Why do transnational approaches to international innovation fail?

The transnational corporation paradigm is increasingly at odds with empirical findings regarding international innovation strategies. Analysing a longitudinal case study, we show that a firm's international R&D subsidiaries can be a powerful force that can shape strategy even more than headquarters. On the basis of a literature review that identifies factors and mechanisms by which the firm's subsidiaries are likely to exert this influence, we explore these factors and mechanisms by applying them to our case. Our findings show that international innovation strategies are unlikely to succeed if international R&D subsidiaries use their capabilities and market power to oppose their implementation.     

The Effect Of International Acquisitions on Firm Leverage

To determine whether corporate international diversification leads firms to increase their leverage, we perform an event study that compares the leverage of corporations before and after they acquire foreign subsidiaries. We find that on average leverage increases from the first to the third year following the acquisition. When we examine the relation between additional debt financing after foreign acquisitions and the characteristics of these acquisitions, we find that in addition to such major determinants as size and profitability, debt financing is explained by geographical and industrial diversification effects.     

Capital structure choice and company taxation: A meta-study

This paper provides a quantitative review of the empirical literature on the tax impact on corporate debt financing. Synthesizing the evidence from 48 previous studies, we find that this impact is substantial. In particular, the tax rate proxy determines the outcome of primary analyses. Measures like the simulated marginal tax rate (Graham, 1996) avoid a downward bias in estimates for the debt response to tax. Moreover, econometric specifications and the set of control-variables affect tax effects. Accounting for misspecification biases by means of meta-regressions, we predict a marginal tax effect on the debt ratio of about 0.27.     

Financial constraints on investment in an emerging market crisis

We investigate whether capital market imperfections constrain investment during an emerging market financial crisis. Both large currency devaluations and banking sector failures characterize recent crises. Although a currency devaluation should increase exporters’ competitiveness and investment, a failing banking system may limit credit to these firms. Foreign-owned firms, which may have greater access to overseas financing but otherwise face the same investment prospects, provide an ideal control group for determining the effect of liquidity constraints. We test for liquidity constraints in Indonesia following the 1997 East Asian financial crisis, a period when the issuance of new domestic credit shrank rapidly. Exporters’ value added and employment increased after the crisis, suggesting that they profited from the devaluation and had sufficient cash flow to finance more workers. However, only exporters with foreign ownership increased their capital significantly. Our results suggest that liquidity constraints greatly retarded domestic-owned manufacturing firms’ ability to take advantage of improved terms of trade. Specifically, compared to foreign-owned exporters they had resembled before the crisis, after the crisis domestic-owned exporters had more than 20% lower employment and capital and more than 40% lower value added and materials usage.     

Creditor rights and debt allocation within multinationals

We analyze the optimal debt structure of multinational corporations choosing between centralized or decentralized borrowing. We identify how this choice is affected by creditor rights and bankruptcy costs, taking into account managerial incentives and coinsurance considerations. We find that partially centralized borrowing structures are optimal with either weak or strong creditor rights. For intermediate levels of creditor rights fully decentralized (centralized) borrowing structures are optimal if managers have strong (weak) empire-building tendencies. Decentralized borrowing is more attractive for companies focussing on short-term profitability. Credits are rather taken in countries with better creditor rights and more efficient insolvency systems.     

R&D intensity for innovative and adaptive purposes in overseas subsidiaries: Evidence from Japanese multinational enterprises

This paper investigates the causes of R&D activities of overseas subsidiaries using firm-level panel data for Japanese multinationals. We distinguish between overseas innovative R&D (basic and applied research) and adaptive R&D (development and design) and examine how the intensity of each type of R&D is determined, using Amemiya Generalized Least Squares estimation. Our findings suggest that overseas innovative R&D aims at the exploitation of foreign knowledge, whereas adaptive R&D has no such aim. In addition, the size of the host country’s market positively affects both types, whereas geographic distance between the host and the home country has a negative impact. Finally, the parent firm’s knowledge is found to increase the size of overseas adaptive R&D but not innovative R&D. Based on a theoretical model, we interpret this evidence as showing that knowledge of the parent firm is not fully utilized in innovative R&D of its subsidiary.     

