led the productivity growth of NVI firms to reach their highest levels in 2010. In a VI structure, a structure comprising VI firms only, the agency problem dominated the synergies of secure supply chains and saving on transaction costs, while NVI firms endeavoured to raise their productivity to step into a VI structure to secure stable supply chains, only to find their R&D initiatives stagnated once they took on the VI structure. Therefore, efficient resource reallocation is hindered by the agency problem within the bounds of vertically integrated industrial structures.     

Globalization,Worker Mobility and Wage Inequality

In the present paper, I integrate frictional labor markets with on‐the‐job search into an otherwise standard heterogeneous firm model of intra‐industry trade. Most importantly, I show that the returns to workers' inter‐firm mobility are higher in a trade equilibrium than in autarky. Intuitively, by favoring large and productive firms, international trade amplifies the disparities in profitability between small and large firms. Hence, the returns to labor reallocation across firms rise. In view of the empirically observed higher inter‐firm mobility among high‐skill workers, this suggests a skill‐biased impact of trade liberalization.     

Job growth in early transition: Comparing two paths*

Small start‐up firms are the engine of job creation in early transition. We ask about differences in their growth across two different transition economies: Estonia, which experienced rapid destruction of pre‐existing firms, and the Czech Republic, which reduced the old sector gradually. We find that the majority of job growth corresponds to within‐industry reallocation. The within‐industry growth of small start‐up firms is similar in the two countries, in line with the convergence to Western industry firm‐size distributions. We also find similar patterns in the evolution of wage differentials between start‐ups and old firms and small differences in the extent of low‐wage employment in start‐ups across the two transition paths. JEL Classifications: J2, J3, J4, L1, O1, P2.     

The causes and consequences of sector‐level job flows in Poland*

We look at the determinants and consequences of job reallocation in the 22 2‐digit sectors of the manufacturing industry in Poland over the period 1995–99. We find that import competition and a competitive market structure (weak concentration) have a positive and significant effect on job reallocation. Moreover, higher job reallocation is associated with higher labour productivity growth in some specifications. This confirms implications from neo‐Schumpeterian growth models: one channel through which competition might positively affect growth is through the reallocation of scarce resources from declining firms to rising ones. JEL Classifications: F16, J24, J6, O3, P3.     

The Korean financial crisis and the soft budget constraint

A panel of Korean firms is used to test for the soft budget constraint (SBC) in bank lending before and after the 1997–1998 financial crisis. SBC is present if a firm can borrow from its bank despite being in financial distress, which we define by a low Altman's z-score. We find that prior to 1997 financially distressed firms were able to borrow while after the crisis their ability to borrow declined substantially. We also demonstrate that SBC was a significant factor in the firms’ propensity to default during the crisis.     

Chinese competition and product variety of Indian firms

Using detailed firm-product-year data across manufacturing industries in India, and exploiting the exogenous nature of China’s entry into the WTO in 2001, we investigate the link between the impact of import penetration from China on the product variety of Indian manufacturing firms. We find: (i) robust and significant effects of product drop, with the effect coming only from competitive pressure in the domestic market; (ii) robust evidence of product drop or ‘creative destruction’ only for firms belonging to the lower-half of the size distribution; (iii) firms drop their peripheral/marginal products and concentrate on the core ones; and (iv) the result is strongest for firms producing intermediate goods. For an average Indian manufacturing firm, a 10 percentage point increase in India’s Chinese share of imports in the domestic market reduces the product scope of firms by 1.7–4.4%. In contrast, we find positive effects on product scope when firms are importing intermediate goods. We also find evidence of significant productivity effects and within-firm factor reallocation. Our results are consistent to a battery of robustness checks and IV estimation.     

Scientific personnel reallocation and firm innovation: Evidence from China’s college expansion

Given that the supply of scientific personnel is inelastic, the expansion of public research may negatively influence private research by driving up the wage of scientific personnel and reallocating them away from private sectors. China's massive college expansion since 1999 and labor market segmentation provide us with a unique opportunity to investigate such a reallocation effect on firm innovation. Consistent with the reallocation hypothesis, we find that China's college expansion negatively influenced firm innovation as well as regional innovation in the short run. Moreover, we provide direct evidence on scientific personnel reallocation by finding that when college expansion was more intensive, highly educated laborers were less likely to choose an industrial job, and those working in industries enjoyed a higher wage rate when holding a professional (research related) job.     

