Laura Alfaro

21 Results


The Real Effects of Capital Controls: Financial Constraints, Exporters, and Firm Investment

The massive surge of foreign capital to emerging markets in the aftermath of the global financial crisis of 2008-2009 has led to a renewed debate about the merits of international capital mobility. To stem the flow of capital and manage the attendant risks, several emerging markets have recently imposed taxes or controls to curb inflows of foreign capital. The case for capital controls usually rests on measures designed to mitigate the volatility of foreign capital inflows. However, controls also have an implicitly protectionist aspect aimed at maintaining persistent currency undervaluation. In this paper the authors investigate the effects of capital controls on firm-level stock returns and real investment using data from Brazil. Brazil is important because it has taken center stage as a country that has implemented extensive controls on capital flows between 2008 and 2012. Among the authors' key findings, real investment at the firm level falls significantly in the aftermath of controls. Overall, capital controls can increase market uncertainty and reduce the availability of external finance, which in turn can lower investment at the firm level. Capital controls disproportionately affect small, non-exporting firms, especially those more dependent on external finance. Read More

To Pay or Not to Pay: Argentina and the International Debt Market

Argentina's escalating financial crisis seems rocketing toward disaster. The fix? Finance Professor Laura Alfaro, who served as Minister of National Planning and Economic Policy in Costa Rica, recommends a radical solution sure to anger banks and fund managers: absolute sovereign immunity, Open for comment; 2 Comments posted.

Carry Trade and Exchange-Rate Regimes

In emerging countries, carry-trade activity and foreign participation in local-currency bond markets have increased dramatically over the past decade. This study revisits the issue of choosing an exchange-rate regime under the assumption that emerging markets can borrow internationally in local currency. This hypothesis reflects a new trend in international capital flows: carry trade and relevant foreign participation in local-currency bond markets. Results show that, by means of international borrowing in domestic currency, emerging countries can partially offset foreign shocks. The authors argue that as emerging nations develop their local currency markets, a "pseudo-flexible regime," whereby a country accumulates reserves in conjunction with debt, is the best policy alternative under real external shocks. Read More

Deregulation, Misallocation, and Size: Evidence from India

India carried out wide-ranging deregulation policies in 1991. Significant sectors of the economy were opened up for private participation through de-licensing and allowing entry to industries previously reserved exclusively for the state-owned sector. This paper analyzes the efficiency impact of the removal of a specific distortion: compulsory industrial licensing that regulated firm entry and imposed output capacity constraints on Indian firms prior to 1991. Did industrial delicensing in India, which relaxed entry barriers and capacity constraints on firm size, lead to a change in firm size distributions within industries? Read More

Selection, Reallocation, and Spillover: Identifying the Sources of Gains from Multinational Production

Nations with greater openness to multinational production exhibit, on average, higher productivity and faster economic growth. This positive relationship, likely conditional on many factors, is often attributed to knowledge spillover, such as direct knowledge transfer through partnership, the possibility to learn from the innovation and experiences of foreign firms, and the interaction and movement in labor markets. However, another less stressed explanation centers on firm selection whereby competition from multinationals leads to market reallocation and survival of only the most productive domestic firms. Moreover, as only firms with greater productivity are able to overcome the fixed cost of foreign investment, countries with greater openness to multinational production are thus attracting foreign firms that are, by selection, more productive. The above mechanisms all imply a positive relationship between multinational production and host-country productivity but represent sharply different economic causalities and policy implications. The self-selection of multinational firms suggests that higher host-country productivity can reflect the productivity of self-selected multinational firms, instead of the causal effect of multinational production. In contrast, domestic firm selection and knowledge spillover imply multinational production causes higher aggregate, domestic productivity. How the latter two affect domestic production is countervailing: tougher domestic firm selection results in a contraction of domestic production while knowledge spillover creates positive externalities. In this paper the authors disentangle the roles of knowledge spillover and firm selection in determining the aggregate productivity and welfare impact of multinational production and quantify the relative importance of these distinct sources of gains. Results show that firm selection and market reallocation constitute an important source of productivity gains while its relative importance varies across nations. There are crucial implications for policy aimed at influencing foreign direct investment (FDI) flows. Read More

