Showing papers by "Kiel Institute for the World Economy published in 2012"

Adaptation to cyclone risk: evidence from the global cross-section

Abstract: Understanding the feasibility and cost of adaptation is essential to management of the global climate. Unfortunately, we lack general estimates of adaptive responses to almost all climatological processes. To address this for one phenomenon, we estimate the extent of adaptation to tropical cyclones (TCs) using the global cross-section of countries. We reconstruct every TC observed during 1950–2008 to parameterize countries' TC climate and year-to-year TC exposure. We then look for evidence of adaptation by comparing deaths and damages from physically similar TC events across countries with different TC climatologies. We find that countries with more intense TC climates suffer lower marginal losses from an actual TC event, indicating that adaptation to this climatological risk occurs but that it is costly. Overall, there is strong evidence that it is both feasible and cost-effective for countries with intense TC climatologies to invest heavily in adaptation. However, marginal changes from countries' current TC climates generate persistent losses, of which only ~3% is "adapted away" in the long run.

Economic costs of ocean acidification: a look into the impacts on global shellfish production

Abstract: Ocean acidification is increasingly recognized as a major global problem. Yet economic assessments of its effects are currently almost absent. Unlike most other marine organisms, mollusks, which have significant commercial value worldwide, have relatively solid scientific evidence of biological impact of acidification and allow us to make such an economic evaluation. By performing a partial-equilibrium analysis, we estimate global and regional economic costs of production loss of mollusks due to ocean acidification. Our results show that the costs for the world as a whole could be over 100 billion USD with an assumption of increasing demand of mollusks with expected income growths combined with a business-as-usual emission trend towards the year 2100. The major determinants of cost levels are the impacts on the Chinese production, which is dominant in the world, and the expected demand increase of mollusks in today’s developing countries, which include China, in accordance with their future income rise. Our results have direct implications for climate policy. Because the ocean acidifies faster than the atmosphere warms, the acidification effects on mollusks would raise the social cost of carbon more strongly than the estimated damage adds to the damage costs of climate change.

Knowledge context and entrepreneurial intentions among students

Abstract: The current paper analyzes the role of the individual and regional knowledge context in forming university students’ entrepreneurial intentions. As access to knowledge resources is crucial for the growth and survival of knowledge-based start-ups, we argue that an individual’s decision in favor or against becoming an entrepreneur should critically depend on the multilevel context providing her with access to strategically relevant knowledge. A unique dataset for German students and regions allows us to analyze a variety of personal and regional determinants of entrepreneurial intentions among students. At the individual level we find that role models facilitating the transfer of tacit knowledge and the expectation that strong ties will provide know-how and know-who positively impact entrepreneurial intentions. At the regional level we find that a high regional start-up rate in knowledge-based industries and a high growth rate of regional knowledge production positively influence entrepreneurial intentions.

Why mode and regional context matter for entrepreneurship education

Abstract: This study examines how modes of entrepreneurship education (active, such as business simulations, versus reflective, such as theory lectures) – alone and in interaction with the universities’ regional context – affect students’ self-employment intentions. Results from a cross-level analysis show that active modes are, irrespective of the regional context, positively related with intentions and attitudes towards entrepreneurship, whereas the effect of reflective modes is contingent on the regional context. The findings have important implications for the ongoing discussion on the teachability of entrepreneurship, the design of educational programmes and for future research.

Fdi and income inequality: evidence from a panel of u.s. states

Abstract: 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, cross-sectional dependence, and endogenous regressors, we find that the short-run effects of FDI on income inequality are insignificant or weakly significant and negative. In the long run, however, 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 the long run 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.

The economic impact of ocean acidification on coral reefs

Abstract: Because ocean acidification has only recently been recognized as a problem caused by CO2 emissions, impact studies are still rare and estimates of the economic impact are absent. This paper estimates the economic impact of ocean acidification on coral reefs which are generally considered to be economically as well as ecologically important ecosystems. First, we conduct an impact assessment in which atmospheric concentration of CO2 is linked to ocean acidity causing coral reef area loss. Next, a meta-analytic value transfer is applied to determine the economic value of coral reefs around the world. Finally, these two analyses are combined to estimate the economic impact of ocean acidification on coral reefs for the four IPCC marker scenarios. We find that the annual economic impact rapidly escalates over time, because the scenarios have rapid economic growth in the relevant countries and coral reefs are a luxury good. Nonetheless, the annual value in 2100 in still only a fraction of total income, one order of magnitude smaller than the previously estimated impact of climate change. Although the estimated impact is uncertain, the estimated confidence interval spans one order of magnitude only. Future research should seek to extend the estimates presented here to other impacts of ocean acidification and investigate the implications of our findings for climate policy.