R&D investment,cash holdings and the financial crisis: evidence from Korean corporate data

This article examines the real effects of the financial crisis in 2008 on corporate R&D investment by analyzing firm-level panel data from 2005 to 2011 obtained from KIS-VALUE, a Korean corporate finance database. I estimate a dynamic panel model of R&D investment that includes an after-crisis dummy to reflect the effects of the external finance supply shock after the financial crisis, an interaction term of the dummy and cash holdings to measure the marginal effect of cash holdings after the crisis, investment opportunities (sales and the q ratio) and financial positions as the debt-equity ratio. The estimation implies a negative yet relatively small impact of the credit supply shock from the financial crisis on R&D investment and the mitigation of the negative impacts by cash holdings after the onset of the financial crisis, whereas the data show decreasing R&D investment and sales for the whole period. Based on the data and the estimation, I find that firms were able to lessen the pressure from diminishing market demand before the crisis using external finance, but they had to use internal financial sources after the crisis smooth R&D investment.     

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.     

Skill-replacing process innovation and the labour market: Theory and evidence

I study the differential impacts of product innovation and process innovation on the labour market. Using European data from 2000 to 2018, I find that industries with proportionally more firms reporting product innovation than process innovation also tend to exhibit a lower income share of low-skilled workers. To better understand the mechanism, I develop a dynamic growth model in which firms conduct both types of innovation endogenously. In the model, product innovation introduces new intermediate goods, which tend to require high-skilled workers to implement. Process innovation simplifies existing production technologies and thereby allows firms to replace high-skilled workers with low-skilled ones. I calibrate an extended version of the model to the largest two industries in UK in 2014 and 2018, respectively. I find that product innovation has become less costly but increasingly demanding for skills, and the cost of process innovation has increased on average and become more diverse across firms.     

Job Creation and Job Destruction in a Regulated Labor Market: The Case of Austria

We study Austrian job reallocation in the period of 1978 to 1998, using a large administrative dataset where we correct for spurious entries and exits of firms. We find that on average 9 out of 100 randomly selected jobs were created within the last year, and that about 9 out of randomly selected 100 jobs were destroyed within the next year. Hence, the magnitude of Austrian job flows seems to be comparable to other countries, similar to the well-known results of Davis et al. (1996) for the United States. Job reallocation appears to be driven primarily by idiosyncratic shocks. However, job creation increases significantly during cyclical upswings whereas job destruction rises in downturns. We also find substantial persistence of job creation and destruction. The pronounced pattern of job reallocation rates falling with firm size and age continues to hold when we use a set of controls. Finally, we show that – controlling for sector and firm size composition – Austrian job reallocation rates are only half the rates for the U.S. This result is not surprising given the impact of tighter regulation and labor law in Austria.     

Labor reallocation and demographics

We explore data from all transition economies over nearly two decades, providing insights on the mechanisms behind labor force reallocation. We show that worker flows between jobs in different industries are rare relative to the demographic flows of youth entry and elderly exit. The same applies to the flows between state-owned enterprises and private firms. In fact, evidence suggest that changes in the demand for labor were accommodated mostly through demographic flows, with a smaller role left for job transitions. We also show that the speed of changing the ownership structure in the economy has driven exits to retirement, in particular the early exits.     

CEO international experience and foreign IPOs

This paper examines listing location as a managerial decision by using a sample of IPOs of Chinese entrepreneurial firms in mainland China, the United States and Hong Kong. We find that Chinese entrepreneurial firms managed by CEOs with international experience are more likely to undertake foreign IPOs, especially those returned from countries with more advanced legal institutions and those operating in high-tech industries. The credibility crisis for Chinese firms in 2010 switched the focus of foreign IPOs from the US to Hong Kong. These results are consistent across returnee CFOs and other senior executives with international experience.     

ICT and resilience in times of crisis: evidence from cross-country micro moments data

ABSTRACT

ICT-intensive firms are often found to have a better performance than their non-ICT-intensive counterparts. Along with investing in ICT capital they have to adapt their production and business processes in order to reap the potentials implied by the use of ICT. Are these firms also more resilient in times of crisis? We study this question by exploiting a novel and unique data set from the Micro Moments Database. Covering 12 countries, 7 industries and the period from 2001 to 2010, the data allow us to distinguish between ICT-intensive and non-ICT-intensive firms within industries. We find evidence that indeed during the crisis in 2008 and 2009, ICT-intensive firms were hit less hard with respect to their productivity. This holds in particular for firms from service industries. Moreover, ICT-intensive firms were also more successful in introducing process innovations during that period which could explain their better productivity performance compared to non-ICT intensive firms.     

