Financial Markets and Real Ecinomy: Four Essays in International Trade

Financial markets play an important role in an economy performing various functions like mobilizing and pooling savings, producing information about investment opportunities, screening and monitoring investments, implementation of corporate governance, diversification and management of risk. These functions influence saving rates, investment decisions, technological innovation and, therefore, have important implications for welfare. In my PhD dissertation I examine the interplay of financial and product markets by looking at different channels through which financial markets may influence an economy.My dissertation consists of four chapters. The first chapter is a co-authored work with Martin Strieborny, a PhD student from the University of Lausanne. The second chapter is a co-authored work with Melise Jaud, a PhD student from the Paris School of Economics. The third chapter is co-authored with both Melise Jaud and Martin Strieborny. The last chapter of my PhD dissertation is a single author paper.Chapter 1 of my PhD thesis analyzes the effect of financial development on growth of contract intensive industries. These industries intensively use intermediate inputs that neither can be sold on organized exchange, nor are reference-priced (Levchenko, 2007; Nunn, 2007). A typical example of a contract intensive industry would be an industry where an upstream supplier has to make investments in order to customize a product for needs of a downstream buyer. After the investment is made and the product is adjusted, the buyer may refuse to meet a commitment and trigger ex post renegotiation. Since the product is customized to the buyer's needs, the supplier cannot sell the product to a different buyer at the original price. This is referred in the literature as the holdup problem. As a consequence, the individually rational suppliers will underinvest into relationship-specific assets, hurting the downstream firms with negative consequences for aggregate growth. The standard way to mitigate the hold up problem is to write a binding contract and to rely on the legal enforcement by the state. However, even the most effective contract enforcement might fail to protect the supplier in tough times when the buyer lacks a reliable source of external financing. This suggests the potential role of financial intermediaries, banks in particular, in mitigating the incomplete contract problem. First, financial products like letters of credit and letters of guarantee can substantially decrease a risk and transaction costs of parties. Second, a bank loan can serve as a signal about a buyer's true financial situation, an upstream firm will be more willing undertake relationship-specific investment knowing that the business partner is creditworthy and will abstain from myopic behavior (Fama, 1985; von Thadden, 1995). Therefore, a well-developed financial (especially banking) system should disproportionately benefit contract intensive industries.The empirical test confirms this hypothesis. Indeed, contract intensive industries seem to grow faster in countries with a well developed financial system. Furthermore, this effect comes from a more developed banking sector rather than from a deeper stock market. These results are reaffirmed examining the effect of US bank deregulation on the growth of contract intensive industries in different states. Beyond an overall pro-growth effect, the bank deregulation seems to disproportionately benefit the industries requiring relationship-specific investments from their suppliers.Chapter 2 of my PhD focuses on the role of the financial sector in promoting exports of developing countries. In particular, it investigates how credit constraints affect the ability of firms operating in agri-food sectors of developing countries to keep exporting to foreign markets.Trade in high-value agri-food products from developing countries has expanded enormously over the last two decades offering opportunities for development. However, trade in agri-food is governed by a growing array of standards. Sanitary and Phytosanitary standards (SPS) and technical regulations impose additional sunk, fixed and operating costs along the firms' export life. Such costs may be detrimental to firms' survival, "pricing out" producers that cannot comply. The existence of these costs suggests a potential role of credit constraints in shaping the duration of trade relationships on foreign markets. A well-developed financial system provides the funds to exporters necessary to adjust production processes in order to meet quality and quantity requirements in foreign markets and to maintain long-standing trade relationships. The products with higher needs for financing should benefit the most from a well functioning financial system. This differential effect calls for a difference-in-difference approach initially proposed by Rajan and Zingales (1998). As a proxy for demand for financing of agri-food products, the sanitary risk index developed by Jaud et al. (2009) is used. The empirical literature on standards and norms show high costs of compliance, both variable and fixed, for high-value food products (Garcia-Martinez and Poole, 2004; Maskus et al., 2005). The sanitary risk index reflects the propensity of products to fail health and safety controls on the European Union (EU) market. Given the high costs of compliance, the sanitary risk index captures the demand for external financing to comply with such regulations.The prediction is empirically tested examining the export