Sovereigns, Upstream Capital Flows and Global Imbalances

Uphill capital flows and global imbalances have been at central stage in debates among academics and policymakers for quite some time. Many have argued that capital has been flowing upstream from fast-growing developing nations to stagnant countries in the last decade. At the same time, these emerging countries accumulate a vast amount of reserves. HBS Professor Laura Alfaro and coauthors dissect capital flows between 1970 and 2004 into private and public components for every type of capital, namely FDI, equity and debt. The authors show that upstream flows and global imbalances are manifestations of the same underlying phenomenon: the central role of official flows in determining the international allocation of capital. Private capital does not flow on average uphill from emerging market countries and total capital flows uphill only out of five Asian countries including China due to reserve accumulation which completely dwarfs the net inflows of private capital. Read More

Trade Policy and Firm Boundaries

What is the impact of trade policies on firms' ownership structures? Drawing on analysis based on a unique database from Dun and Bradstreet that contains both listed and unlisted plant-level observations in more than 200 countries, HBS professor Laura Alfaro and coauthors describe a simple model in which firms' boundaries depend on the prices of the products they sell: The higher the prices, the more integrated firms will be. More generally, when equilibrium prices converge across economies, so do ownership structures. The reason behind these predictions is that integration, although more productive than non-integration because of its comparative advantage in the coordination of firms' operating decisions, also imposes higher private costs on enterprise managers. At low prices, the productivity gains from integrating have little value, and managers choose non-integration. As prices rise, the relative value of coordination increases, favoring integration. Read More

Surviving the Global Financial Crisis: Foreign Direct Investment and Establishment Performance

In 2008 and 2009 the world economy suffered the deepest global financial crisis since World War II. Countries around the globe witnessed major declines in output, employment, and trade, and world trade volume plummeted by more than 40 percent in the second half of 2008. Using a new dataset that reports operational activities of over 12 million establishments worldwide before and after 2008, HBS professor Laura Alfaro and George Washington University professor Maggie Chen study how multinationals around the world responded to the crisis relative to local firms, and the underlying mechanisms of those differential responses. By taking into account establishments both at the epicenter and on the periphery of the crisis, their analysis also considers multinationals' role as an international linkage in transmitting economic shocks. Read More

The Global Agglomeration of Multinational Firms

(Paper formerly titled "The Global Networks of Multinational Firms.") When and why do multinationals group together overseas? Do they agglomerate in the same fashion abroad as they do at home? An answer to these questions is central to the long-standing debate over the consequences of foreign direct investment (FDI). It is critical to understand interdependencies of multinational networks and how multinationals influence one another in their activities at home and overseas. HBS professor Laura Alfaro and George Washington University professor Maggie Chen examine the global network of multinationals and study the significance and causes of multinational agglomeration. Their results provide further evidence of the increasing separation of headquarters services and production activities within multinational firms. The differential specialization of headquarters and subsidiaries leads to distinct patterns of agglomeration. Read More

India Transformed? Insights from the Firm Level 1988-2005

Between 1986 and 2005, Indian growth put to rest the concern that there was something about the "nature of India" that made rapid growth difficult. Following broad-ranging reforms in the mid-1980s and early 1990s, the state deregulated entry, both domestic and foreign, in many industries, and also hugely reduced barriers to trade. Laura Alfaro of Harvard Business School and Anusha Chari of the University of North Carolina at Chapel Hill analyze the evolution of India's industrial structure at the firm level following the reforms. Despite the substantial increase in the number of private and foreign firms, the overall pattern that emerges is one of continued incumbent dominance in terms of assets, sales, and profits in both state-owned and traditional private firms. Read More

Intra-Industry Foreign Direct Investment

One of the enduring puzzles for researchers on FDI has been the role and importance of "horizontal" and "vertical" FDI. Horizontal FDI tends to mean locating production closer to customers and avoiding trade costs. Vertical FDI, on the other hand, represents firms' attempts to take advantage of cross-border factor cost differences. A central challenge for study has been the absence of firm-level data to distinguish properly among the types of and motivations for FDI. Alfaro and Charlton analyzed a new dataset, and in this paper present the first detailed characterization of the location, ownership, and activity of global multinational subsidiaries. Read More

