Alfaro, Laura
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- 23 Jan 2018
- First Look
First Look at New Research and Ideas, January 23, 2018
Why is productivity declining? ... Angel investmernts around the world ... How do the children of employed moms turn out?
- 08 Jan 2018
- Working Paper Summaries
Come Together: Firm Boundaries and Delegation
The study develops a simple model and provides new data to examine the relationship between vertical integration and delegation of decision-making, two critical aspects of a firm organizational design that are typically studied in isolation. The results show that delegation and vertical integration are positively correlated.
- 14 Dec 2017
- Working Paper Summaries
The Real Exchange Rate, Innovation and Productivity
Addressing debates on the effects of real exchange rate (RER) movements on the economy, this study examines manufacturing firm-level effects of medium-term fluctuations, in particular firm-level productivity across a wide range of countries. RER changes have different impacts depending on the export and import orientation of regions and the prevalence of credit constraints. Effects are non-linear and asymmetric, suggesting that the link between RER changes and macroeconomic performance might be much more nuanced than usually thought.
- 15 Sep 2017
- Working Paper Summaries
Debt Redemption and Reserve Accumulation
This study examines how reserve accumulation affects governments’ decisions to default. The analysis assumes that countries can accumulate reserves and borrow internationally using their own currency. Results suggest that the optimal level of international reserves is fairly large because their cost is mitigated by valuation-smoothing gains. The model matches some features of Brazil’s economic fluctuations.
- 30 May 2017
- Working Paper Summaries
Lessons Unlearned? Corporate Debt in Emerging Markets
Emerging markets are contending with a worrisome slowdown in economic growth accompanied by the build-up of corporate debt. Understanding this and other potential vulnerabilities requires knowing more about the state of emerging market corporate balance sheets, the drivers of debt accumulation, and the effects of both on the macroeconomy.
- 08 Sep 2016
- Working Paper Summaries
A Model of Credit Market Sentiment
Recent empirical research in finance and economics has revived the idea that investor sentiment drives credit booms and busts. To explore the drivers of sentiment in credit markets, the authors model the two-way feedback between credit market sentiment and credit market outcomes. In their model the propagation of credit cycles is driven by the interplay between expectations and the refinancing nature of credit markets.
- 29 Aug 2016
- Working Paper Summaries
Location Fundamentals, Agglomeration Economies, and the Geography of Multinational Firms
Understanding the location interdependence of multinational firms and how they agglomerate with one another is critical to designing and improving economic policies. These authors’ analysis, using a worldwide plant-level dataset and a novel index of agglomeration, yields a number of insights into the economic geography of multinational production. In addition to market access and comparative advantage motives, multinationals' location choices are significantly affected by agglomeration economies including not only vertical production linkages but also technology diffusion and capital-market externalities.
- 27 Jun 2016
- Working Paper Summaries
Fiscal Rules and Sovereign Default
As they catch up to developed ones, emerging countries tend to overborrow and often default on their debt. This study by Laura Alfaro and Fabio Kanczuk analyzes the welfare gains from alternative fiscal rules, finding the gains economically important. What is more, a simple, easily contractible threshold rule can generate gains virtually as high as the optimal rule.
- 20 Oct 2015
- Working Paper Summaries
Internalizing Global Value Chains: A Firm-Level Analysis
Manufacturing activities that used to be performed in close proximity are increasingly fragmented across firms and countries. This paper provides strong evidence that considerations driven by contractual frictions critically shape firms' ownership decisions along their value chains.
- 02 Jul 2015
- Op-Ed
The Future of the Greek Economy
Before last weekend's referendum in Greece, Laura Alfaro, Dante Roscini, and George Serafeim explored the country's economic, social, and political crisis. Their insights still stand, even as Greece's situation changes hour by hour. Open for comment; 4 Comment(s) posted.
- 30 Sep 2014
- Working Paper Summaries
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. Key concepts include: Capital controls policy measures range from large-scale efforts to reduce the volatility of foreign capital inflows to a protectionist stance on maintaining the competitiveness of the external sector. The intended purpose of controls notwithstanding, evidence in this paper suggests that capital controls can increase market uncertainty and reduce the availability of external finance, which in turn can lower investment at the firm level. Controls affect small, non-exporting firms most, especially those more dependent on external finance. Closed for comment; 0 Comment(s) posted.
- 25 Apr 2014
- Research & Ideas
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 Comment(s) posted.
- 19 Mar 2013
- Working Paper Summaries
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. Key concepts include: This study reflects recent trends in the international flow of funds: the development of local currency bonds in emerging markets and increased foreign participation. It is well known that the choice of exchange-rate regime depends crucially on the type of shock to an economy. In this new framework, however, a flexible-exchange-rate regime is optimal for domestic shocks and a fixed-exchange-rate regime is optimal for external shocks. The traditional fixed-exchange-rate regime, albeit ideal in the presence of external shocks, is not sustainable. A flexible-exchange-rate regime can reduce exchange-rate volatility by issuing local-currency bonds, a policy the authors dub a "pseudo-flexible regime." Welfare levels are better if a pseudo-flexible regime is implemented in conjunction with reserve accumulation. Closed for comment; 0 Comment(s) posted.