Fatal attraction: Using distance to measure contagion in good times as well as bad

This paper proposes a new measure of contagion that is good at anticipating future vulnerabilities. Building on previous work, it uses correlations of equity markets across countries to measure contagion, but in a departure from previous practice measures contagion using the relationship of these correlations with distance. Also in contrast to previous work, our test is good at identifying periods of “positive contagion,” in which capital flows to emerging markets in a herd-like manner largely unrelated to fundamentals. Identifying such periods of “fatal attraction” is important as they provide the essential ingredients for subsequent crises and rapid outflows of capital.     

Investment cycles and startup innovation

We find that venture capital-backed startups receiving their initial investment in hot markets are more likely to go bankrupt, but conditional on going public, are valued higher on the day of their initial public offering, have more patents, and have more citations to their patents. Our results suggest that VCs invest in riskier and more innovative startups in hot markets (rather than just worse firms). This is particularly true for the most experienced VCs. Furthermore, our results suggest that increased capital in hot times plays a causal role in shifting investments to more novel startups by lowering the cost of experimentation for early stage investors and allowing them to make riskier, more novel, investments.     

Credit supply and corporate innovation

We present evidence that banking development plays a key role in technological progress. We focus on manufacturing firms' innovative performance, measured by patent-based metrics, and employ exogenous variations in banking development arising from the staggered deregulation of banking activities across US states during the 1980s and 1990s. We find that interstate banking deregulation had significant beneficial effects on the quantity and quality of innovation activities, especially for firms highly dependent on external capital and located closer to entering banks. Furthermore, we find that these results are strongly driven by a greater ability of deregulated banks to geographically diversify credit risk.     

Adjustment patterns to commodity terms of trade shocks: The role of exchange rate and international reserves policies

We analyze the way in which Latin American countries have adjusted to commodity terms of trade (CTOT) shocks in the 1970–2007 period. Specifically, we investigate the degree to which the active management of international reserves and exchange rates impacted the transmission of international price shocks to real exchange rates. We find that active reserve management not only lowers the short run impact of CTOT shocks significantly, but also affects the long run adjustment of REER, effectively lowering its volatility. We also show that relatively small increases in the average holdings of reserves by Latin American economies (to levels still well below other emerging regions current averages) would provide a policy tool as effective as a fixed exchange rate regime in insulating the economy from CTOT shocks. Reserve management could be an effective alternative to fiscal or currency policies for relatively trade closed countries and economies with relatively poor institutions or high government debt. Finally, we analyze the effects of active use of reserve accumulation aimed at smoothing REERs. The result support the view that “leaning against the wind” is potent, but more effective when intervening to support weak currencies rather than intervening to slow down the pace of real appreciation. The active reserve management reduces substantially REER volatility.     

Banking deregulation and innovation

We document empirical support for a key micro-level channel—innovation by young, private firms—through which financial sector deregulation affects economic growth. We find that intrastate banking deregulation, which increased the local market power of banks, decreased the level and risk of innovation by young, private firms. In contrast, interstate banking deregulation, which decreased the local market power of banks, increased the level and risk of innovation by young, private firms. These contrasting effects on innovation also translated into contrasting effects on economic growth. Our study suggests that the nature of financial sector deregulation crucially affects its potential benefits to the real economy.     

Equity market timing and capital structure: International evidence

We investigate the equity market timing hypothesis of capital structure in major industrialized (G-7) countries. As claimed by its proponents, we find that leverage of firms is negatively related to the historical market-to-book ratio in all G-7 countries. However, this negative relationship cannot be attributed to equity market timing. We find no association between equity issues and market-to-book ratios at the time of equity financing decisions by Japanese firms. Firms in all G-7 countries, except Japan, undo the effect of equity issuance and the impact of equity market timing attempts on leverage is short lived. This is inconsistent with the prediction of the equity market timing hypothesis and more in line with dynamic trade-off model.     