Firm-Size Distribution and Cross-Country Income Differences

Country-to-country differences in per-worker income are known to be enormous. Per capita income in the richest countries exceeds that in the poorest countries by more than a factor of 50. The consensus view in scholarly literature on development accounting is that two-thirds of these variations can be attributed to differences in efficiency or total factor productivity (TFP). Emerging research, however, suggests other possibilities. Alfaro and coauthors, applied a monopolistic competitive firm model to a new dataset of more than 20 million firms in nearly 80 developing and industrialized countries. They then calculated the extent to which differences in the misallocation of resources (as well as differences in the amount of physical and human capital resources) explain dispersion in income per worker. Their results suggest that misallocation of resources is a crucial determinant of income dispersion. Read More

The Price of Capital: Evidence from Trade Data

Is the price of capital higher across different countries? Motivated by the fact that most countries import the bulk of machinery and equipment, Alfaro and Ahmed used an alternative trade data to capture differences in the price of capital goods across countries. On this basis they found evidence that capital goods are more expensive in poor countries. Read More

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

Understanding the effect of foreign direct investment is important for two main reasons: It informs foreign investment policy, and it has implications for the effect of rapidly growing investment flows on the process of economic development. While academics tend to treat foreign direct investment as a homogenous capital flow, policymakers maintain that some FDI projects are better than others. In fact, national policies toward FDI seek to attract some types of FDI while regulating other types, reflecting a belief among policymakers that FDI projects differ greatly in terms of the national benefits to be derived from them. Policymakers from Dublin to Beijing, for instance, have implemented complex FDI regimes in order to influence the nature of FDI projects attracted to their shores. Using a dataset on 29 countries, Alfaro and Charlton distinguished different qualities of FDI in order to examine the various links between types of FDI and growth. Read More

All Eyes on Slovakia’s Flat Tax

The flat tax is an idea that's burst to life in post-communist Eastern and Central Europe, especially in Slovakia. But is the rest of the world ready? A new Harvard Business School case on Slovakia's complex experience highlights many hurdles elsewhere, as HBS professor Laura Alfaro, Europe Research Center Director Vincent Dessain, and Research Assistant Ane Damgaard Jensen explain in this Q&A. Read More

How Does Foreign Direct Investment Promote Economic Growth? Exploring the Effects of Financial Markets on Linkages

Does FDI help developing countries as much as we think? While theoretical models imply that FDI is beneficial for a host country's development—a belief widely shared among policymakers—the empirical evidence does not support this view. This paper bridges the gap between theoretical and empirical literature with a model and calibration exercises that examine the role of local financial markets. Ultimately, Alfaro and colleagues contribute to existing research that emphasizes how local policies and institutions may actually limit the potential benefits that FDI could provide to a host country. Read More

Optimal Reserve Management and Sovereign Debt

One of the puzzles in the study of emerging markets is understanding why developing countries accumulate reserves as a means to avoid a financial crisis, rather than work to reduce their sovereign debt. In 2005, for example, reserve accumulation totaled 20 percent of gross domestic product in low- and middle-income countries but only about 5 percent in high-income countries. The costs and benefits of reserve accumulation still aren't clear, nor do economists agree on the optimal level of foreign reserves that sovereign countries should hold. By testing a model of a small, open economy with non-contingent debt and reserve assets, Alfaro and Kanczuk explored the issue in depth. Read More

International Financial Integration and Entrepreneurship

Why does entrepreneurship flourish in some countries and struggle in others? Economists and policymakers are divided on whether the rapid rate of global financial integration, specifically the explosive growth of foreign direct investment, helps or hurts local entrepreneurs and domestic economies. To see the differential effects of restrictions on capital mobility on entrepreneurship, Alfaro of HBS and Charlton of the London School of Economics analyzed data on 24 million firms—listed and unlisted—in nearly 100 countries in 1999 and 2004. Read More

Lessons from a Nasty Trade Dispute

Even if the World Trade Organization rules in favor of your country’s government, it may not mean the end of a business dispute. HBS professors Rawi Abdelal and Laura Alfaro explain why. Read More

In Troubled Africa, Botswana Flowers

Quick, name the country with the highest sustained growth in real output over the last forty years. The surprising answer: Botswana. Harvard Business School professor Debora L. Spar discusses the dynamics behind this little-reported story. Read More

Faculty Research Looks to Latin America

HBS faculty have long found Latin America a fertile landscape for in-depth study. In Buenos Aires, nine members of the faculty presented synopses of their latest research—the raw material for present and future case studies, journal articles, books and new management ideas. Read More