Evolvement of Uniformity and Volatility in the Stressed Global Financial Village

Abstract: In the current era of strong worldwide market couplings the global financial village became highly prone to systemic collapses, events that can rapidly sweep throughout the entire village. Here we present a new methodology to assess and quantify inter-market relations. The approach is based on the correlations between the market index, the index volatility, the market Index Cohesive Force and the meta-correlations (correlations between the intra-correlations.) We investigated the relations between six important world markets - U.S., U.K., Germany, Japan, China and India from January 2000 until December 2010. We found that while the developed ``western'' markets (U.S., U.K., Germany), are highly correlated, the interdependencies between these markets and the developing ``eastern'' markets (India and China) are very volatile and with noticeable maxima at times of global world events. The Japanese market switches ``identity'' - it switches between periods of high meta-correlations with the ``western'' markets and periods that it behaves more similar to the ``eastern'' markets. These and additional reported findings illustrate that the methodological framework provides a way to quantify the evolvement of interdependencies in the global market, to evaluate a world financial network and quantify changes in the world inter market relations. Such changes can be used as precursors to the agitation of the global financial village. Hence, the new approach can help to develop a sensitive ``financial seismograph'' to detect early signs of global financial crises so they can be treated before developed into worldwide events.

Firm Productivity and the Foreign-Market Entry Decision

Abstract: We use Japanese firm-level data to examine how a firm’s productivity affects its foreign-market entry strategy. The firm faces a choice between exporting and foreign direct investment (FDI). In the case of FDI, the firm has two options: greenfield investment or acquisition of an existing plant (M&A). If it selects greenfield investment, it has two ownership choices: whole ownership or a joint venture with a local company. Controlling for industry- and country-specific characteristics, we find that the more productive a firm is, the more likely it is to choose FDI rather than exporting and greenfield investment rather than M&A.

The location choices of foreign investors: a district-level analysis in india

Abstract: This paper analyzes the determinants of the location choices made by foreign investors at the district level in India to gauge the relative importance of economic geography factors, local business conditions, and the presence of previous foreign investors. We employ a discretechoice model and Poisson regressions to control for the potential violation of the assumption of Independence of Irrelevant Alternatives. Our sample includes about 19,500 foreign investment projects approved in 447 districts from 1991-2005. We find that foreign investors strongly prefer locations where other foreign investors are. They are also attracted to industrially diverse locations and those with better infrastructure. We conclude that the concentration of FDI in a few locations could fuel regional divergence in post-reform India.

Soil degradation and agricultural sustainability: an overview from Iran

Abstract: During the past six decades, agriculture as a main sector in Iran’s economy has been affected by economic development, land-use policies, and population growth and its pressures. From the 1940s until 2010, the percentage of the total urban population of Iran increased from about 21 % to around 72 %. Urbanization, industrialization, and intensive cultivation have dramatically affected soil and water resources. The exploitation of groundwater has been increased around fourfold from the 1970s to the mid-2000s. Total water resources per capita reduced around 23 % from 1956 to 2008. The average annual decrease in the groundwater table in Iran during the last two decades is 0.51 m. In 2008, the groundwater table fell around −1.14 m in average in Iran. The average use of chemical fertilizers increased from around 2.1 million tons in 1990s to about 3.7 million tons in 2009. During that period, fertilizer use efficiency decreased from around 28 % to around 21 %. Approximately 77 % of the agricultural land under irrigation suffers from different levels of salinity. According to the quantification of four indices, such as soil erosion, fall in groundwater levels, salinity, and use of chemical fertilizer, that are directly related to agricultural land use, the results show that agricultural management in Iran needs special attention to reach sustainable conditions. The total cost of soil and water degradation and use of fertilizers in agriculture are estimated around than US $12.8 billion (about 157,000 billion IRRials)—approximately 4 % of the total gross domestic product (GDP) and approximately 35 % of the GDP of the agricultural sector in Iran.

