Foreign Direct Investment: Effects, Complementarities, and Promotion

In 1996, Intel Corporation announced the construction of a semiconductor assembly plant in Costa Rica. Production started in 1998. Intel’s investment was six times what had been the annual foreign direct investment (FDI) in this Central American country of 3.5 million people (see Spar, 1998) and it marked the expansion of FDI in electronics, medical devices, and business services by companies such as Boston Scientific, Hewlett Packard, IBM, and Procter & Gamble. But Intel’s investment in Costa Rica was also emblematic of the desire of Central American countries to move away from textile and clothing manufacturing into higher-end manufacturing and services, in hopes of boosting development efforts by promoting technology upgrades, knowledge spillovers, and linkages of foreign with domestic firms. In 2014, the company announced the restructuring of the facilities. Intel’s Global Services Center as well as the company’s Engineering and Design Center will remain in their current location in Costa Rica. These operations will gain relevance in Research & Development related activities. As part of its global strategy, the company will relocate its assembly and test operation to Asia, where these activities will be concentrated. Headcount for R&D services operations currently reaches 1200 people and new positions were recently been announced

Optimal reserve management and sovereign debt

Most models currently used to determine optimal foreign reserve holdings take the level of international debt as given. However, given the sovereign's willingness-to-pay incentive problems, reserve accumulation may reduce sustainable debt levels. In addition, assuming constant debt levels does not allow addressing one of the puzzles behind using reserves as a means to avoid the negative effects of crisis: why do not sovereign countries reduce their sovereign debt instead? To study the joint decision of holding sovereign debt and reserves, we construct a stochastic dynamic equilibrium model calibrated to a sample of emerging markets. We obtain that the optimal policy is not to hold reserves at all. This finding is robust to considering interest rate shocks, sudden stops, contingent reserves and reserve dependent output costs.Debt ; Default (Finance)

Sovereign Debt: Indexation and Maturity

In this paper we review the literature on sovereign debt with particular emphasis on indexation and maturity and the main policy proposals related to these topics. We also advance some implications derived from our work. In Alfaro and Kanczuk (2005a, b, c), we modeled sovereign debt as a contingent claim following the framework developed by Grossman and Van Huyck (1988). Our framework, however, recognizes that contingent debt might be associated with incentive problems. Applying this framework to the study of the sustainability of sovereign debt, the tradeoff between nominal and indexed debt, and the optimal debt maturity, we find some of the proposals advanced in the literature regarding lengthening debt maturity and issuing nominal debt to be unsustainable in emerging (volatile) economies.

Stellar Open Clusters' Membership Probabilities: an N-Dimensional Geometrical Approach

We present a new geometrical method aimed at determining the members of open clusters. The methodology estimates, in an N-dimensional space, the membership probabilities by means of the distances between every star and the cluster central overdensity. It can handle different sets of variables, which have to satisfy the simple condition of being more densely distributed for the cluster members than for the field stars (as positions, proper motions, radial velocities and/or parallaxes are). Unlike other existing techniques, this fact makes the method more flexible and so can be easily applied to different datasets. To quantify how the method identifies the clus- ter members, we design series of realistic simulations recreating sky regions in both position and proper motion subspaces populated by clusters and field stars. The re- sults, using different simulated datasets (N = 1, 2 and 4 variables), show that the method properly recovers a very high fraction of simulated cluster members, with a low number of misclassified stars. To compare the goodness of our methodology, we also run other existing algorithms on the same simulated data. The results show that our method has a similar or even better performance than the other techniques. We study the robustness of the new methodology from different subsamplings of the ini- tial sample, showing a progressive deterioration of the capability of our method as the fraction of missing objects increases. Finally, we apply all the methodologies to the real cluster NGC 2682, indicating that our methodology is again in good agreement with preceding studies.Comment: 15 pages, 9 figures, 6 tables, accepted for publication in MNRA

International Financial Integration and Entrepreneurial Firm Activity

We explore the relation between international financial integration and the level of entrepreneurial activity in a country. We use a unique firm level data set of approximately 24 million firms in nearly 100 countries in 2004 and 1999, which enables us to present both cross-country and industry level evidence. We establish robust cross-country correlations between increased international financial integration and the activity of entrepreneurs using various proxies for entrepreneurial activity such as entry, size, and skewness of the firm-size distribution and de jure and de facto measures of international capital integration. We then explore causal channels through which foreign capital may encourage entrepreneurship. We find evidence that entrepreneurial activity in industries which are more reliant on external finance is disproportionately affected by international financial integration, suggesting that foreign capital may improve access to capital either directly or through improved domestic financial intermediation. Second we find that entrepreneurial activity is higher in industries which have a large share of foreign firms or in vertically linked industries.

