Contractual Frictions and the Patterns of Trade: The Role of Generalized Trust

Extant studies on the relationship between “domestic institutions, comparative advantage and international specialization” have largely focused on formal institutions. This paper contributes to this literature by focusing on domestic informal contracting institution vis-á-vis generalized trust as a source of comparative advantage. Employing a bilateral industry trade data, the paper finds a robust evidence that countries with high generalized trust level export relatively more in industries that that are prone to contractual frictions. Results on export margins further suggest that countries with high generalized trust level enter more markets, ship more products to each destination, and have higher export per product and export intensities in those industries. On the one hand, the results reemphasizes the importance of trust for improved economic performance. On the other hand, it offers explanation as to why a country though poorly endowed with weak formal domestic institutions may still have a comparative cost advantage in industries that are more prone to contractual frictions due to having strong domestic informal institutions such as generalized trust

Trust and R&D Investments: Evidence from OECD Countries

This paper contributes to the literature on the innovation effect of social trust by analyzing the mechanisms linking social trust and R&D Investments. High social trust level can ease firms’ credit constraints by reducing moral hazards and information asymmetries problems which make raising external capital difficult and expensive for firms. It can also reduce relational risks that expose firms to ex-post holdup or outright intellectual property expropriation. Using data from 20 OECD countries, I test these mechanisms by evaluating whether more external finance dependent and relational risks vulnerable sectors exhibit disproportional higher R&D investments in countries with high social trust level. The empirical results confirm that high social trust level encourages investments in R&D. Importantly, the results indicate that sectors which depend more on external finance and those sectors that are more vulnerable to relational risks experience a relatively greater increase in R&D investments in countries with high social trust. The results underline access to external credit and reduction in relational risks as causal pathways linking social trust and R&D investment

Trust and R&D Investments: Evidence from OECD Countries

This paper contributes to the literature on the innovation effect of social trust by analyzing the mechanisms linking social trust and R&D Investments. High social trust level can ease firms’ credit constraints by reducing moral hazards and information asymmetries problems which make raising external capital difficult and expensive for firms. It can also reduce relational risks that expose firms to ex-post holdup or outright intellectual property expropriation. Using data from 20 OECD countries, I test these mechanisms by evaluating whether more external finance dependent and relational risks vulnerable sectors exhibit disproportional higher R&D investments in countries with high social trust level. The empirical results confirm that high social trust level encourages investments in R&D. Importantly, the results indicate that sectors which depend more on external finance and those sectors that are more vulnerable to relational risks experience a relatively greater increase in R&D investments in countries with high social trust. The results underline access to external credit and reduction in relational risks as causal pathways linking social trust and R&D investment

Contractual Frictions and the Patterns of Trade: The Role of Generalized Trust

Extant studies on the relationship between “domestic institutions, comparative advantage and international specialization” have largely focused on formal institutions. This paper contributes to this literature by focusing on domestic informal contracting institution vis-á-vis generalized trust as a source of comparative advantage. Employing a bilateral industry trade data, the paper finds a robust evidence that countries with high generalized trust level export relatively more in industries that that are prone to contractual frictions. Results on export margins further suggest that countries with high generalized trust level enter more markets, ship more products to each destination, and have higher export per product and export intensities in those industries. On the one hand, the results reemphasizes the importance of trust for improved economic performance. On the other hand, it offers explanation as to why a country though poorly endowed with weak formal domestic institutions may still have a comparative cost advantage in industries that are more prone to contractual frictions due to having strong domestic informal institutions such as generalized trust

Export Variety and Imported Intermediate Inputs: Industry-Level Evidence from Africa

Imported intermediate inputs offer access to lower-priced, higher quality, and a wider variety of inputs that can increase the possibility of producing and selling more diversified products in foreign markets. In this paper, we examine this relationship using a novel manufacturing industry-level data across 26 African countries over the 1995-2016 period. We find strong evidence of a positive relationship between imported intermediate inputs and the variety of exported products. Further analyses in the study indicate that imported intermediate inputs positively affect the variety of exported products because they offer lower-priced, and higher-quality/technology embodied inputs. However, the positive effect of imported intermediate inputs on the variety of exported products depend on industry's absorptive capacity, especially when the inputs are sourced from advanced countries. We discuss the implications of our findings

Supporting an Innovation Agenda for the Western Balkans - Tools and Methodologies

The Western Balkan region has significantly improved in terms of innovation performance in the last ten years. However, in catching up with other European regions, the focus of innovation efforts should be enhanced. Exports are still far more focused on medium- and low-technology products. Innovative efforts mostly accommodate traditionally strong sectors, which do not necessarily reflect the ideal competitiveness paths for economies in the region. Although some Western Balkan economies record increases in patent activity, patent intensity in the region is still low, while, on the other hand, scientific publication production displays a stable growth trend. While Western Balkan economies are at different stages in the formation of research and innovation (R&I) policy governance systems, national research and innovation policy frameworks are continuously being improved. The enhancement of governance in the area of R&I came as the result of increased capacity building activities in the region, as well as of the real needs emerging as a result of social and economic transformation. On the other hand, R&I systems in the Western Balkan economies need to continue shifting their focus towards businesses to provide better balance between public and private sector orientation. The Joint Research Centre of the European Commission is committed to supporting the shift in innovation policies and improvement of R&I efforts and governance in the Western Balkan economies through a number of tools and activities, allowing policy instruments to be matched with the specific needs of the economy. This approach seeks efficient governance mechanisms for R&I policy by reaching out to the business sector and other important actors of the innovation ecosystem. It determines sustainable development directions for economies and ensures the continuity of policy monitoring and evaluation cycles. This ambitious challenge is translated into four specific lines of activity: (i) the application of the smart specialisation methodology to design and implement innovation strategies; (ii) capacity-building activities for technology transfer, in particular through specialised workshops, tools and instruments specifically designed to assist the academic institutions in the regional economies; (iii) support to transnational collaboration and linkages in the context of EU macro-regional strategies; and (iv) data quality enhancement. The analysis of the development potential of the Western Balkan region in terms of economic, innovative and scientific capabilities in this report is supported with the good practices addressing specific challenges in the region.JRC.B.3-Territorial Developmen