CLIMBING TO THE TOP? FOREIGN DIRECT INVESTMENT AND PROPERTY RIGHTS

This article operates at the interface of the literature on the impact of foreign direct investment (FDI) on host countries and the literature on the determinants of institutional quality. We argue that FDI contributes to economic development by improving institutional quality in the host country. This proposition is tested within a large panel data set of 70 developing countries for the period 1981–2005. We show that FDI inflows have a positive and highly significant impact on property rights. Results are very robust and not affected by model specification, different control variables, or estimation technique. To our knowledge this is the first article to empirically test the FDI—property rights linkage. (JEL F23, O43, P48)     

INFORMAL LABOR MARKETS AND ON‐THE‐JOB TRAINING: EVIDENCE FROM WAGE DATA

This study examines whether informal sector jobs are a source of training for young less‐educated workers. Controlling for worker and job characteristics, it is found that, in the early years of workers' careers in Mexico, wage growth in the informal sector is higher than in the formal sector. This result is consistent with general human capital investment on‐the‐job if the informal labor market is more competitive than the formal labor market due to frictions generated by labor regulations. (JEL O17, J24, J310)     

THE ROLE OF REGULATORY ARBITRAGE IN U.S. BANKS' INTERNATIONAL FLOWS: BANK‐LEVEL EVIDENCE

I study the prevalence and profitability of regulatory arbitrage in U.S. banks' foreign activities. I analyze a publicly available bank‐level data set on bilateral lending flows to 75 countries over 2003–2013. U.S. banks' affiliates lend less to borrowers in host countries with stricter bank capital regulations, and are less likely to maintain affiliates in such countries. Banks substitute from (host‐regulated) affiliate toward (U.S.‐regulated) cross‐border lending in hosts with strict bank capital rules. This is particularly so for low‐capitalized banks with lower foreign ownership shares. Banks that reduce their exposure to stricter host capital rules are more profitable in foreign activities. (JEL F3, F4, G2)     

FOREIGN DIRECT INVESTMENT AND ECONOMIC GROWTH: THE GROWTH ACCOUNTING PERSPECTIVE

A positive relationship between FDI and economic growth under two economic conditions has been estimated: a sufficient level of human capital and well-developed financial markets, respectively. However, these two conditions can be fundamentally different catalysts for FDI to promote economic growth in the perspective of growth accounting. Using data from 69 countries over 1970–1989, we find that FDI promotes productivity growth only when the host country reaches a threshold level of human capital; and FDI promotes capital growth only when a certain level of financial development is achieved. ( JEL F21)     

THE EFFECTS OF FOREIGN UNIVERSITIES ON DOMESTIC HUMAN CAPITAL ACCUMULATION

This article considers the effects upon human capital in a host country when foreign universities open branches within this country. We create a model where aspiring students differ according to inherent ability and choose endogenously how much time to devote to preparing to win admittance to a university. Universities can either be domestic or foreign, and payoffs for the student differ between them. The presence of these foreign universities can potentially increase effort—and so human capital—by providing more incentive to study. However, they can also lead to brain drain as students could be more likely to emigrate upon graduation relative to those who attend a domestic university. We apply this model to China and use parameter values in simulations to assess to what extent inflow of foreign universities provide benefits to China. (JEL D82, I23, I25)     

TECHNOLOGICAL ASYMMETRY AMONG FOREIGN INVESTORS AND MODE OF ENTRY

How does the preferred entry mode of foreign investors depend on their technological capability relative to that of their rivals? This article develops a simple model of entry mode choice and evaluates its main testable implication using data on foreign investors in Eastern European countries and the successor states of the Soviet Union. The model considers competition between two asymmetric foreign investors and captures the following trade‐off: while a joint venture (JV) helps a foreign investor secure a better position in the product market vis‐à‐vis its rival, it also requires that profits be shared with the local partner. The model predicts that the efficient foreign investor is less likely to choose a JV and more likely to enter directly relative to the inefficient investor. Our empirical analysis supports this prediction: foreign investors with more sophisticated technologies and marketing skills (relative to other firms in their industry) tend to prefer direct entry to JVs. This empirical finding is robust to controlling for host country–specific effects and other commonly cited determinants of entry mode. (JEL F13, F23, O32)     

