The impact of foreign direct investment on productivity: New evidence for developing countries

We provide new empirical evidence on the relationship between inward foreign direct investment (FDI) and total factor productivity (TFP) growth using cross-country data for 51 developing countries over the period 1984–2010. Our results suggest a weak direct effect of FDI on TFP growth but, after accounting for the roles of human capital and institutions as contingencies in the FDI-TFP growth relationship, we find a robust FDI-induced productivity growth response dependent on these ‘absorptive capacities’. However, the relevance of the human capital contingency effect diminishes when the effect of institutions is also considered, which suggests that improving institutions is relatively more important than human capital development for developing countries to realise productivity gains from FDI.     

Trade and product market policies in upstream sectors and productivity in downstream sectors: Firm-level evidence from China

This paper explores the heterogeneous productivity impact of trade, product market and financial market policies over the last decade in China. The paper makes a critical distinction between downstream and upstream industries, focusing on the indirect effects of regulation in upstream industries on firm performance in downstream manufacturing industries. We identify the differential effect of these policies on firm productivity growth depending on how far incumbents are relative to the technological frontier. Trade and product market reforms are found to deliver stronger gains for firms that are closer to the industry-level technological frontier, while the reverse holds for financial market reforms. The key conclusion that can be derived from the empirical analysis is that further product, trade and financial market reforms would bring substantial gains in China and could therefore speed up the convergence process. Taken at face value, the empirical estimates would imply that aligning product, trade and financial market regulation to the average level observed in OECD countries would bring aggregate manufacturing productivity gains of respectively 9%, 3% and 6.5% after 5 years.     

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.     

The impact of product innovation on firm-level markup and productivity: evidence from China

This article empirically evaluates the impact of product innovation on firms’ markup and productivity. Based on a large sample of Chinese manufacturing firms, we estimate firm-level markup using the wedge between output elasticities of intermediate input and its cost share in total revenue. Firm productivity is measured as revenue productivity and adjusted with the estimated markup. The results suggest that product innovation increases firm-level markup and revenue productivity. However, the effect of product innovation on the adjusted productivity is mostly negative or insignificant. The observed relationships also vary in response to market structures. Our results indicate that the positive impact of product innovation on revenue productivity is mainly driven by price-cost markup changes rather than physical productivity improvements. Our study suggests the widely observed positive relationship between product innovation and revenue productivity should be interpreted with caution.     

The productivity impact of climate change: Evidence from Australia's Millennium drought

The economic impact of climate change has usually been estimated based on changes in average weather condition and is often measured in terms of immediate loss of output or profit. Yet little is known about the impact of extreme weather event, in particular its impact on productivity in the medium to long term. Using Australia's Millennium drought as a case of extreme weather event and applying the synthetic control method, we show that severe droughts occurred between 2002 and 2010 has brought down agricultural total factor productivity by about 18 percent in Australia over the period, contributing significantly to the country's long-term slowdown of agricultural total factor productivity growth. Our results highlight the significance of productivity impact of extreme weather events that has been overlooked when accessing the economic impact of climate change.     

The sources of total factor productivity growth: Evidence from Canadian data

A dynamic general equilibrium model is constructed and used to identify sources of total factor productivity growth in Canada and to quantify their importance. The model also provides procedures for constructing measures of technological progress. We find that periods of low productivity growth correspond to periods of high growth in investment-specific technology (IST) or high rates of technology embodiment. For example, the growth rate of IST was relatively high between 1974 and 1996. The higher growth rate of IST during this period should have increased the rate of productivity growth by an estimated 0.29 percentage points, ceteris paribus. Yet, productivity growth slowed. Why?     

The impact of product market competition on training provision: Evidence from Canada

While standard models of training focus on how input market affects firms' training decisions, this paper investigates the impact of product market competition on training provision. Using the longitudinal data from Statistics Canada's Workplace and Employee Survey, we find that increased competition is strongly associated with more training provision. This association is unlikely to be driven by unobserved heterogeneity, specific measures used and other relevant factors. To the extent that training is a significant source of human capital and industry competitiveness, our results suggest that increasing training is an important channel through which competition raises productivity.     

