THE INTERNATIONAL DIMENSION OF PRODUCTIVITY AND DEMAND SHOCKS IN THE US ECONOMY

This paper analyzes the cross‐country effects of productivity and demand disturbances in the United States identified with sign restrictions based on standard theory. Productivity gains in US manufacturing increase US consumption and investment vis‐à‐vis foreign countries, resulting in a trade deficit and higher international prices of US goods, despite the rise in their supply. Financial adjustment works via a higher global value of US equities, real dollar appreciation, and an expansion of US gross foreign liabilities as well as assets. Positive demand shocks to US manufacturing also increase investment and cause a real dollar appreciation, but have limited effects on the trade balance and net foreign assets. Our findings emphasize the importance for macroeconomic interdependence of endogenous fluctuations in aggregate demand across countries in response to business cycle shocks.     

CAPITAL INFLOWS,FINANCIAL STRUCTURE AND HOUSING BOOMS

We use a panel VAR to study the effect of shocks to capital inflows, which are identified using sign restrictions, on the housing market in OECD countries. To explore how effects of these shocks change with the structure of the mortgage market and the degree of mortgage securitization, we allow the VAR coefficients to vary with mortgage‐market characteristics. Our results indicate that capital‐inflow shocks have a significant and positive effect on real house prices, real credit available to the private sector, and real residential investment. The responses of these variables are stronger in countries with more developed mortgage markets and in countries where securitization is allowed.     

INSTITUTION‐INDUCED PRODUCTIVITY DIFFERENCES AND PATTERNS OF INTERNATIONAL CAPITAL FLOWS

This paper studies theoretically how the cross‐country differences in the institutional quality (IQ) of domestic credit markets shape the patterns of international capital flows when such IQ differences also cause productivity differences across countries. IQ affects productivity by changing productivity–agency‐cost trade‐offs across heterogeneous investment projects. Such institution‐induced productivity differences are shown to have effects on the investment and capital flows that are opposite of exogenous productivity differences. This implies that the overall effect of IQ could generate U‐shaped responses of the investment and capital flows. Among other things, this means that capital could flow from middle‐income countries to both low‐income and high‐income countries, and that, starting from a very low IQ, a country could experience both a growth and a current account surplus after a successful institutional reform. More generally, the results here provide some cautions when interpreting the empirical evidence on the role of productivity differences and institutional differences on capital flows. It also calls into question the validity of treating the degree of financial frictions as a proxy for the quality of financial institutions, as commonly done in the literature.     

VOLATILITY,LABOR MARKET FLEXIBILITY,AND THE PATTERN OF COMPARATIVE ADVANTAGE

This paper studies the link between volatility, labor market flexibility, and international trade. International differences in labor market regulations affect how firms can adjust to idiosyncratic shocks. These institutional differences interact with sector specific differences in volatility (the variance of the firm‐specific shocks in a sector) to generate a new source of comparative advantage. Other things equal, countries with more flexible labor markets specialize in sectors with higher volatility. Empirical evidence for a large sample of countries strongly supports this theory: the exports of countries with more flexible labor markets are biased towards high‐volatility sectors. We show how differences in labor market institutions can be parsimoniously integrated into the workhorse model of Ricardian comparative advantage of Dornbusch, Fischer, and Samuelson (1977, American Economic Review, 67, 823–839). We also show how our model can be extended to multiple factors of production.     

The Impact of Vicarious Experience on Foreign Location Strategy

MNEs can learn from the foreign investment experiences of other firms when evaluating their own foreign entry strategies. We argue that other firms' experiences reduce investment barriers arising from formal and informal institutional environments in host countries that are dissimilar from an MNE's home country, thereby encouraging new entry. Our empirical analysis of foreign entries by Japanese public manufacturing firms over more than a thirty-year period indicates that the prior experiences of other firms in a host country mitigate the negative effect of formal and informal institutional distance on entry decisions: as other firms' experiences in a host country increase, a firm is less deterred by greater institutional distance from entering the country. We also find that the distance-mitigating effect of other firms' experiences in different industries is less significant when a larger body of same-industry firm experience exists in a country, implying a substitution effect between different types of vicarious experience.     