Immigration Policy in Australia,Canada, New Zealand,and the United States: An Overview of Recent Trends

Immigration policies in most host nations of the west have undergone significant changes in recent years. Based on the four country‐specific papers that appear in this section of the journal, and also on our own research, we present an overview of these changes and their context. In all countries, economic considerations play a central role in shaping immigration policy and greater importance is given to scientific research. Several common policy changes are noted in Australia, Canada and New Zealand which include: a shift away from a human capital focus toward more targeted selection based on labor market demand for specific skills, increased emphasis on temporary foreign worker programs, attraction of international students, an overhauling of the refugee system, and regionalization of immigration. In the U.S., while adoption of some of these changes has often surfaced in public policy and academic discussions, legalization of unauthorized migrants remains an important policy debate, with recent arguments focusing on the economic benefits of legalization.     

OFFSHORE OUTSOURCING DECISION AND CAPITAL INTENSITY: FIRM‐LEVEL RELATIONSHIPS

In offshore sourcing, a firm chooses outsourcing to independent suppliers or in‐sourcing from own foreign direct investment (FDI) subsidiaries. Based on the firm‐level data on offshore make‐or‐buy decision covering all manufacturing industries, this paper compares averages, documents inter‐firm distributions, and estimates multinomial logit models of the firm's sourcing mode choice. As predicted by previous theoretical models, this paper directly confirms at the firm level that outsourcing firms tend to be substantially labor‐intensive compared with firms in‐sourcing from the same region, even after the firm's R&D intensity, firm size, or industry is controlled for. (JEL F23, L23, L24, L14)     

KNOWLEDGE SPILLOVERS AND OUTPUT PER WORKER: AN INDUSTRY‐LEVEL ANALYSIS FOR OECD COUNTRIES

This study analyzes the impact of knowledge spillovers on output per worker at the industry level using a primal production function approach. The article makes three different contributions to the international spillovers literature: (1) it identifies trade‐related spillovers under alternative assumptions regarding the information transferred through imports; (2) it explores the importance of horizontal and vertical foreign direct investment (FDI) in knowledge spillovers; and (3) it looks at how institutional factors determine the impact of FDI‐related spillovers on productivity. The main findings of the study are: (1) international knowledge spillover is an important driver of industry output per worker, and the magnitude of this spillover effect varies with alternative assumptions about the information content embodied in imports, while high technology industries benefit significantly more from import‐related knowledge spillovers; and (2) the gains from FDI spillovers are primarily horizontal, but when institutional factors are considered, countries with stronger protection of intellectual property rights and a high “ease of doing business” tend to experience a substantial increase in the effectiveness of both horizontal and vertical FDI‐related spillovers. (JEL E24, F1, F6, O3, O4)     

FDI AND INCOME INEQUALITY: EVIDENCE FROM A PANEL OF U.S. STATES

This study employs state‐level panel data to explore the relationship between inward foreign direct investment (FDI) and income inequality in the United States. Using panel cointegration techniques that allow for cross‐sectional heterogeneity and cross‐sectional dependence, we find that, in the long run, FDI exerts a significant and robust negative effect on income inequality in the United States. This result for the United States as a whole does not imply that FDI narrows income gaps in each individual state. There is considerable heterogeneity in the long‐run effects of FDI on income inequality across states, with some states (21 out of 48 cases) exhibiting a positive relationship between FDI in income inequality.(JEL F21, D31, C23)     

IMPORTED CAPITAL INPUT,ABSORPTIVE CAPACITY,AND FIRM PERFORMANCE: EVIDENCE FROM FIRM‐LEVEL DATA

Importing capital inputs has been recognized as a critical channel for technology transfer across countries. We examine whether and to what extent the productive impact of imported capital varies with firms' abilities to absorb new technologies using ordinary least squares, instrumental variable, and threshold regression estimators. We find that firms with higher absorptive capacity gain significantly more from importing foreign capital. Our results also suggest a threshold for such benefits. Furthermore, the productive contribution of skilled labor is significantly higher in firms that import foreign capital. Developing policies to augment absorptive capacity will help firms in developing countries to realize benefits associated with imported capital. (JEL F14, D24, L24, O33)     