Inflation and growth in the long run: a new keynesian theory and further semiparametric evidence

Abstract: This paper explores the influence of inflation on economic growth both theoretically and empirically. We propose to merge an endogenous growth model of learning by doing with a New Keynesian one with sticky wages. We show that the intertemporal elasticity of substitution of working time is a key parameter for the shape of the inflation–growth nexus. When it is set equal to zero, the inflation–growth nexus is weak and hump-shaped. When it is greater than zero, inflation has a sizable and negative effect on growth. Endogenizing the length of wage contracts does not lead to inflation superneutrality in the presence of a fixed cost of wage resetting. Adopting various semiparametric and instrumental-variable estimation approaches on a cross-country/time-series data set, we show that increasing inflation reduces real economic growth, consistent with our theoretical model with a positive intertemporal elasticity of substitution of working time.

Determinants of government bond spreads in the euro area: in good times as in bad

Abstract: Government bond spreads increased rapidly during the financial turmoil in the euro area. In general, government bond spreads in the euro area are attributed to solvency and liquidity risks and determinants thereof. This paper proposes the use of latent processes to model the time variation present in the evaluation of these determinants. In contrast to approaches using global measures like the US corporate bond spreads or short-term interest rates to approximate time variation, our model is also flexible enough to deal with the unfolding of the financial crisis. The findings suggest that the expected debt-to-GDP ratio explains a major part of the differences in bond yields in the euro area between 2003 and the unfolding of the financial crises. Coefficients for many determinants increased rapidly during the financial crises. Especially market capitalization gained relative importance in winter 2008/2009.

What makes a successful export? Evidence from firm‐product‐ level data

Abstract: We analyse a very rich and unique panel database that provides information on exports at the firm-product level. Motivated by the recent theory of multi-product firms, we investigate what determines the survival of products in the export mix to find that, in export dynamics, characteristics of the product as well as that of the firm matter. In particular, firm productivity as well as product scale and tenure are associated with a higher export survival rate. This suggests, in line with theory, that there are firm- as well as firm-product-specific competencies that are important for shaping firms’ export mix. On analyse une base de donnees unique et tres riche qui fournit des renseignements sur les exportations au niveau du produit et de la firme. Motive par une theorie recente des firmes multi-produits, les auteurs examinent ce qui determine la survie des produits dans le melange des exportations. On decouvre que dans la dynamique des exportations, les caracteristiques des produits et de la firme comptent. En particulier, la productivite de la firme tout autant que l’echelle et la perennite du produit sont associees a un taux de survie plus eleve de l’exportation. Voila qui suggere que, comme le veut la theorie, qu’il existe des competences specifiques de la firme tout autant que des competences attachees a la jonction firme-produit qui sont importantes dans la conformation du melange d’exportations des firmes.

Correlations and dependencies in the global financial village

Abstract: The high degree of coupling between global financial markets has made the financial village prone to systemic collapses. Here we present a new methodology to assess and quantify inter-market relations. The approach is based on meta-correlations (correlations between the intra-market correlations), and a Dependency Network analysis approach. We investigated the relations between six important world markets — U.S., U.K., Germany, Japan, China and India from January 2000 until December 2010. Our findings show that while the developed Western markets (U.S., U.K., Germany), are highly correlated, the inter-dependencies between these markets and the Eastern markets (India and China) are very volatile and with noticeable maxima at times of global world events. Finally, using the Dependency network approach, we quantify the flow of information between the different markets, and how markets affect each other. We observe that German and U.K. stocks show a large amount of coupling, while other markets are more segmented. These and additional reported findings illustrate that this methodological framework provides a way to quantify interdependencies in the global market and their evolvement, to evaluate the world financial network, and quantify changes in inter-market relations. Such changes can be used as precursors to the agitation of the global financial village.

Spatial effects of foreign direct investment in US states

Abstract: This paper estimates the aggregate productivity effects of Marshallian externalities generated by foreign direct investments (FDI) in the US. In contrast to earlier work, this paper puts special emphasis on controlling for Marshallian externalities and other intra- and inter-regional spillovers generated by domestic firms. The productivity effects of these externalities may, if not accounted for appropriately, be falsely attributed to FDI. This paper also deals with the potential endogeneity of FDI and the presence of spatial lags by employing a system generalized method of moments (GMM) estimator. We use a regional production function framework that models Marshallian externalities and other intraand inter-regional spillovers explicitly as determinants of total factor productivity, and tests several empirical specifications of this model, using data for US states from 1977—2003. The results indicate that FDI does, in fact, generate positive externalities, while those from domestic firms are negative.

