Optimal Reserve Management and Sovereign Debt
|Authors:||Laura Alfaro and Fabio Kanczuk|
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 sovereign countries not 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.
Download working paper: http://www.hbs.edu/research/pdf/07-010.pdf
Corporate Governance and Networks: Bankers in the Corporate Networks of Brazil, Mexico, and the United States circa 1910
How does the development of financial markets change the interaction between banks and corporations? This paper compares the importance of interlocking boards of directors between corporations and banks in Brazil, Mexico, and the United States circa 1909. The hypothesis tested is that the development of financial markets and the institutions that accompany it (e.g., financial disclosure rules, investor protections, etc.) allows corporations to rely less on connections to banks. There are two specific hypotheses tested in this work. First, given the development of disclosure and corporate governance standards in Brazil, I expect bankers to have been less central than in Mexico and, perhaps, the United States. Second, I test if the availability of financing alternatives, like a well-developed bond market in Brazil, reduced the average importance of corporate connections to commercial banks compared to Mexico. I test these hypotheses using network analysis and a simple multivariate regression that explains bank connections. I use comparable business directories to create databases with names of directors and financial information for all major corporations in Mexico and Brazil in 1909. The findings show that using different centrality measures, connections between banks and corporations were less important in Brazil than in Mexico and the United States. Also, in Brazil, the availability of bonds as a way to obtain financing allowed corporations to have a lower average number of connections to banks when compared to their Mexican counterparts. In Mexico, foreign companies, which had access to financial markets abroad, also had lower average connections with banks. I conclude by arguing that even though the Brazil, Mexico and the United States had very different network structures, rapid industrial growth was achieved by these three countries. In Mexico, a strong and dense network replaced for some of the institutions that promoted financial development and growth in Brazil.
Download working paper: http://www.hbs.edu/research/pdf/07-008.pdf
Capturing Benefits from Tomorrow's Technology in Today's Products: The Effect of Absorptive Capacity
In this paper, I propose and examine a specific means by which firms' R&D experience may be helping firms to improve their current-technology products: Firms that conduct future-technology R&D may be better at adapting components from related future technologies for use in their current-technology products. I use patent data to test whether automobile carburetor suppliers with higher levels of future-technology R&D activity are better at adapting components from related future technologies for use in carburetors.
Download working paper: http://www.hbs.edu/research/pdf/07-009.pdf
Cases & Course Materials
Innovating in Health Care—Framework
Harvard Business School Note 306-042
Contains the framework for the second-year Innovating in Health Care course. Delineates the role of six exogenous forces on new ventures: structure, financing, regulations, consumers, accountability, technology, and public policy. Also, presents the essential elements of business models for new health-care ventures. A rewritten version of an earlier note.
Purchase this note:
The Nehemiah Strategy: Bringing It to Boston
Harvard Business School Case 303-130
In 2003, Lee Stuart, who had successfully used the Nehemiah Strategy to create thousands of units of affordable housing in the South Bronx, was working with the Greater Boston Interfaith Organization to implement the strategy in Boston. She and her colleagues faced a number of challenges in transferring the strategy, with some questioning whether the strategy was appropriate for the Boston marketplace. The project was at a critical point, and key decisions had to be made regarding project direction. Teaching Purpose: To explore a model of building affordable housing and the challenge of implementing it in different communities.
Purchase this case:
New Business Ventures and the Entrepreneur, 6th edition
|Authors:||Michael J. Roberts, Howard H. Stevenson, William A. Sahlman, Paul W. Marshall, and Richard G. Hamermesh, eds.|
|Publication:||New York: McGraw-Hill/Irwin, 2006|
New Business Ventures and the Entrepreneur, 6th edition, is a text designed to guide tomorrow's entrepreneurs down the difficult road ahead. Specifically, the authors address the entrepreneur before, during, and after the decision to create a new venture. Entrepreneurs need to realize that they are assuming a managerial role—both in a product and a people sense. New Business Ventures, 6th edition, will leave students with the skills needed to grasp and implement the general managerial responsibilities required to be a successful entrepreneur. The text provides an innovative approach to teaching the core general management skills via the lens of the entrepreneur. This book is based on the new core required course in general management at Harvard Business School.
Financial Constraints and Growth: Multinational and Local Firm Responses to Currency Crises
|Authors:||Mihir A. Desai, C. Fritz Foley, and Kristin J. Forbes|
|Periodical:||Review of Financial Studies|
This paper examines how financial constraints and product market exposures determine the response of multinational and local firms to sharp depreciations. U.S. multinational affiliates increase sales, assets, and investment significantly more than local firms during, and subsequent to, depreciations. Differing product market exposures do not explain these differences in performance. Instead, a differential ability to circumvent financial constraints is a significant determinant of the observed differences in investment responses. Multinational affiliates also access parent equity when local firms are most constrained. These results indicate another role for foreign direct investment in emerging markets—multinational affiliates expand economic activity during currency crises when local firms are most constrained.
Download paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=548782