Task Trade Between Similar Countries

We propose a theory of task trade between countries that have similar relative factor endowments and technological capabilities, but may differ in size. Firms produce differentiated goods by performing a continuum of tasks, each of which generates local spillovers. Tasks can be performed at home or abroad, but offshoring entails costs that vary by task. In equilibrium, the tasks with the highest offshoring costs may not be traded. Among the remainder, those with the relatively higher offshoring costs are performed in the country that has the higher wage and the higher aggregate output. We discuss the relationship between equilibrium wages, equilibrium outputs, and relative country size.     

THE INTERNATIONAL TRANSMISSION OF VOLATILITY SHOCKS: AN EMPIRICAL ANALYSIS

This paper proposes an empirical model which can be used to estimate the international transmission of volatility shocks. Using this model we estimate that a one standard deviation increase in the volatility of the shock to US real GDP leads to a decline in UK GDP of 1% relative to trend and a 0.7% increase in UK CPI relative to trend at the two‐year horizon. Using a nonlinear open‐economy DSGE model, we find that these empirical estimates are consistent with the response to a perturbation to the volatility of foreign “supply” type shocks, while an increase in the volatility of demand shocks has a negligible impact.     

An Elementary Theory of Comparative Advantage

Comparative advantage, whether driven by technology or factor endowment, is at the core of neoclassical trade theory. Using tools from the mathematics of complementarity, this paper offers a simple yet unifying perspective on the fundamental forces that shape comparative advantage. The main results characterize sufficient conditions on factor productivity and factor supply to predict patterns of international specialization in a multifactor generalization of the Ricardian model which we refer to as an “elementary neoclassical economy.” These conditions, which hold for an arbitrarily large number of countries, goods, and factors, generalize and extend many results from the previous trade literature. They also offer new insights about the joint effects of technology and factor endowments on international specialization.     

DEEP FINANCIAL INTEGRATION AND VOLATILITY

We investigate the relationship between foreign direct ownership of firms and firm‐ and region‐level output volatility using a novel panel data set for European countries. We document a positive, highly robust, relationship between firm‐level foreign ownership and volatility of value added. This relationship holds cross‐sectionally and in panels with firm fixed effects where the relationship captures within‐firm variation over time. Considering domestic firms with assets in foreign countries, we document that it is international diversification, rather than the nationality of the owner, that explains this positive correlation. Our results can also be found at the aggregate level, where we show that region‐level volatility is correlated positively with foreign investment in the region. We show that this positive relation between aggregate volatility and foreign investment can be explained by the granularity of the firm size distribution and the fact that foreign ownership is concentrated among the largest firms.     

STOCHASTIC GROWTH IN THE UNITED STATES AND EURO AREA

This paper estimates, using data from the United States and the Euro Area, a two‐country stochastic growth model in which both neutral and investment‐specific technology shocks are nonstationary but cointegrated across economies. The results point to large and persistent swings in productivity, both favorable and adverse, originating in the United States but not transmitted to the Euro Area. More specifically, the results suggest that while the Euro Area missed out on the period of rapid investment‐specific technological change enjoyed in the United States during the 1990s, it also escaped the stagnation in neutral technological progress that plagued the United States in the 1970s.     