Surviving the crisis: Foreign multinationals vs domestic firms

Abstract: Starting from the observation that all firms in Ireland (foreign and domestic in manufacturing and services industries) were hit by the crisis, the paper asks whether there is a difference in the behaviour of foreign and domestic firms. One hypothesis is that foreign multinationals are less linked into the Irish economy, so more likely to leave once the economy is hit by a negative shock. The paper discusses background hypotheses before giving empirical evidence from firstly aggregate data, and secondly firm-level observations. The analysis of the latter suggests that foreign firms are not more likely to leave during the crisis than Irish firms. Some policy conclusions are offered in the paper.

Informal–Formal Linkages and Informal Enterprise Performance in Urban West Africa

Abstract: Employing a unique dataset that covers almost 6000 informal enterprises from six West African urban centers, this paper examines the backward and forward linkages of these enterprises to the formal sector. Authors first provide a descriptive analysis of the existing formal-informal linkages. It turns out that formal backward linkages are much more prevalent than formal forward linkages, and that linkages vary with the degree of informality, occurring less frequently if firms have no ties to the formal sector at all or low capital stocks. In the second step, authors employ a Probit approach to identify major factors associated with the observed backward linkages. The Probit analysis corroborates the importance of the degree of informality for the existence of linkages and shows various enterprise characteristics to be significant determinants as well. Finally, authors analyze whether backward linkages matter for enterprise performance using both Ordinary Least Squares (OLS) and four estimations. Authors find a positive and robust impact of backward linkages, whereas the degree of informality of the enterprises in our sample seems to affect firm performance only indirectly through their linkages to the formal sector.

A genuine foundation for prospect theory

Abstract: In most models of (cumulative) prospect theory, reference dependence of preferences is imposed beforehand and the location of the reference point is determined exogenously. This paper presents principles that provide critical tests and foundations for prospect theory preferences without assuming reference-dependent preferences a priori. Instead, reference dependence is derived from behavior and the reference point arises endogenously.

The Real Economics of Climate Engineering

Abstract: In 2008 Scott Barrett wrote a paper on “The incredible economics of geoengineering” in which he argued that the potentially low cost of climate engineering (CE) measures together with the quick response of the earth’s temperature to such interventions will change the whole debate about the mitigation of climate change. Whereas Barrett was mostly focusing on the cost of running CE measures, we point out that several determinants of overall economic cost like price or external effects are not yet sufficiently accounted for and that the question of dynamic efficiency is still unresolved. Combining the existing theoretical investigations about the topic from the literature, we show that even though these new measures provide new options to deal with climate change, several of them might also reduce our scope of action. Consequently, we suggest that economic research should shift its focus to portfolios of CE measures and put more emphasis on those measures which control atmospheric carbon concentration and therefore allow extending our scope of action. Additionally, economic research should address the question of phase-in and phase-out scenarios for measures which directly influence the radiation balance.

What Drives India’s Outward FDI?:

Abstract: We empirically assess the determinants of India's FDI outflows across a large sample of host countries in the 1996-2009 period. Based on gravity model specifications, we employ Poisson pseudo maximum likelihood (PPML) estimators. Major findings include: India's outward FDI is hardly affected by motives to access raw materials or superior technologies. Market-related factors appear to have dominated the location choices of Indian direct investors. A larger Indian diaspora in the host countries attracts more FDI. Finally, it seems that Indian direct investors are relatively resilient to weak institutions and economic instability in the host countries. However, we do not find robust evidence that India provides an alternative source of FDI for countries that traditional investors tend to avoid.

Do Russia and China promote autocracy in Central Asia

Abstract: The purpose of our paper is to contribute to the literature on autocracy promotion by analyzing Central Asia as the most-likely case, considering both Russia and China as relevant external actors. We develop a concept for our analysis based on the different strategies of Russia and China towards the region and present the results of a qualitative study of the main dimensions of autocracy promotion (regional organizations, economic cooperation, and interference and threat). Based on this qualitative study, we define variables measuring the potential for autocracy promotion and test our hypotheses using panel data for 24 post-communist countries. The somewhat surprising result of our analysis is that, in contrast to Russia's dominance mode of operation, China's doing-business approach towards its neighbors in Central Asia may have—although unintentionally—even positive effects in terms of improving governance and undermining autocratic structures.