Capital deepening

About: Capital deepening is a research topic. Over the lifetime, 5203 publications have been published within this topic receiving 230297 citations.

Should Business Groups be Dismantled? The Equilibrium Costs of Efficient Internal Capital Markets

Abstract: We analyze the relationship between conglomerates' internal capital markets and the efficiency of economy-wide capital allocation, and identify a novel cost of conglomeration that arises from an equilibrium framework. Because of financial market imperfections engendered by imperfect investor protection, conglomerates that engage in "winner-picking" (Stein, 1997) find it optimal to allocate scarce capital internally to mediocre projects, even when other firms in the economy have higher productivity projects that are in need of additional capital. This bias for internal capital allocation can decrease allocative efficiency even when conglomerates have efficient internal capital markets, because a substantial presence of conglomerates might make it harder for other firms in the economy to raise capital. We also argue that the negative externality associated with conglomeration is particularly costly for countries that are at intermediary levels of financial development. In such countries, a high degree of conglomeration, generated for example by the control of the corporate sector by family business groups, may decrease the efficiency of the capital market. Our theory generates novel empirical predictions that cannot be derived in models that ignore the equilibrium effects of conglomerates. These predictions are consistent with anecdotal evidence that the presence of business groups in developing countries inhibits the growth of new independent firms due to lack of finance.

The Impact of Intelligence and Institutional Improvements on Economic Growth

Abstract: Standard indicators of human capital endowment ? like literacy, school enrollment ratios or years of schooling ? suffer from a number of defects. They are crude. Mostly, they refer to input rather than output measures of human capital formation. Occasionally, they produce implausible effects. They are not robustly significant determinants of growth. Here, they are replaced by average intelligence. This variable consistently outperforms the other human capital indicators in spite of suffering from severe defects of its own. The immediate impact of institutional improvements, i.e., more government tolerance of private enterprise or economic freedom, on growth it is in the same order of magnitude as intelligence effects are.

Capital Controls and Foreign Direct Investment

Abstract: This paper examines the effect of three types of capital control policies on FDI: (i) the existence of multiple exchange rates; (ii) restrictions on capital account, and (iii) restrictions on the repatriation of export proceeds. We find that the impact of capital controls on FDI varies by region and has changed over time. In the 1970s and 1980s, none of the policies had a significant impact on FDI. In the 1990s, all three were significant. Furthermore, capital controls has no effect on FDI to Sub-Saharan Africa and the Middle East, but affects FDI to East Asia and Latin America adversely.

Imperfections in the Capital Market

Abstract: THE adult economist, once the subject is called to his attention, will recall the frequency and variety of contexts in which he has encountered "imperfections-in-thecapital-market." The area of industrial organization teems with instances. A predatory price cutter drives his small rival to the (poorly attended!) auction block-a technique which is not profitable if the small rival can borrow and ride out the competitive storm (Jones, 1921, pp. 77 ff.). In fact, all systems of disciplining rivals by imposing losses require that the rival have inferior access to capital (Jones, 1921, p. 83; also Machlup, 1949, pp. 160 ff; Loescher, 1959, pp. 125 ff.). The cigarette companies earned large rates of return because potential rivals could not "afford" to advertise lavishly for years and so to develop acceptance of new brands (Nicholls, 1951, pp. 201, 412). The integration of a firm forward or backward has been explained as a device to increase (to presumably unattainable levels) the capital requirements of potential new firms (Stigler, 1950, p. 33; Blake and Jones, 1965, p. 392). The labor markets provide an equally generous supply of examples. All of us have said that rates of return on investment in education of men were higher than rates on (other?) investment goods because of "imperfections-in-the-capital-market" (see Friedman and Kuznets, 1945, pp. 89-92, 391-92; Stigler, 1966, pp. 266-67). The monopsonistic power of an employer arises because the laborer (lacking capital) cannot hold back his services in a bilateral monopoly setting (Marshall, 1920, p. 568). Perhaps these samples are sufficient to remind the reader of the variety and frequency of appearance of imperfections-inthe-capital-market. If not, we may add the considerable literature on capital rationing, with special reference to agriculture (see Schultz, 1940). The opulent literature of economic development would not fail to supply instances (Lewis, 1955, pp. 127 ff.). The problem of usury is at least by half a problem in capital market imperfections (Ryan, 1924). And, arbitrarily to close this listing, there are numerous examples of imperfections-in-the-capital-market in corporation finance (Buchanan, 1940, p. 315) and the literature of the economics of exhaustible resources (Pigou, 1932, pp. 2729). Not only is imperfections-in-the-capitalmarket a popular concept, but what is more important, it is a terminal concept. Once this phrase has been written or spoken, the economist has finished with that strand of analysis. In the list of closing phrases of economics, which includes "that is an index number problem," and "of course the second-best considerations still remain, surely imperfections-in-the-capital-market deserves pride of place. This Gabriel-horn phrase has accordingly received only negligible and negligent attention. The present essay seeks to make preliminary amends for this neglect.

Schooling, Capital Constraints and Entrepreneurial Performance: The Endogenous Triangle

Abstract: To what extent is the performance of a small business venture, once started, affected by capital constraints at the time of inception and by the business founder's investment in human capital? We attempt to answer this question taking into account the potential endogeneity of human and financial capital, and also possible interdependence between these variables. A theoretical model is developed which generates predictions about the nature and directions of the interdependencies. Using a rich data set on Dutch entrepreneurs in 1995, we obtain findings that are broadly consistent with the theoretical model. Instrumental variable estimates indicate that a 1 percentage point relaxation of capital constraints increases entrepreneurs' gross business incomes by 2 per cent on average. Also, education enhances entrepreneurs' performance both directly - with a rate of return of 12.7 per cent - and indirectly, because each extra year of schooling decreases capital constraints by 1.18 percentage points. The indirect effect of education on entrepreneurs' performance is estimated to be between 0.8 and 2.4 per cent.