LABOR MARKET OPENNESS,H‐1B VISA POLICY,AND THE SCALE OF INTERNATIONAL STUDENT ENROLLMENT IN THE UNITED STATES

International students have long comprised an important part of U.S. higher education. However, little is known regarding the factors that encourage students from across the world to enroll in U.S. colleges and universities each year. This paper examines the relationship between international enrollment and the openness of the United States' skilled labor market, currently regulated by the H‐1B program. Gravity regressions reveal that H‐1B visa issuances to a country are positively and significantly related to the number of international students from that country. Causal estimates of the impact of labor market openness are achieved by exploiting a dramatic fall in the H‐1B visa cap in October 2003. Triple difference estimates show that the fall in the cap lowered foreign enrollment by 10%. (JEL F22, I21, J11)     

Recent Immigration to Canada and the United States: A Mixed Tale of Relative Selection

Using large‐scale census data and adjusting for sending‐country fixed effect to account for changing composition of immigrants, we study relative immigrant selection to Canada and the U.S. during 1990–2006, a period characterized by diverging immigration policies in the two countries. Results show a gradual change in selection patterns in educational attainment and host‐country language proficiency in favor of Canada as its post‐1990 immigration policy allocated more points to the human capital of new entrants. Specifically, in 1990, new immigrants in Canada were less likely to have a B.A. degree than those in the U.S.; they were also less likely to have a highschool or lower education. By 2006, Canada surpassed the U.S. in drawing highly educated immigrants, while continuing to attract fewer low‐educated immigrants. Canada also improved its edge over the U.S. in terms of host‐country language proficiency of new immigrants. Entry‐level earnings, however, do not reflect the same trend: Recent immigrants to Canada have experienced a wage disadvantage compared to recent immigrants to the U.S., as well as Canadian natives. One plausible explanation is that while the Canadian points system has successfully attracted more educated immigrants, it may not be effective in capturing productivity‐related traits that are not easily measurable.     

CAN TRADE REALLY HURT? AN EMPIRICAL FOLLOW‐UP ON SAMUELSON'S CONTROVERSIAL PAPER

This paper investigates Samuelson's [Samuelson, P. A. “Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization.” Journal of Economic Perspectives, 18(3), 2004, 135–46] argument that technical progress of the trade partner may hurt the home country. We illustrate this prospect in a simple Ricardian model for situations with outward knowledge spillovers. Within this framework Samuelson's Act II effects may occur. Based on industry level panel data for 17 OECD countries for the period 1973–2000 we show econometrically that the outflow of domestic knowledge via exports or foreign direct investment (FDI) to the rest of the world may have a negative impact on industry output in the home country. This is particularly so when exporting to technologically less advanced countries and, more specifically, China. (JEL F10, F11, F14, O30)     

HOW DOES GLOBALIZATION AFFECT THE IMPLICIT TAX RATES ON LABOR INCOME,CAPITAL INCOME,AND CONSUMPTION IN THE EUROPEAN UNION?

This article analyzes the effects of globalization on implicit tax rates (ITRs) on labor income, capital income, and consumption in the EU15 and Central and Eastern European New Member States (CEE NMS). We find supportive evidence for an increase in the ITR on labor income in the EU15, but no effect on the ITR on capital income. There is evidence of convergence in terms of the ITR on consumption, as countries with higher than average ITR on consumption respond to globalization by decreasing their tax rates. There are important differences among the welfare regimes within the EU15. Social‐democratic countries have decreased the tax burden on capital, but increased that on labor due to globalization. Globalization exerts a pressure to increase taxes on labor income in the conservative and liberal regimes as well. Taxes on consumption decrease in response to globalization in the conservative and social‐democratic regimes. In the CEE NMS, there is no effect of globalization on the ITR on labor and capital income, but we find a negative impact on the ITR on consumption in the CEE NMS with higher than average ITR on consumption. (JEL H23, H24, H25, F19, F21)     

