While the global economic downturn will affect China's exports, the domestic economy is expected to remain strong, agreed panelists at the HBS Business Summit.
Why do some countries adopt the European Union (EU)-based International Financial Reporting Standards (IFRS) when others do not? To expand our understanding of the determinants and consequences of IFRS adoption on a global sample, HBS professor Karthik Ramanna and MIT Sloan School of Management coauthor Ewa Sletten studied variations over time in the decision to adopt these standards in more than a hundred non-EU countries. Understanding countries' adoption decisions can provide insights into the benefits and costs of IFRS adoption.
Why is there apparently limited demand for financial services in emerging markets? On the one hand, low-income individuals may not want formal services when informal savings, credit, and insurance markets function reasonably well, and the benefits of formal financial market participation may not exceed the costs. On the other hand, limited financial literacy could be the barrier: If people are not familiar or comfortable with products, they will not demand them. These two views carry significantly different implications for the development of financial markets around the world, and would suggest quite different policy decisions by governments and international organizations seeking to promote "financial deepening." HBS professor Shawn Cole and coauthors found that financial literacy education has no effect on the probability of opening a bank savings account for the full population, although it does significantly increase the probability among those with low initial levels of financial literacy and low levels of education. In contrast, modest financial subsidies significantly increase the share of households that open a bank savings account within the subsequent two months.
Board members may be inclined to advance their own interests at voting time. This appears true for the World Bank's Board of Executive Directors, too. The problem? Many countries are being shut out of development funding. New research by Harvard Law School student Ashwin Kaja and HBS professor Eric Werker tells why misgovernance at the World Bank should be corrected.
This paper examines the politics of corporate governance at the world's largest appropriations committee, the World Bank's Board of Executive Directors, and exposes a weakness in the design of the World Bank's decision-making structure. Any large public organization faces a challenge of representation and management. Since all decisions cannot be made by all members, founders often grant a more nimble body with decision-making powers. But representatives on the decision-making body may face a temptation to govern in the interests of their own wallet or narrow constituency rather than in the interests of the larger body. In 2008, the Bank's two primary component institutions—the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA)—committed nearly $25 billion in loans and grants through some 300 development projects around the globe. Where did it go? By exploring the political dynamics and corporate governance of an international appropriations committee, we not only learn about international organizations but also the nature of the international system itself.
The role of sovereign wealth funds (SWFs) in the global financial system has been increasingly recognized in recent years, and many reports suggest that SWFs are often employed to further the geopolitical and strategic economic interests of their governments. The resources controlled by these funds—estimated to be $3.5 trillion in 2008—have grown sharply over the past decade. Projections, while inherently tentative due to the uncertainties about the future path of economic growth and commodity prices, suggest that they will be increasingly important actors in the years to come. Despite this significant and growing role, financial economists have devoted remarkably little attention to these funds. The lack of scrutiny must be largely attributed to the deliberately low profile adopted by many SWFs, which makes systematic analysis challenging. Bernstein, Lerner, and Schoar analyze how SWFs vary in their investment styles and performance across various geographies and governance structures. Taken as a whole, results suggest that high levels of home investments by SWFs, particularly those with the active involvement of political leaders, are associated with trend chasing and worse performance.
Gray market goods are brand-name products that are initially sold into a designated market but then resold through unofficial channels into a different market. Gray markets can arise when transaction and search costs are low enough to allow products to "leak" from one market segment back into another. Examples of industries with active gray markets include pharmaceuticals, automobiles, and electronics. Understandably, reactions to gray market encroachment are mixed. On the one hand, consumer advocates and governments have applauded the increasing role that gray markets have played in improving competition for domestic goods. On the other hand, multinationals have decried the increasing role of gray markets in the economy, with an estimated $40 billion in cannibalized sales resulting from gray markets in the information technology sector alone. This study investigates the optimal price of a multinational's internal transfers and the consequences of regulations mandating arm's-length transfer pricing.
A recent Harvard Business School case looks at Russia's decision in 2006 to cut off supply of natural gas to Ukraine's energy company—a move repeated this year. Is Russia just an energy bully? Students of professor Rawi Abdelal learn there is nothing black and white when it comes to Russia's energy politics. From HBS Alumni Bulletin.