Dealing with high-risk environments: Institutional-based tools to reduce political risk costs

The international business (IB) literature on political risk mitigation has assigned explanatory preeminence to the organizational capabilities of multinational corporations (MNCs). The literature has assumed that political risk is avoidable for MNCs with specific political capabilities. We argue that political risk is inevitable. We posit that even if MNCs have political capabilities, host countries' political risk and its associated costs will not simply disappear. Extending the literature on political risk mitigation, we highlight the role of institutional-based tools in curbing political risk costs. Specifically, we posit that MNCs can reduce political risk costs through (i) international investment agreements, (ii) investment contracts with host governments, (iii) political risk insurance, and (iv) guarantees with binding enforcement mechanisms in unison with relying on political capabilities, thereby dampening the negative effect of uncontrollable host country political risk. We leverage the political-institutional approach to political risk and draw on relevant literature from law and IB to develop a framework to describe the conditions under which MNCs may use these institutional-based tools.     

Country location choices of service multinationals: An empirical study of the international hotel sector

This article examines international country location choices for equity investment undertaken by global hotel chains. Why do certain host countries attract more hotel investment than others? A second underlying issue that we tackle in this article is whether the traditional foreign direct investment determinants used in past studies on manufacturing also apply to services—or whether service sector-specific determinants are better explanatory variables for understanding the distribution of service foreign direct investment across countries.     

WORKERS,WARRIORS, AND CRIMINALS: SOCIAL CONFLICT IN GENERAL EQUILIBRIUM

We incorporate appropriation activities (social conflict) into canonical models of trade and study how economic shocks and policies affect the intensity of conflict. We show that not all shocks that could make society richer reduce conflict: positive shocks to labor‐intensive industries diminish conflict, while positive shocks to capital‐intensive industries increase it. The key requirement is that conflict activities be more labor intensive than the economy as this determines how shocks affect the returns and costs of conflict. Our theory is consistent with several observed patterns of conflict and implies that empirical work should take into account the relative factor intensities of the productive and conflict sectors in each country. Incorporating appropriation into a canonic general equilibrium model affects what policies may be deemed desirable: in order to reduce conflict and generate Pareto‐improvements policy must be distortionary, while reforms that appear efficiency‐enhancing under the unrealistic assumption of perfect property rights may backfire. This offers one explanation for why reforms based on traditional models without appropriation may be delayed and become unpopular when implemented, and why societies may sympathize with seemingly inefficient redistribution.     

A GLOBAL VIEW OF CROSS‐BORDER MIGRATION

This paper evaluates the global welfare impact of observed levels of migration using a quantitative multi‐sector model of the world economy calibrated to aggregate and firm‐level data. Our framework features cross‐country labor productivity differences, international trade, remittances, and a heterogeneous workforce. We compare welfare under the observed levels of migration to a no‐migration counterfactual. In the long run, natives in countries that received a lot of migration—such as Canada or Australia—are better off due to greater product variety available in consumption and as intermediate inputs. In the short run, the impact of migration on average welfare in these countries is close to zero, while the skilled and unskilled natives tend to experience welfare changes of opposite signs. The remaining natives in countries with large emigration flows—such as Jamaica or El Salvador—are also better off due to migration, but for a different reason: remittances. The welfare impact of observed levels of migration is substantial, at about 5% to 10% for the main receiving countries and about 10% in countries with large incoming remittances.     

Heterogeneous firm response to organized crime: Evidence from FDI in Mexico

We thank Editor Massaki Kotabe and two anonymous reviewers for their comments and suggestions. In addition, we appreciate helpful feedback on earlier versions of this paper from Myles Shaver, Jennifer Oetzel, Adam Fremeth, anonymous reviewers for the 2011 31st Strategic Management Society Annual International Conference and conference participants. Jorge Delgado and Avilia Bueno provided valuable assistance with data collection.This paper examines the impact of organized crime on Foreign Direct Investment (FDI) considering the role of foreign investor home-country experience. Extant research shows a negative impact of organized crime on FDI. We expect investor home-country experience with organized crime to ameliorate this deterrent effect. We do not find support for this prediction analyzing FDI net flows into Mexican states from 2001 to 2010. Our analysis does, however, reveal a heterogeneous investor response to organized crime. Our results suggest, surprisingly, that crime in host locations is actually positively associated with investment from high-crime countries. This research makes several contributions. Our evidence suggests that firms seek to leverage home experience with high levels of local organized crime, involving seemingly localized routines and practices, as they expand abroad. In addition, our work draws attention to the effect of institutional variation within host countries in foreign entry. It also expands the literature by focusing on organized crime, a largely unexplored source of country risk in international management research. Finally, it brings attention to the role of powerful international criminal organizations, drug cartels, in shaping cross-border business activity.     