- 17 Jan 2013
- Working Paper Summaries
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? Key concepts include: Pro-market reforms in the 1990s rapidly deregulated significant sectors of the Indian economy previously kept off-limits to private participation. Deregulation of entry and the end of industrial licensing (also known as the "License Raj") in all but a small subset of industries had the capacity to transform the competitive environment in which firms operated. Deregulation in India may have created a winner-take-all environment where the largest firms drive out any competition. While deregulation leads to more small firms in the sample, the size distribution that the authors observe—namely, a large number of small firms and a small number of large firms—can be characterized as the "missing middle" in Indian manufacturing. Small firms may continue to face constraints in their attempts to grow. Distortions have decreased over time with higher gains for deregulated industries. Closed for comment; 0 Comment(s) posted.
- 16 Jul 2012
- Working Paper Summaries
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. Key concepts include: If foreign firms have knowledge spillover effects for domestic firms, special policy treatment may be justified. If, however, as these results suggest, increases in productivity can also arise from tougher selection on domestic firms as a result of competition for scarce labor and capital, it is important to improve domestic conditions, including conditions of labor (in particular, skilled labor) supply and credit access, and to eliminate barriers in order to facilitate gains from competition and reallocation of resources. The entry of multinational firms raises the cutoff productivity of domestic firms, pushing the least productive domestic firms to exit the markets. New multinational production also leads to an increase in the minimum revenue of continuing domestic firms, indicating an increase in fixed production cost and capital price. The authors analyzed a 60-country dataset of financial, operation, and ownership information for over one million public and private manufacturing companies in 2002-2007. Closed for comment; 0 Comment(s) posted.
- 20 Sep 2011
- Working Paper Summaries
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. Key concepts include: There is much more nuance to the direction of capital flows than is commonly appreciated. Current account deficits of low-productivity developing countries have been driven by government debt/aid. Once aid flows are subtracted, there is capital flight out of these countries. Total capital does not flow uphill for an average emerging market economy, and the regional patterns for current account behavior in Asia are driven by few outliers who happen to be big players in reserve accumulation, such as China. This paper has important policy implications. Addressing systemic distortions in the international financial system that require international cooperation, such as intentional undervaluation of exchange rates, should come before fixing domestic distortions in fast-growing emerging markets. The paper sheds light on the relevant theories. The most common theoretical references in understanding the uphill flows and global imbalances are models in which domestic financial frictions and/or precautionary motives lead to over-saving in emerging markets. However, as the paper shows, any explanation for uphill flows and global imbalances must take into account the fact that private capital flows downhill. The failure to consider official flows as the main driver of uphill flows and global imbalances is an important shortcoming of the recent literature. Closed for comment; 0 Comment(s) posted.
- 15 Jul 2010
- Working Paper Summaries
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. Key concepts include: Results lend empirical support to a simple model of the determination of firm boundaries in a global economy. There is systematic relationship between firm boundaries and the equilibrium price in the product market. Higher prices, as proxied by higher most-favored-nation tariffs, lead to more vertical integration at the firm level. The impact of tariffs on vertical integration is significant. Enterprises' integration choices affect not only their productivity, but also aggregate economic performance and consumer welfare. Closed for comment; 0 Comment(s) posted.
- 08 Jul 2010
- Working Paper Summaries
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. Key concepts include: Responses to the crisis differed sharply between multinational and local firms. On average, establishments with multinational ownership performed better than local competitors, but there was considerable differentiation in the role of foreign direct investment. Multinationals located in host countries that have experienced sharper declines in aggregate demand and credit conditions displayed a greater advantage over local firms in economic performance. Multinationals headquartered in countries with a greater incidence of the crisis, including lower demand and worse credit conditions, fared less satisfactorily overseas, suggesting a potential spillover of home-country shocks. Multinational corporation subsidiaries that share vertical production linkages with parent firms exhibited more resilient performance while horizontally linked subsidiaries responded less positively. The size of multinational networks matters. Being part of a larger multinational network, on average, was associated with superior economic performance during the crisis. But there was a negative interdependence across establishments with horizontal production linkages. Closed for comment; 0 Comment(s) posted.
- 23 Dec 2009
- Working Paper Summaries
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. Key concepts include: Recent decades have witnessed an explosion in the activities of multinational corporations, but little is understood about global patterns of multinational agglomeration. Examples of this trend include firms that agglomerated in Silicon Valley and in Detroit now having subsidiaries clustered in Bangalore (termed "the Silicon Valley of India") and in Slovakia ("the Detroit of the East"). A new data set provides detailed location, ownership, and activity information for establishments in more than 100 countries. Multinational subsidiaries with knowledge spillovers, among other factors, tend to agglomerate to one another. The importance of these agglomeration economies is, however, different across headquarters, subsidiary, and employment networks. Many factors play a role in the location decisions of firms, so it may not be possible for a country to duplicate the circumstances that led to agglomeration in other nations. Policymakers need to consider the interdependence of multinational firms when making decisions about FDI. Closed for comment; 0 Comment(s) posted.
Credit Supply Shocks, Network Effects, and the Real Economy
Using data for Spain between 2003 and 2013, this study examines firms’ responses to credit supply shocks during times of boom (expansion) and bust (financial crisis and recession). Results indicate that propagation of these shocks through the Spanish production network doubles the magnitude of the real effects typically estimated in the literature. This study also shows how such effects vary greatly during booms and busts.