Government subsidy and aggregate productivity dynamics: Evidence from China

Based on data for Chinese manufacturing firms from 1999 to 2007, this study explores the dynamic evolution of aggregate total factor productivity (TFP) from the perspective of firmsʼ entry and exit. It also quantifies how government subsidies influence the aggregate productivity growth. By decomposing aggregate productivity growth into components, including technological progress, reallocation, entry, and exit effects, we found that aggregate TFP growth in Chinese manufacturingfollows an upward trend during the sample period. This tendency originates from the contribution of technological progress, reallocation, and exit effects. Moreover, the effects of these four components on aggregate TFP growth of different industries, regions, and ownership types are different. Furthermore, technological progress, reallocation, and exit effects are important pathways for government subsidies to promote aggregate TFP growth in Chinese manufacturing.     

Microdynamics,granularity and populism: The Finnish case

We study how measures of microdynamics such as job and worker flows, the job reallocation rate and the labor market churning rate are related to populism support. Moreover, we investigate the relation between employment shocks to large firms, granular shocks, and populism. To measure populism, we look at the municipal-level support toward the Finns Party, the Finnish right-wing populist party, during the 2011 and 2015 parliamentary elections. We find that the labor market churning rate and the granular shocks are negatively associated with support for populism. Hirings in continuing establishments are negatively correlated with populism, while hirings due to the entry of new establishments and the job reallocation rate are positively related with populism, a possible consequence of economic restructuring. We complete our analysis by looking at the link between local labor market conditions and the supply of populist candidates, and by examining the usefulness of microdynamics indicators in a predictive setting.     

Slow recoveries

Economies respond differently to aggregate shocks that reduce output. While some countries rapidly recover their pre-crisis trend, others stagnate. Recent studies provide empirical support for a link between aggregate growth and plant dynamics through its effect on productivity: the entry and exit of firms and the reallocation of resources from less to more efficient firms explain a relevant part of transitional productivity dynamics. In this paper, we use a stochastic general equilibrium model with heterogeneous firms to study the effect on aggregate short-run growth of policies that distort the process of birth, growth, and death of firms, as well as the reallocation of resources across economic units. Our findings show that indeed policies that alter plant dynamics can explain slow recoveries. We also find that output losses associated to delayed recoveries are large.     

Agglomeration economies and location choice of Korean manufacturers within the United States

Employing the micro data for 1997–2004, we investigate the location decision of Korean-affiliated manufacturing investments in the United States. The conditional logit estimates confirm that although industry-specific Korean agglomeration and domestic agglomeration play an important role, the Foreign Direct Investment (FDI) location is more sensitively affected by the interstate difference in endowment conditions than by the same nationality agglomeration. Both business service and intermediate good agglomeration are main determinants of FDI location. Furthermore, estimation results show substantial change in the location pattern after recovery from the Asian financial crisis. We find quite different patterns of location decision across industry groups; dispersion forces work greater than the agglomeration force in the consumer goods industry, forward linkages with US upstream firms can be seen in the assembly and processing industry, and typical follow-the-leader pattern mixed with market potential effect by Korean immigrants is seen in the basic material manufacturing industry.     

Economic integration and the dynamics of firms’ competitive behavior

We investigate the evolution of firms’ competitive behavior in the EU by studying the dynamics of firms’ price-cost margins (PCMs) across four countries (France, Italy, Poland and Sweden), in three manufacturing and three services industries for around 170,000 firms over the period 1999–2007. By looking at density distributions of the PCM across firms, we detect an aggregation problem affecting country specific measures of PCM levels, with PCM changes providing instead an unbiased representation of industry dynamics. A Laspeyres-type decomposition of PCM changes shows pro-competitive effects over the period, induced mainly by the reallocation channel, and a tendency to a quality upgrading of firms, revealed by the positive interaction term. These trends are stronger after 2002. We also observe a trend towards lower PCMs across manufacturing industries, while the latter is not true for services. These findings are confirmed by a dynamic panel econometric exercise performed on the pooled firm-level sample.