QUALITY LADDERS IN A RICARDIAN MODEL OF TRADE WITH NONHOMOTHETIC PREFERENCES

The North–South trade literature has traditionally explored conditions under which international trade might further magnify income disparities between the advanced North and the backward South. We show that even when no single country is initially more advanced than any other one and productivity changes are uniform and identical in all countries, trade may still be a source of income divergence when nonhomothetic preferences and quality ladders are jointly taken into account. Income divergence will be experienced when comparative advantages induce patterns of specialization that, although initially optimal for all countries, do not offer the same scope for quality upgrading of final products.     

Growth,Trade and Factor Endowment: A Survey

This paper examines the relationship between factor endowment, human capital formation and trade in the theory of economic growth. The paper analyses the evolution of the idea that both trade and human capital play a leading role in explaining country performance and development. Economic growth, dynamic comparative advantage, international specialization and cumulative technological progress are identified as the key ingredients that explain why countries perform differently and, at the same time, why they may tend to converge towards a common benchmark.     

Internalization and internationalization under competing real options

The theories of internalization and internationalization provide general factors of international market entry but are not precise about its timing. The theory of real options may complement these approaches as it centers the impact of uncertainty on the timing and dimensioning of investment. A panel study of 5379 German entries to 22 countries suggests that, under the moderating influence of competition, the economic uncertainty in a host country has a U-shaped influence on the moment of entry. The results further reveal that uncertainty has a negative effect on the amount of capital at entry. Uncertainty shows no impact on the share in capital at entry, which challenges the view of international joint ventures as real options.     

Idiosyncratic Shocks and the Role of Nonconvexities in Plant and Aggregate Investment Dynamics

We study a model of lumpy investment wherein establishments face persistent shocks to common and plant‐specific productivity, and nonconvex adjustment costs lead them to pursue generalized (S, s) investment rules. We allow persistent heterogeneity in both capital and total factor productivity alongside low‐level investments exempt from adjustment costs to develop the first model consistent with the cross‐sectional distribution of establishment investment rates. Examining the implications of lumpy investment for aggregate dynamics in this setting, we find that they remain substantial when factor supply considerations are ignored, but are quantitatively irrelevant in general equilibrium. The substantial implications of general equilibrium extend beyond the dynamics of aggregate series. While the presence of idiosyncratic shocks makes the time‐averaged distribution of plant‐level investment rates largely invariant to market‐clearing movements in real wages and interest rates, we show that the dynamics of plants' investments differ sharply in their presence. Thus, model‐based estimations of capital adjustment costs involving panel data may be quite sensitive to the assumption about equilibrium. Our analysis also offers new insights about how nonconvex adjustment costs influence investment at the plant. When establishments face idiosyncratic productivity shocks consistent with existing estimates, we find that nonconvex costs do not cause lumpy investments, but act to eliminate them.     

Demand Fluctuations in the Ready‐Mix Concrete Industry

I investigate the role of demand shocks in the ready‐mix concrete industry. Using Census data on more than 15,000 plants, I estimate a model of investment and entry in oligopolistic markets. These estimates are used to simulate the effect of eliminating short‐term local demand changes. A policy of smoothing the volatility of demand has a market expansion effect: The model predicts a 39% increase in the number of plants in the industry. Since bigger markets have both more plants and larger plants, a demand‐smoothing fiscal policy would increase the share of large plants by 20%. Finally, the policy of smoothing demand reduces entry and exit by 25%, but has no effect on the rate at which firms change their size.