survival of different agri-food products from firms operating in Ghana, Mali, Malawi, Senegal and Tanzania. The results suggest that agri-food products that require more financing to keep up with food safety regulation of the destination market, indeed sustain longer in foreign market, when they are exported from countries with better developed financial markets.Chapter 3 analyzes the link between financial markets and efficiency of resource allocation in an economy. Producing and exporting products inconsistent with a country's factor endowments constitutes a serious misallocation of funds, which undermines competitiveness of the economy and inhibits its long term growth. In this chapter, inefficient exporting patterns are analyzed through the lens of the agency theories from the corporate finance literature. Managers may pursue projects with negative net present values because their perquisites or even their job might depend on them. Exporting activities are particularly prone to this problem. Business related to foreign markets involves both high levels of additional spending and strong incentives for managers to overinvest. Rational managers might have incentives to push for exports that use country's scarce factors which is suboptimal from a social point of view. Export subsidies might further skew the incentives towards inefficient exporting. Management can divert the export subsidies into investments promoting inefficient exporting.Corporate finance literature stresses the disciplining role of outside debt in counteracting the internal pressures to divert such "free cash flow" into unprofitable investments. Managers can lose both their reputation and the control of "their" firm if the unpaid external debt triggers a bankruptcy procedure. The threat of possible failure to satisfy debt service payments pushes the managers toward an efficient use of available resources (Jensen, 1986; Stulz, 1990; Hart and Moore, 1995). The main sources of debt financing in the most countries are banks. The disciplining role of banks might be especially important in the countries suffering from insufficient judicial quality. Banks, in pursuing their rights, rely on comparatively simple legal interventions that can be implemented even by mediocre courts. In addition to their disciplining role, banks can promote efficient exporting patterns in a more direct way by relaxing credit constraints of producers, through screening, identifying and investing in the most profitable investment projects. Therefore, a well-developed domestic financial system, and particular banking system, would help to push a country's exports towards products congruent with its comparative advantage.This prediction is tested looking at the survival of different product categories exported to US market. Products are identified according to the Euclidian distance between their revealed factor intensity and the country's factor endowments. The results suggest that products suffering from a comparative disadvantage (labour-intensive products from capital-abundant countries) survive less on the competitive US market. This pattern is stronger if the exporting country has a well-developed banking system. Thus, a strong banking sector promotes exports consistent with a country comparative advantage.Chapter 4 of my PhD thesis further examines the role of financial markets in fostering efficient resource allocation in an economy. In particular, the allocative efficiency hypothesis is investigated in the context of equity market liberalization.Many empirical studies document a positive and significant effect of financial liberalization on growth (Levchenko et al. 2009; Quinn and Toyoda 2009; Bekaert et al., 2005). However, the decrease in the cost of capital and the associated growth in investment appears rather modest in comparison to the large GDP growth effect (Bekaert and Harvey, 2005; Henry, 2000, 2003). Therefore, financial liberalization may have a positive impact on growth through its effect on the allocation of funds across firms and sectors.Free access to international capital markets allows the largest and most profitable domestic firms to borrow funds in foreign markets (Rajan and Zingales, 2003). As domestic banks loose some of their best clients, they reoptimize their lending practices seeking new clients among small and younger industrial firms. These firms are likely to be more risky than large and established companies. Screening of customers becomes prevalent as the return to screening rises. Banks, ceteris paribus, tend to focus on firms operating in comparative-advantage sectors because they are better risks. Firms in comparative-disadvantage sectors finding it harder to finance their entry into or survival in export markets either exit or refrain from entering export markets. On aggregate, one should therefore expect to see less entry, more exit, and shorter survival on export markets in those sectors after financial liberalization.The paper investigates the effect of financial liberalization on a country's export pattern by comparing the dynamics of entry and exit of different products in a country export portfolio before and after financial liberalization.The results suggest that products that lie far from the country's comparative advantage set tend to disappear relatively faster from the country's export portfolio following the liberalization of financial markets. In other words, financial liberalization tends to rebalance the composition of a country's export portfolio towards the products that intensively use the economy's abundant factors.