INTELLECTUAL PROPERTY PROTECTION AND THE INDUSTRIAL COMPOSITION OF MULTINATIONAL ACTIVITY

In a North‐South model with endogenous foreign direct investment (FDI), we examine the impact of Southern intellectual property rights (IPR) protection on the mode and industrial composition of international technology transfer. A novel feature of the model is that, due to technological reasons, industries differ with respect to their susceptibility to imitation. In equilibrium, licensing occurs in industries where the risk of imitation is low and FDI where it is of intermediate magnitude. Stronger IPRs in the South (1) alter the industrial composition of multinational activity toward licensing at the expense of FDI; (2) reduce local imitation; and (3) increase licensing and, to a lesser extent, FDI. (JEL F10, O34)     

WELFARE IMPACT OF A BAN ON CHILD LABOR

This article presents a new rationale for imposing restrictions on child labor. In a standard overlapping generation model where parental altruism results in transfers that children allocate to consumption and education, the Nash‐Cournot equilibrium results in suboptimal levels of parental transfers and does not maximize the average level of utility of currently living agents. A ban on child labor decreases children's income and generates an increase in parental transfers bringing their levels closer to the optimum, raising children's welfare as well as average welfare in the short run and in the long run. Moreover, the inability to work allows children to allocate more time to education, and it leads to an increase in human capital. Besides, to increase transfers, parents decrease savings and hence physical capital accumulation. When prices are flexible, these effects diminish the positive welfare impact of the ban on child labor. (JEL D91, E21)     

Source‐Country Gender Roles and the Division of Labor Within Immigrant Families

The authors examined the relationship between source‐country gender roles and the gender division of paid and unpaid labor within immigrant families in the host society. Results from Canadian Census of Population (N = 497,973) data show that the 2 indicators of source‐country gender roles examined—female/male labor activity ratio and female/male secondary education ratio—are both positively associated with immigrant wives' share in their family labor supply and negatively associated with their share in housework. The association between source‐country gender roles and women's share in couples' labor activities weakens over time. Moreover, the relationship between source‐country female/male labor activity and immigrant couples' gender division of labor is reduced when immigrant women have nonimmigrant husbands, indicating that husband's immigration status matters.     

THE HETEROGENEITY OF IMMIGRANTS,HOST COUNTRIES' INCOME AND PRODUCTIVITY: A CHANNEL ACCOUNTING APPROACH

This article exploits changes in the distribution of immigrants across 20 Organization for Economic Co‐operation and Development countries from 1960 to 2005 in order to assess their contribution to income of destination countries. The non‐random sorting of immigrants across countries is addressed by using an instrumental variable strategy. The instrument is built by estimating a bilateral migration model incorporating exogenous origin country determinants of migration. Aggregate results reveal that immigrants have a positive effect on income that works primarily through total factor productivity (TFP). We further construct a novel dataset from censuses and labor force surveys to explore the information on the age of immigrants. Contrasting income effects are found across age groups: a higher share of immigrants among the youth has a negative impact on aggregate income, while a higher share of immigrants among prime‐aged workers has a positive effect. We interpret this disparity as short‐term versus medium‐term effects. Adjustments over time involve changes in TFP but also in the human capital of the native‐born. (JEL F22, J24, J31, O31)     

BEYOND EDUCATION AND FAIRNESS: A LABOR MARKET TAXATION MODEL FOR THE GREAT GATSBY CURVE

Applied researchers have been drawn to models that attribute the demonstrated cross‐country differences in intergenerational income transmission to government failures to invest in the human capital of poor children. To highlight another potential mechanism, the disincentive effects of labor market taxation and redistribution, we present a simple model that can explain cross‐country differences in intergenerational mobility and other previously observed empirical patterns. Empirical tests using data on income mobility, tax rates, and public expenditures largely support the model predictions. We conclude that the common presumption that intergenerational mobility largely measures fairness or opportunity, and the resultant policy recommendations, are premature. (JEL D31, J24, J62)