The researchers begin with a simply stated question: Can a country grow faster by saving more? Long-run growth theories imply that a country can grow faster by investing more in human or physical capital or in R&D, but that a country with access to international capital markets cannot grow faster by saving more. Domestic saving is therefore not considered an important ingredient in the growth process because investment can be financed by foreign saving. From the point of view of standard growth theory, the positive cross-country correlation between saving and growth that many commentators have noted appears puzzling. HBS professor Diego Comin and colleagues develop a theory of local saving and growth in an open economy with domestic and foreign investors.
Why was the 1990s a lost decade for Japan? HBS professor Diego Comin argues that it was the combination of some shocks that lasted for about three years and the response of companies that drastically reduced their expenses in adopting new technologies and developing new ones. Though the severe shocks that hit the Japanese economy did not persist, the investments that Japanese companies and entrepreneurs did not undertake to improve technology and production methods during the 1990s propagated those shocks and made their effects very long-lasting.
Published in 2008
Economic globalization presents severe governance challenges. The insufficiency of states as a source of surety for transactions that transcend national borders creates an opportunity for an increased role for organizations in the global institutional framework. The authors of this paper applied a network methodology to show how one type of organization, the intergovernmental organization (IGO), facilitates the cross-border investments of another type, the multinational corporation (MNC). They further document the interdependence between domestic institutions, and international institutions represented by IGOs. The results help to understand and explain which countries attract FDI, and from which senders. Results also point to an emerging rivalry between states and organizations as sources of governance in the global economy.
By hosting the Summer Games, China is putting itself at the center of the world's stage, a position some reformers would like to leverage to spark human rights improvements in the country. Can outsiders influence Chinese policy? Not without help, says HBS professor Tarun Khanna.
How long are technology adoption lags? Can cross-country differences in technology adoption lags account for a significant fraction of cross-country GDP disparities? Diego Comin of Harvard Business School and Bart Hobijn of the Federal Reserve Bank of New York develop a new benchmark to understand the diffusion process of individual technologies and the consequences that this has for aggregate growth. This benchmark provides a rationale for the evolution of diffusion measures that include how many units of technology each adopter has adopted in addition to the traditional extensive margin. The model is estimated to obtain measures of adoption lags for 15 technologies in 166 countries.
Even without cooperation between them, China and India appear headed toward economic superpower status in the coming decades. But what if they worked together? In this podcast, Harvard Business School professor Tarun Khanna discusses the possibility of Sino-Indian cooperation and its impact on global business.
Published in 2007
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.
A series of recent setbacks including the Mattel toy recalls threaten China's new and improving image, says Professor John Quelch. There is just not enough preexisting brand equity among the world's consumers to inoculate Brand China against the current tide of negative publicity. What should the country do to polish its image?
Nepal, the home of Mount Everest, has been gripped in recent years by civil war. A new paper by Harvard Business School professor Lakshmi Iyer and Quy-Toan Do of the World Bank looked at the roots of Nepal's conflict from a variety of angles. For the future, investing in poverty reduction strategies is a key for peace, Iyer says.
In poor rural communities, public goods such as health and education services, clean water, electricity, and transport facilities are remarkably scarce. Within this picture of overall inadequacy there is considerable variation both across countries and inside national boundaries. How can these variations in public goods be explained? This paper surveys theoretical and empirical research on the characteristics of groups and the ability of members to act collectively to promote group interests. There remain many missing pieces in the public goods puzzle and there are important policy implications as a result.
More than 70 civil wars have occurred around the world since 1945. Understanding what causes such violent conflicts to begin and then fester is a topic of increasing research interest to economists. In Nepal the conflict known as "the People's War" began in 1996 and spread to all parts of the country, resulting in the deaths of more than 13,000 people. Do and Iyer considered a wide range of economic and social factors that they hypothesized could affect the likelihood of violent conflict, and econometrically examined their relationship with conflict intensity. These factors include geographic conditions (mountains and forests), economic development, social diversity including linguistic diversity, and government investment in infrastructure. Do and Iyer's nuanced approach allowed them to examine the spread of a single conflict across different parts of the country and over time.
India? South Africa? Russia? Which are the best countries for a firm to invest in? In a new book, Professor Richard Vietor looks at the economic, political, and structural strengths and weaknesses of ten countries and tells readers how to analyze the development of these areas in the future. Read our Q&A and book excerpt.