The innovation consequences of mandatory patent disclosures

We investigate the effect of patent disclosures on corporate innovation. Using the American Inventor's Protection Act (AIPA) as a shock that increased patent disclosures, we find an increase in innovation for firms whose rivals reveal more information after the AIPA and a decrease in innovation for firms whose own disclosures are divulged to competitors as a result of the law. These findings suggest patent disclosures generate both spillover benefits and proprietary costs. Our findings provide justification for patent disclosure requirements by demonstrating positive externalities: rivals' disclosures facilitate a firm's innovation. However, we also highlight that mandatory patent disclosures can impose proprietary costs on firms. These results broadly contribute to our understanding of the real effects of disclosure, such that forcing firms to share proprietary information can be privately costly but beneficial to other firms.     

Capital controls in Brazil – Stemming a tide with a signal?

Controls on capital inflows have been experiencing a renaissance since 2008, with several prominent emerging markets implementing them in recent years. We focus on Brazil, which instituted five changes in its capital account regime in 2008–2011. Using the synthetic control method, we construct counterfactuals (i.e., Brazil with no policy change) for each of these changes. We find no evidence that any tightening of controls was effective in reducing the magnitudes of capital inflows, but we observe some modest and short-lived success in preventing further declines in inflows when the capital controls were relaxed. We hypothesize that price-based capital controls’ only perceptible effect is to be found in the content of the signal they broadcast regarding the government’s larger intentions and sensibilities. In the case of Brazil, its left-of-center government’s willingness to remove controls was perceived as a noteworthy indication that the government was not as hostile to the international financial markets as many expected it to be.     

International house prices and macroeconomic fluctuations

The paper investigates linkages between general macroeconomic conditions and the housing market for the G-7 area. Among the key results of the paper, we find that the US are an important source of global fluctuations not only for real activity, nominal variables and stock prices, but also for real housing prices. Secondly, albeit distinct driving forces for real activity and financial factors can be pointed out, sizeable global interactions are also evident. In particular, global supply-side shocks are an important determinant of G-7 house prices fluctuations. The linkage between real housing prices and macroeconomic developments is however bidirectional, with investment showing in general a stronger reaction than consumption and output to housing price shocks. Implications for the real effects of the sub-prime crisis are also explored.     

Regional economic development,strategic investors,and efficiency of Chinese city commercial banks

We investigate the effect of strategic investors on bank efficiency in the context of regional economic development. The data on Chinese city commercial banks operating regionally are well-suited for the study. Our findings suggest that strategic investors significantly increase efficiency in Chinese city commercial banks, while the effect of strategic investors on the efficiency of Chinese city commercial banks is negatively correlated to the level of regional economic development. The negative correlation of the effect of strategic investors on Chinese city commercial banks’ efficiency with regional economic development may be explained by the mix of local official promotion system and city commercial banks’ governance structure.     

Inequality and the US import demand function

In this paper we investigate the empirical importance of changes in inequality on the demand for imports by examining US data from 1948 to 2007. We find evidence of a long-run relationship of a standard imports equation including income inequality. The existence of a cointegrating equation in imports, income, relative prices and inequality exists not only for aggregate real imports but also for more disaggregated categories as well. The evolution of inequality seems to have a large and positive influence on the demand for imports in the US with the exception of imports of services whereas the impact of inequality on imports of durables is more ambiguous. Our results are robust to alternative methods of estimating cointegration equations.     

Capital inflows and asset prices: Evidence from emerging Asia

The withdrawal of foreign capital from emerging countries at the height of the recent financial crisis and its quick return sparked a debate about the impact of capital flow surges on asset markets. This paper addresses the response of property prices to an inflow of foreign capital. For that purpose we estimate a panel VAR on a set of Asian emerging market economies, for which the waves of inflows were particularly pronounced, and identify capital inflow shocks based on sign restrictions. Our results suggest that capital inflow shocks have a significant effect on the appreciation of house prices and equity prices. Capital inflow shocks account for – roughly – twice the portion of overall house price changes they explain in OECD countries. We also address cross-country differences in the house price responses to shocks, which are most likely due to differences in the monetary policy response to capital inflows.