Economic Policy Institute

About: Economic Policy Institute is a nonprofit organization based out in Washington D.C., District of Columbia, United States. It is known for research contribution in the topics: Monetary policy & Exchange rate. The organization has 1921 authors who have published 14230 publications receiving 765876 citations. The organization is also known as: EPI.

Financial Dependence and Growth

Abstract: Does finance affect economic growth? A number of studies have identified a positive correlation between the level of development of a country's financial sector and the rate of growth of its per capita income. As has been noted elsewhere, the observed correlation does not necessarily imply a causal relationship. This paper examines whether financial development facilitates economic growth by scrutinizing one rationale for such a relationship; that financial development reduces the costs of external finance to firms. Specifically, we ask whether industrial sectors that are relatively more in need of external finance develop disproportionately faster in countries with more developed financial markets. We find this to be true in a large sample of countries over the 1980s. We show this result is unlikely to be driven by omitted variables, outliers, or reverse causality.

What Do We Know About Capital Structure? Some Evidence from International Data

Abstract: We investigate the determinants of capital structure choice by analyzing the financing decisions of public firms in the major industrialized countries. At an aggregate level, firm leverage is fairly similar across the G-7 countries. We find that factors identified by previous studies as important in determining the cross- section of capital structure in the U.S. affect firm leverage in other countries as well. However, a deeper examination of the U.S. and foreign evidence suggests that the theoretical underpinnings of the observed correlations are still largely unresolved.

The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity

Abstract: This Paper builds a dynamic industry model with heterogeneous firms that explains why international trade induces reallocations of resources among firms in an industry. The Paper shows how the exposure to trade will induce only the more productive firms to enter the export market (while some less productive firms continue to produce only for the domestic market) and will simultaneously force the least productive firms to exit. It then shows how further increases in the industry's exposure to trade lead to additional inter-firm reallocations towards more productive firms. These phenomena have been empirically documented but cannot be explained by current general equilibrium trade models, because they rely on a representative firm framework. The Paper also shows how the aggregate industry productivity growth generated by the reallocations contributes to a welfare gain, thus highlighting a benefit from trade that has not been examined theoretically before. The Paper adapts Hopenhayn's (1992a) dynamic industry model to monopolistic competition in a general equilibrium setting. In so doing, the Paper provides an extension of Krugman's (1980) trade model that incorporates firm level productivity differences. Firms with different productivity levels coexist in an industry because each firm faces initial uncertainty concerning its productivity before making an irreversible investment to enter the industry. Entry into the export market is also costly, but the firm's decision to export occurs after it gains knowledge of its productivity.

Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers Through Backward Linkages

Abstract: Many countries compete against one another in attracting foreign investors by offering ever more generous incentive packages and justifying their actions with the productivity gains that are expected to accrue to domestic producers from knowledge externalities generated by foreign affiliates. Despite this being hugely important to public policy choices, there is little conclusive evidence indicating that domestic firms benefit from foreign presence in their sector. It is possible, though, that researchers have been looking for foreign direct investment (FDI) spillovers in the wrong place. Multinationals have an incentive to prevent information leakage that would enhance the performance of their local competitors in the same industry but at the same time may want to transfer knowledge to their local suppliers in other sectors. Spillovers from FDI may be, therefore, more likely to take place through backward linkages - that is, contacts between domestic suppliers of intermediate inputs and their multinational clients - and thus would not have been captured by the earlier literature. This paper focuses on the understudied issue of FDI spillovers through backward linkages and goes beyond existing studies by shedding some light on factors driving this phenomenon. It also improves over existing literature by addressing several econometric problems that may have biased the results of earlier research. Based on a firm-level panel data set from Lithuania, the estimation results are consistent with the existence of productivity spillovers. They suggest that a 10 percent increase in the foreign presence in downstream sectors is associated with 0.38 percent rise in output of each domestic firm in the supplying industry. The data indicate that these spillovers are not restricted geographically, since local firms seem to benefit from the operation of downstream foreign affiliates on their own, as well as in other regions. The results further show that greater productivity benefits are associated with domestic-market, rather than export-oriented, foreign affiliates. But no difference is detected between the effects of fully-owned foreign firms and those with joint domestic and foreign ownership. The findings of a positive correlation between productivity growth of domestic firms and the increase in multinational presence in downstream sectors should not, however, be interpreted as a call for subsidizing FDI. These results are consistent with the existence of knowledge spillovers from foreign affiliates to their local suppliers, but they may also be a result of increased competition in upstream sectors. While the former case would call for offering FDI incentive packages, it would not be the optimal policy in the latter. Certainly more research is needed to disentangle these two effects. This paper - a product of Trade, Development Research Group - is part of a larger effort in the group to study the contribution of trade and foreign direct investment to technology transfer.