Intra-Industry Foreign Direct Investment

We use a new firm level data set that establishes the location, ownership, and activity of 650,000 multinational subsidiaries -- close to a comprehensive picture of global multinational activity. A number of patterns emerge from the data. Most foreign direct investment (FDI) occurs between rich countries. The share of vertical FDI (subsidiaries which provide inputs to their parent firms) is larger than commonly thought, even within developed countries. More than half of all vertical subsidiaries are only observable at the four-digit level because the inputs they are supplying are so proximate to their parent firms' final good that they appear identical at the two-digit level. We call these proximate subsidiaries 'intra-industry' vertical FDI and find that their location and activity are significantly different to the inter-industry vertical FDI visible at the two-digit level. These subsidiaries are not readily explained by the comparative advantage considerations in traditional models, where firms locate their low skill production stages abroad in low skill countries to take advantage of factor cost differences. We find that overwhelmingly, multinationals tend to own the stages of production proximate to their final production giving rise to a class of high-skill intra-industry vertical FDI.

Growth and the Quality of Foreign Direct Investment: Is All FDI Equal?

In this paper we distinguish different "qualities" of FDI to re-examine the relationship between FDI and growth. We use 'quality' to mean the effect of a unit of FDI on economic growth. However this is difficult to establish because it is a function of many different country and project characteristics which are often hard to measure Hence, we differentiate "quality FDI" in several different ways. First, we look at the possibility that the effects of FDI differ by sector. Second, we differentiate FDI based on objective qualitative industry characteristics including the average skill intensity and reliance on external capital. Third, we use a new dataset on industry-level targeting to analyze quality FDI based on the subjective preferences expressed by the receiving countries themselves. Finally, we use a two-stage least squares methodology to control for measurement error and endogeneity. Exploiting a new comprehensive industry level data set of 29 countries between 1985 and 2000, we find that the growth effects of FDI increase when we account for the quality of FDI.foreign direct investment, economic growth, industry data, spillovers,instrumental variables

Intra-Industry Foreign Direct Investment

We use a new firm level data set that establishes the location, ownership, and activity of 650,000 multinational subsidiaries—close to a comprehensive picture of global multinational activity. A number of patterns emerge from the data. Most foreign direct investment (FDI) occurs between rich countries. The share of vertical FDI (subsidiaries which provide inputs to their parent firms) is larger than commonly thought, even within developed countries. More than half of all vertical subsidiaries are only observable at the four-digit level because the inputs they are supplying are so proximate to their parent firms' final good that they appear identical at the two-digit level. We call these proximate subsidiaries 'intra-industry' vertical FDI and find that their location and activity are significantly different to the inter-industry vertical FDI visible at the two-digit level. These subsidiaries are not readily explained by the comparative advantage considerations in traditional models, where firms locate their low skill production stages abroad in low skill countries to take advantage of factor cost differences. We find that overwhelmingly, multinationals tend to own the stages of production proximate to their final production giving rise to a class of high-skill intra-industry vertical FDI.Multinational Activity, Foreign Direct Investment, Horizontal FDI, Vertical FDI, Stagesof Production

International Financial Integration and Entrepreneurship

We explore the relation between international financial integration and the level of entrepreneurial activity in a country. Using a unique data set of approximately 24 million firms in nearly 100 countries in 1999 and 2004, we find suggestive evidence that international financial integration has been associated with higher levels of entrepreneurial activity. Our results are robust to using various proxies for entrepreneurial activity such as entry, size, and skewness of the firm-size distribution; controlling for level of economic development, regulation, institutional constraints, and other variables that might affect the business environment; and using different empirical specifications. We further explore various channels through which international financial integration can affect entrepreneurship (a foreign direct investment channel and a capital/credit availability channel) and provide consistent evidence to support our results.international financial integration, capital mobility, entrepreneurship, firm entry, capital controls, foreign direct investment

India Transformed? Insights from the Firm Level 1988-2005

Using firm-level data this paper analyzes, the transformation of India's economic structure following the implementation of economic reforms. The focus of the study is on publicly-listed and unlisted firms from across a wide spectrum of manufacturing and services industries and ownership structures such as state-owned firms, business groups, private and foreign firms. Detailed balance sheet and ownership information permit an investigation of a range of variables such as sales, profitability, and assets. Here we analyze firm characteristics shown by industry before and after liberalization and investigate how industrial concentration, the number, and size of firms of the ownership type evolved between 1988 and 2005. We find great dynamism displayed by foreign and private firms as reflected in the growth in their numbers, assets, sales and profits. Yet, closer scrutiny reveals no dramatic transformation in the wake of liberalization. The story rather is one of an economy still dominated by the incumbents (state-owned firms) and to a lesser extent, traditional private firms (firms incorporated before 1985). Sectors dominated by state-owned and traditional private firms before 1988-1990, with assets, sales and profits representing shares higher than 50%, generally remained so in 2005. The exception to this broad pattern is the growing importance of new and large private firms in the services sector. Rates of return also have remained stable over time and show low dispersion across sectors and across ownership groups within sectors.