Speeding Up the Product Cycle: The Role of Host Country Reforms

We study the effects of policy reforms in the South on the decisions of intrafirm and arm's length production transfers by Northern firms. We show theoretically that relaxing ownership controls and improving contract enforcement can induce multinational companies to expand product varieties to host developing countries, and that a combination of the two reforms has an amplifying effect on product transfers. Consistent with these implications, we find that ownership liberalization and judicial quality played an important role in raising the extensive margin of processing exports in China for the period of 1997-2007. Our findings imply that institutional reforms in developing countries can effectively speed up the product cycle.product cycle, ownership structure, contract environment, export variety, processing trade, China

Expanding Export Variety: The Role of Institutional Reforms in Developing Countries

This paper presents theory and evidence showing that institutional reforms in developing countries can effectively expand their product varieties in export. Our model demonstrates that relaxing foreign ownership controls and improving contract enforcement can induce multinational companies to produce new products in host developing countries, and that a combination of the two reforms has an amplifying effect on the introduction of product varieties. Consistent with these theoretical predictions, we find empirically that ownership liberalization and judicial quality played an important role in raising the extensive margin of processing exports in China for the period of 1997-2007

Speeding up the product cycle: The role of host country reforms

We study the effects of policy reforms in the South on the decisions of intrafirm and arm's length production transfers by Northern firms. We show theoretically that relaxing ownership controls and improving contract enforcement can induce multinational companies to expand product varieties to host developing countries, and that a combination of the two reforms has an amplifying effect on product transfers. Consistent with these implications, we find that ownership liberalization and judicial quality played an important role in raising the extensive margin of processing exports in China for the period of 1997-2007. Our findings imply that institutional reforms in developing countries can effectively speed up the product cycle

Nickell Bias in Panel Local Projection: Financial Crises Are Worse Than You Think

Local Projection is widely used for impulse response estimation, with the Fixed Effect (FE) estimator being the default for panel data. This paper highlights the presence of Nickell bias for all regressors in the FE estimator, even if lagged dependent variables are absent in the regression. This bias is the consequence of the inherent panel predictive specification. We recommend using the split-panel jackknife estimator to eliminate the asymptotic bias and restore the standard statistical inference. Revisiting three macro-finance studies on the linkage between financial crises and economic contraction, we find that the FE estimator substantially underestimates the post-crisis economic losses

Offshoring and Wage Inequality: Theory and Evidence from China

We present a global production sharing model that integrates the organizational choices of offshoring into the determination of relative wages in developing countries. The model shows that offshoring through foreign direct investment contributes more prominently than arm's length outsourcing to the demand for skill in the South, thereby increasing the relative wage of skilled workers. We incorporate these theoretical results into an augmented Mincer earnings function and test the model based on a natural experiment in which China lifted its restrictions on foreign ownership for multinational companies upon its accession to the World Trade Organization in 2001. Empirical findings based on detailed Urban Household Surveys and trade data from Chinese customs provide support to our proposed theory, thus shedding light on the changes in firm ownership structure, the skill upgrading in exports, and the evolution of wage inequality from 1992 to 2008 in China's manufacturing sector

News Shocks in Open Economies: Evidence from Giant Oil Discoveries

This paper explores the effect of news shocks on the current account and other macroeconomic variables using worldwide giant oil discoveries as a directly observable measure of news shocks about future output ? the delay between a discovery and production is on average 4 to 6 years. We first present a two-sector small open economy model in order to predict the responses of macroeconomic aggregates to news of an oil discovery. We then estimate the effects of giant oil discoveries on a large panel of countries. Our empirical estimates are consistent with the predictions of the model. After an oil discovery, the current account and saving rate decline for the first 5 years and then rise sharply during the ensuing years. Investment rises robustly soon after the news arrives, while GDP does not increase until after 5 years. Employment rates fall slightly for a sustained period of time