The transatlantic telegraph’s introduction is a lesson from history on how information technology can improve firms’ ability to forecast demand

When new technology leads to a dramatic change in the availability of information, how do firms and markets respond? In a unique historical ‘experiment’, Claudia Steinwender evaluates the trade impact of the submarine transatlantic telegraph cable that connected Europe and North America in the mid-nineteenth century

Real Effects of Information Frictions: When the States and the Kingdom Became United

This paper exploits a unique historical experiment to estimate how information frictions distort international trade: the establishment of the transatlantic telegraph in 1866. I use newly collected data on cotton prices, trade, and information flows from historical newspapers and find that the average and volatility of the transatlantic price difference fell after the telegraph, while average trade flows increased and became more volatile. Using a trade model in which exporters use the latest news about a foreign market to forecast expected prices, I estimate the efficiency gains of the telegraph to be equivalent to 8 percent of export value

Industrial policy and the great divergence

We discuss recent work evaluating the role of the government in shaping the economy during the long 19th century, a practice we refer to as industrial policy. We show that states deployed a vast variety of different policies aimed at, primarily, but not exclusively, fostering industrialization. We discuss the thin, but growing literature that evaluates the economic effects of these policies. We highlight some fruitful avenues for future study

How free trade changes domestic firms’ ability to innovate

Trade flows are complex. Protecting some domestic firms may have inadvertent impacts on others, write Pian Shu and Claudia Steinwende

Import competition, heterogeneous preferences of managers and productivity

When managers have objectives beyond maximizing monetary profits, inefficiencies may arise. An increase in competition may then force managers to improve the productivity of the firm in order to ensure survival. While this hypothesis has received ample theoretical attention, empirical evidence is scarce, mainly because preferences of managers are typically unobserved. In this paper, we exploit the fact that a large literature has documented specific non-monetary preferences of family managers. Using Spanish firm-level data, we compare how family-managed and professionally-managed firms react to import competition shocks. We find that import competition leads to productivity increases in family-managed firms that are initially unproductive. Productivity improvements are driven by family management as opposed to family ownership or non-managing family members. Furthermore, we show that these managers increase efficiency by reducing material usage, which is consistent with them trying to increase their short-term cash flow in order to survive. Finally, productivity improvements seem to be particularly pronounced in multi-generational family firms that also introduce organizational changes

International and innovation activities of firms

The economic environment in which a firm operates is constantly changing. This thesis contains three essays to examine how firms adapt their innovation and international activities to a variety of external changes. The first paper, “Information Frictions and the Law of One Price: ‘When the States and the Kingdom became United’”, shows how information frictions affect the exporting behavior of merchants, exploiting a unique historical experiment: the transatlantic telegraph, established in 1866. Using a newly collected data set on cotton trade based on historical newspapers, I find that information frictions result in large and volatile deviations from the Law of One Price. There are also real effects, because exports respond to information about foreign demand shocks, and average exports increase after the telegraph and become more volatile. I provide a model in which exporters use the latest news about a foreign market to forecast expected selling prices when their exports arrive at the destination. Their forecast error is smaller and less volatile the more recent the available information. The welfare gains from the telegraph are estimated to be around 8% of annual export value. The second paper, “Survive another day: Using changes in the composition of investments to measure the cost of credit constraints” is joint work with Luis Garicano. We introduce a novel empirical strategy to measure the credit shocks that were triggered by the recent financial crisis: Theoretically, we show that credit shocks affect long term investments by more than short term ones. Credit shocks can then be measured within firms by the relative drop of long run relative to short run investments; using firm-times-year fixed effects to absorb idiosyncratic demand shocks. Using data on Spanish manufacturing firms we find that credit constraints are equivalent to an additional tax rate of around 11% on the longest lived investment. While the trade literature has established a positive impact of globalization on the productivity of firms, there is lacking consensus about the underlying mechanism at work: Trade theory focuses on a market access mechanism, but empirical papers point out that import competition matters as well. The third paper, “The roles of import competition and export opportunities for technical change”, conducts a “horse race” between the two mechanisms. Using Spanish firm level data, I find robust evidence that access to export markets leads to productivity increases, but only for firms that were already highly productive before. The evidence on import competition is weaker and very heterogeneous, pointing towards an omitted variable bias in earlier papers

The roles of import competition and export opportunities for technical change

A variety of empirical and theoretical trade papers have suggested and documented a positive impact of trade on the productivity of firms. However, there is less consensus about the underlying mechanism at work. While trade papers focus on access to export markets, other papers stress the importance of import competition. Since imports and exports (and even tariffs affecting either) are usually highly correlated, it is unclear which mechanism the existing empirical papers uncover. This paper conducts a “horse race” between export opportunities and import competition. Using Spanish firm level data, instrumenting for exports and imports with tariff changes and controlling for selection, I find robust evidence that access to export markets leads to productivity increases, but only for firms that were already highly productive before. The evidence on import competition is weaker. If anything, initially low-tech firms manage to increase their productivity in response to increased competition from abroad. The latter finding is at odds with most trade models, so I propose a model incorporating non-profit maximizing managers to reconcile theory with the evidence. Empirically, I find that all productivity upgrades are driven by increased R&D, patenting, and product innovation. Access to export markets also leads to the adaptation of foreign technologies. There is no evidence that either mechanism leads to increased full time employment, instead full time workers seem to be replaced by part-time or temporary workers

Who stands on the shoulders of Chinese (scientific) giants? Evidence from chemistry

In recent decades, Chinese researchers have become preeminent contributors to the scientific enterprise, as reflected by the number of publications originating from Chinese research institutions. China's rise in science has the potential to push forward the global frontier, but mere production of knowledge does not guarantee that others are able to build on it. In this manuscript, we study how fertile Chinese research is, as measured by citations. Using publication and citation data for elite Chemistry researchers, we show that Chinese authored articles receive only half the citations from the US compared to articles from other countries. We show that even after carefully controlling for the "quality" of Chinese research, Chinese PIs' articles receive 28% fewer citations from US researchers. Our results imply that US researchers do not build as readily on the work of Chinese researchers, relative to the work of other foreign scientists, even in a setting where Chinese scientists have long excelled

The intellectual spoils of war? Defense R&D, productivity and international spillovers

In the US and many other OECD countries, expenditures for defense-related R&D represent a key policy channel through which governments shape innovation, and dwarf all other public subsidies for innovation. We examine the impact of government funding for R&D - and defense-related R&D in particular - on privately conducted R&D, and its ultimate effect on productivity growth. We estimate models that relate privately funded R&D to lagged government-funded R&D using industry-country level data from OECD countries and firm level data from France. To deal with the potentially endogenous allocation of government R&D funds we use changes in predicted defense R&D as an instrumental variable. In both datasets, we uncover evidence of “crowding in” rather than “crowding out,” as increases in government-funded R&D for an industry or a firm result in significant increases in private sector R&D in that industry or firm. A 10% increase in government-financed R&D generates 4.3% additional privately funded R&D. An analysis of wages and employment suggests that the increase in private R&D expenditure reflects actual increases in R&D employment, not just higher labor costs. Our estimates imply that some of the existing cross-country differences in private R&D investment are due to cross-country differences in defense R&D expenditures. We also find evidence of international spillovers, as increases in government-funded R&D in a particular industry and country raise private R&D in the same industry in other countries. Finally, we find that increases in private R&D induced by increases in defense R&D result in significant productivity gains