The impact of temperature on manufacturing worker productivity: Evidence from personnel data

This paper presents novel evidence on the impact of temperature on daily indoor worker productivity in a non-climate-controlled manufacturing environment in China. Combining individual worker productivity data from personnel records with weather data, it documents an inverted-U shaped relationship between temperature and labor productivity. Workers do not increase avoidance behavior. The findings suggest that the economic loss from reduced manufacturing labor productivity due to ambient temperature is quantitatively important, providing new insights into the biological effects of climate factor on human labor. Further, back-of-the envelope calculations indicate that the estimated welfare gains from preventing extreme temperatures are substantial.     

The effects of economic reforms on manufacturing dualism: Evidence from India

Dualism is a pervasive feature of the manufacturing sectors of less-developed countries, with large differences in productivity between the informal and the formal sectors. Policy distortions are viewed as an important factor behind the prevalence of manufacturing dualism. We examine whether tariff reforms, industrial de-licensing and the withdrawal of reservation of products for small firms implemented since the mid-1980s have had any effects on efficiency differentials between informal and formal firms in Indian manufacturing. We find strong evidence that economic reforms have exacerbated dualism by increasing the productivity differentials between the more efficient formal firms and the less efficient informal firms.     

The dynamic impact of immigration on natives' labor market outcomes: Evidence from Israel

This paper studies the short and medium run impact of highly skilled immigrants from the Former Soviet Union to Israel on natives' wages and employment. If immigrants are relatively good substitutes for native workers, the impact of immigration will be largest immediately upon the immigrants' arrival, and may become smaller as the labor market adjusts to the supply shock. Conversely, if immigrants upon arrival are poor substitutes for natives, the initial effect of immigration is small, and increases over time as immigrants acquire local labor market skills and compete with native workers. We empirically examine these alternative hypotheses using data from Israel between 1989 and 1999.We find that wages of both men and women are negatively correlated with the fraction of immigrants with little local experience in a labor market segment. A 10 percent increase in the share of immigrants lowers natives' wages in the short run by 1–3 percent, but this effect dissolves after 4–7 years. This result is robust to a variety of different segmentations of the labor market, to the inclusion of cohort effects, and to different dynamic structures in the residual term of the wage equation. On the other hand, we do not find any effect of immigration on employment, neither in the short nor in the medium run.     

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.     

The impact of pre-IPO performance pressure on research and development investments of an IPO firm: Evidence from China

We derive a simple model to show that pre-IPO performance pressure has a negative impact on an IPO applicant's research and development investments. The findings from the Chinese IPOs in the growth enterprise market (GEM) are consistent with the model's predictions. Further analysis suggests that when the time to listing is shorter, the adverse impact of performance pressure on R&D investments is stronger. While the objective of the GEM is to encourage innovative firms to raise new capital via IPOs to enhance their innovations in the future, the cutting of R&D investments to enhance the probability of receiving IPO approval defeats the purpose. Our findings suggest that it may be useful for a regulatory authority to consider multi-dimensional criteria in IPO approvals for GEMs instead of heavily relying on the pre-IPO performance to sustain a healthy IPO market and innovation activities of a country.     

The impact of Sunday shopping on employment and hours of work in the retail industry: Evidence from Canada

Between 1980 and 1998 every Canadian province passed legislation that in some way relaxed restrictions on Sunday shopping. This study exploits the variation in deregulation dates between provinces to identify how retail employers adjust employment and hours of work when deciding to open on Sundays. A major complication of this analysis is to first determine for which provinces the deregulation dates are useful indicators of increases in Sunday store openings. This paper uses a unique trading-day regression approach to identify these provinces and then uses aggregate data from the selected provinces to estimate a simple dynamic labour demand model that allows employment and hours to be imperfect substitutes in production. The results suggest that retailers’ needs for Sunday labour were disproportionately satisfied through increases in employment levels. Comparison of the estimates at three levels of the retail industry suggests that the employment and hours gains were larger among general merchandise stores than among more specialized retail establishments and relatively modest at the aggregate retail industry level. In addition, despite evidence of an immediate shortfall in the employment level below the long-run optimal level, the results suggest that firms were unable to compensate by temporarily increasing the hours of their existing employees.     