Evaluation of U.S. and European Concrete Pavement Noise Reduction Methods, July 2006

Highway noise is one of the most pressing of the surface characteristics issues facing the concrete paving industry. This is particularly true in urban areas, where not only is there a higher population density near major thoroughfares, but also a greater volume of commuter traffic (Sandberg and Ejsmont 2002; van Keulen 2004). To help address this issue, the National Concrete Pavement Technology Center (CP Tech Center) at Iowa State University (ISU), Federal Highway Administration (FHWA), American Concrete Pavement Association (ACPA), and other organizations have partnered to conduct a multi-part, seven-year Concrete Pavement Surface Characteristics Project. This document contains the results of Part 1, Task 2, of the ISU-FHWA project, addressing the noise issue by evaluating conventional and innovative concrete pavement noise reduction methods. The first objective of this task was to determine what if any concrete surface textures currently constructed in the United States or Europe were considered quiet, had long-term friction characteristics, could be consistently built, and were cost effective. Any specifications of such concrete textures would be included in this report. The second objective was to determine whether any promising new concrete pavement surfaces to control tire-pavement noise and friction were in the development stage and, if so, what further research was necessary. The final objective was to identify measurement techniques used in the evaluation.

The Impact of Industry Collaboration on Academic Research Output: A Dynamic Panel Data Analysis

The aim of this paper is to analyse the impact of university knowledge and technology transfer activities on academic research output. Specifically, we study whether researchers with collaborative links with the private sector publish less than their peers without such links, once controlling for other sources of heterogeneity. We report findings from a longitudinal dataset on researchers from two engineering departments in the UK between 1985 until 2006. Our results indicate that researchers with industrial links publish significantly more than their peers. Academic productivity, though, is higher for low levels of industry involvement as compared to high levels.

Iowa Budget Report Capital Projects, January 2005

This report is of the projects for the capital.

Intra-Industry Trade, Multilateral Trade Integration, and Invasive Species Risk, December 2006

We analyze the linkage between protectionism and invasive species (IS) hazard in the context of two-way trade and multilateral trade integration, two major features of real-world agricultural trade. Multilateral integration includes the joint reduction of tariffs and trade costs among trading partners. Multilateral trade integration is more likely to increase damages from IS than predicted by unilateral trade opening under the classic Heckscher-Ohlin-Samuelson (HOS) framework because domestic production (the base susceptible to damages) is likely to increase with expanding export markets. A country integrating its trade with a partner characterized by relatively higher tariff and trade costs is also more likely to experience increased IS damages via expanded domestic production for the same reason. We illustrate our analytical results with a stylized model of the world wheat market.

An analisys of suply and Demand Conditions for Cape Verde´s Banana Industry

Michigan State University

Audit report on Highway Safety Projects administered by The Integer Group Midwest for the year ended September 30, 2006

Audit report on Highway Safety Projects administered by The Integer Group Midwest for the year ended September 30, 2006

The Growth and Direction of the Biodiesel Industry in the United States, 2007

The biodiesel industry in the United States has realized significant growth over the past decade through large increases in annual production and production capacity and a transition from smaller batch plants to larger-scale continuous producers. The larger, continuous-flow plants provide operating cost advantages over the smaller batch plants through their ability to capture co-products and reuse certain components in the production process. This paper uses a simple capital budgeting model developed by the authors along with production data supplied by industry sources to estimate production costs, return-on-investment levels, and break-even conditions for two common plant sizes (30 and 60 million gallon annual capacities) over a range of biodiesel and feedstock price levels. The analysis shows that the larger plant realizes returns to scale in both labor and capital costs, enabling the larger plant to pay up to $0.015 more per pound for the feedstock to achieve equivalent return levels as the smaller plant under the same conditions. The paper contributes to the growing literature on the biodiesel industry by using the most current conversion rates for the production technology and current price levels to estimate biodiesel production costs and potential plant performance, providing a useful follow-up to previous studies.