The impact of macroeconomic factors on income inequality: Evidence from the BRICS

In this paper we investigate how the evolution of income growth, real interest rates, and inflation have driven income inequality across a variety of countries with particular focus on the BRICS economies (Brazil, Russia, India, China, and South Africa) during the period 2001 to 2015. Our work suggests that, when central banks of the BRICS economies use monetary policy for macroeconomic stabilization, they need to consider the impact monetary policy changes have on the distribution of income in their nations. Our estimates reveal that the unintended consequence of policies that induce economic growth and higher prices is higher income inequality. We find that the positive relationship between the three macroeconomic variables and income inequality for the BRICS economies is stronger during the post-2008 period.     

The better you are the stronger it makes you: Evidence on the asymmetric impact of liberalization

This paper shows how trade liberalization can have an asymmetric effect on heterogeneous firms. It develops a neo-Schumpeterian growth model predicting that the impact of liberalization on economic performance is positive “on average”, but more advanced firms benefit more. These predictions are tested using Mexican plant-level data confirming that, under NAFTA, the liberalization spurred productivity growth on average. However, the empirical analysis goes beyond estimating the average effect of liberalization and shows that more advanced firms benefited disproportionately more from the liberalization. Focusing on the mechanisms explaining these results, the paper shows that the results are not just driven by an increase in input usage and investments, but rather by innovative and managerial efforts as they are significantly stronger in those sectors where the scope for innovative activities is larger.     

The impact of exchange rate volatility on plant-level investment: Evidence from Colombia

We estimate the impact of exchange rate volatility on firms' investment decisions in a developing country setting. Employing plant-level panel data from the Colombian Manufacturing Census, we estimate a dynamic investment equation using the system-GMM estimator developed by Arellano and Bover (1995) and Blundell and Bond (1998). We find a robust negative impact of exchange rate volatility, constructed either using a GARCH model or a simple standard deviation measure, on plant investment. Consistent with theory, we also document that the negative effect is mitigated for establishments with higher mark-up or exports, and exacerbated for lower mark-up plants with larger volume of imported intermediates.     

The impact of digital finance on household consumption: Evidence from China

Using panel data from the China Household Finance Survey (CHFS) in 2013, 2015, and 2017 and the digital inclusive finance index developed by Peking University, this study examined impacts of the digital inclusive finance on household consumption and explored its mechanisms. Results suggest that the digital inclusive finance could promote households consumption. A heterogeneity analysis showed that households with fewer assets, lower income, less financial literacy and in third- and fourth-tier cities experienced larger facilitating effects of digital finance on consumption compared to their counterparts. For consumption categories, digital finance was positively correlated with food, clothing, house maintenance, medical care, and education and entertainment expenditures. In terms of consumption structure, digital finance mainly promoted the recurring household expenditures rather than the non-recurring expenditures. Further analyses based on the mediating model found that online shopping, digital payment, obtainment of online credit, purchase of financing products on the internet and business insurance, were the main mediating variables through which digital finance affected household consumption.     

The influence of fiscal policy uncertainty on corporate total factor productivity: Evidence from Chinese public companies

This paper uses China's public companies to test the influence of fiscal policy uncertainty on corporate total factor productivity. The study finds that fiscal policy uncertainty has a negative impact on the total factor productivity, and the effect of conservative tax avoidance, a mediating variable between the two, is found more significant for non-state-owned and non-recession-stage enterprises. The study further finds that facing fiscal policy uncertainty, companies reduce R&D investment, which will deteriorate productivity. The overall results show that if the government maintains relatively stable fiscal policies, it will positively improve corporate total factor productivity, even in a longer period.     

With a little help from our friends: The effect of USAID assistance on SME growth in a transition economy

Using survey data on Macedonian firms that participated in USAID programs providing technical and financial assistance for small and medium-sized enterprises (SMEs) and on firms that did not, we estimate the effectiveness of such assistance in increasing the growth of employment in the assisted firms. We control for selection bias in program participation and use both kernel and caliper propensity score matching to estimate the excess growth of employment in assisted firms. We find that assistance programs raised employment growth by 16-20 percentage points in the first year after assistance and by 26-30 points by the third year.