Entrepreneurship, organization and economic performance among Spanish firms, 1930-1975. The case of the motor industry

Before the Civil War (1936-1939), Spain had seen the emergence offirms of complex organizational forms. However, the conflict andthe postwar years changed this pattern. The argument put forwardin this paper is based on historical experience, the efforts willbe addressed to explain the development of Spanish entrepreneurshipduring the second half of the twentieth century. To illustrate thechange in entrepreneurship and organizational patterns among theSpanish firms during the Francoist regime we will turn to the caseof the motor vehicle industry.

Determinants of organizational form: Transaction costs and institutions in the European trucking industry

We explain why European trucking carriers are much smaller and rely more heavily on owner-operators(as opposed to employee drivers) than their US counterparts. Our analysis begins by ruling outdifferences in technology as the source of those disparities and confirms that standard hypothesesin organizational economics, which have been shown to explain the choice of organizational form inUS industry, also apply in Europe. We then argue that the preference for subcontracting oververtical integration in Europe is the result of European institutions particularly, labor regulationand tax laws that increase the costs of vertical integration.

Summary Report for the Iowa Alzheimer's Task Force 2007 from the Iowa Alzheimer's Disease Demonstration Projects

The Iowa Department of Elder Affairs, in collaboration with the University of Iowa College of Nursing, has been engaged in developing and evaluating community based services for persons with dementia in the state of Iowa over the past 7 years under a grant form the Administration on Aging. This grant tested out several models of care (dementia nurse care manager, memory loss nurse specialist, “People Living Alone Need Support” (PLANS), varying models of respite care), surveyed agencies and service providers in regard to how they provide services for persons with dementia, and provided training to case management, community college instructors, adult day service providers and other related services providers including assisted living and nursing home facilities.

The drive for quality - the impact on accounting in the wine industry

There is a substancial literature on the accounting procedures needed to trackdown the costs of quality control and quality failure. In a drive for improved quality the changes in the process of production or service delivery will also give rise to new accounting needs. In this article we take one example of an industry, wine production, where in most countries there has been a movement towards expanding higher quality production. We report on interviews with wine producers in the US, Australia, Canada, New Zealand and Spain, and identify avariety of ways in which a more sophisticated approach to accounting has become necessary as a result of the drive for quality.

Wage determination in the Spanish industry

In this paper we estimate wage equations for the Spanish industryusing time series data on 85 industrial sectors, which allows us todistinguish between aggregate and sector specific effects in wagedetermination. Industry wages respond mainly to economy wide labourmarket conditions and to a much lesser extent to sector specificproductivity gains. The size of the insider effect has not remainedstable through the sample period. The estimated equations show a strongtransitory effect of unemployment on wages, which is in accordancewith the non--stationarity of the Spanish unemployment rate. Thishysteresis effect seems well accounted for by the sharp rise in theproportion of long term unemployment.

The persistence of abnormal returns at industry and firm levels

The present paper proposes a model for the persistence of abnormal returnsboth at firm and industry levels, when longitudinal data for the profitsof firms classiffied as industries are available. The model produces a two-way variance decomposition of abnormal returns: (a) at firm versus industrylevels, and (b) for permanent versus transitory components. This variancedecomposition supplies information on the relative importance of thefundamental components of abnormal returns that have been discussed in theliterature. The model is applied to a Spanish sample of firms, obtainingresults such as: (a) there are significant and permanent differences betweenprofit rates both at industry and firm levels; (b) variation of abnormal returnsat firm level is greater than at industry level; and (c) firm and industry levelsdo not differ significantly regarding rates of convergence of abnormal returns.