Headlines 2017

IFN Stockholm Conference 2017 Globalization and New Technology: Effects on Firms and Workers


“Globalization and New Technology: Effects on Firms and Workers” was the theme of a conference organized by the Research Institute of Industrial Economics, IFN, on June 15-16, 2017. The conference brought together researchers with the objective to shed light on the effects of globalization and new technology. In total, 16 papers were presented.

Joacim TågJoacim Tåg, IFN, chaired a session at the Stockholm Conference. In addition he was the discussant when David Hummels presented a study.

Globalization and Innovation, Trade and Tax evasion

The first paper, “Better, Faster, Stronger: Global Innovation and Trade”, was presented by Andreas Moxnes, University of Oslo. The study analyzes the impact of the global decline in tariffs during the 1990s on firms’ innovation. The authors use the Great Liberalization of the 1990s as a quasi-natural experiment. At the conference, Moxnes explained that trade policy liberalization had a significant positive net effect on innovation worldwide and that this could be attributed to both a larger market access for firms and a higher degree of competition.

Related to trade policy changes, Beata Javorcik, University of Oxford, presented the paper “Forensics, Elasticities and Benford’s Law: Detecting Tax Fraud in International Trade”. The paper analyzes the effects of Turkey increasing the cost of import financing which affected tax evasion. Through the Benford’s law based method, the paper confirms that tax evasion increased after the policy change. Javorcik further presented a trade model, which predicts that the elasticity of imports in regards to trade taxes is distorted in the case of tax evasion. The empirical results confirm that the policy shock cause more evasion that creates a downward bias in tax elasticity estimates leading to overestimation of welfare gains/losses.

Beata J.Beata Javorcik, University of Oxford, presenting her study “Forensics, Elasticities and Benford’s Law: Detecting Tax Fraud in International Trade”.

Globalization and Firm Performance

Shon Ferguson, IFN, presented the paper “The Origins and Performance of Early Exporters” which theoretically and empirically examines the relationship between internationalization and firm performance. The developed theory predicts that the larger fixed production cost, the more likely firms are to export to additional markets and to improve their performance by upholding size advantage over new firms. Ferguson then presented empirical evidence showing that Swedish firms that quickly expand into multiple export markets, so-called “Born Global” firms, have a significant initial size advantage over other exporting firms and this advantage persists up to 14 years. Javier Miranda, U.S. Census Bureau, who was discussing the paper, was questioning why certain firms are “born” to export and how exceptional they are in terms of their revenue and size, compared to other firms.

Shon FergusonShon Ferguson, IFN, presented his study “The Origins and Performance of Early Exporters”.

Katariina Nilsson Hakkala, VATT Institute for Economic Research, presented the paper “Firm-Level Responses to Chinese Competition on Export Markets”. In the paper, she investigates how increased Chinese competition affects exports by Finnish firms. Using detailed firm-level trade data and an instrumented variable approach, the authors have found that Chinese export competition crowd out exports of Finnish firms both at an aggregate and firm level. The discussant of the paper, Kaveh Majlesi, Lund University, had concerns regarding the instruments used. He emphasized that it would be interesting to measure potential specialization in production of high-quality goods as a result of increased competition from low-wage countries. Related to globalization and firm performance,

Andrew Bernard, Tuck School of Business at Dartmouth, presented a paper, “The Origins of Firm Heterogeneity: A Production Network Approach”. The paper explores whether it matters for firm size to be part of international production networks. Using Belgian firm-level data, which also includes firms’ upstream and downstream sales, the paper investigates how final demand as well as demand and supply by other firms impact firm size. The findings show that variation in sales is mostly driven by variation in demand by other firms. That is, what seems to matter for firm size is business-to-business sales rather than sales to consumers.

Andrew BernardAndrew Bernard, Tuck School of Business at Dartmouth, presenting his study “The Origins of Firm Heterogeneity: A Production Network Approach”.

Political Polarization

A different aspect of increased import competition was presented by Kaveh Majlesi, Lund University, one of the co-authors of the paper “Importing Political Polarization? The Electoral Consequences of Rising Trade Exposure”. The paper exploits an exogenous component of increasing trade between the U.S. and China and classifies legislator ideologies by congressional voting records. The authors find that in congressional districts exposed to increased Chinese import penetration, a disproportionate number of moderate representatives are pushed out from office in the 2000s. At the conference in Vaxholm, Majlesi explained that trade-exposed districts with an initial majority white population or initially in Republican hands, became more likely to elect a conservative Republican. On the other hand, trade-exposed districts with an initial majority-minority population or initially in Democratic hands became more likely to elect a liberal Democrat. According to Majlesi, the results emphasize the connection between adverse economic conditions and support for nativist politicians.

Kav Mailesi“Importing Political Polarization? The Electoral Consequences of Rising Trade Exposure” was the study presented by Kaveh Majlesi, Lund University.

Source Country Differences in FDI

Pehr-Johan Norbäck, IFN, presented the paper “Foreign Direct Investment, Source Country Heterogeneity and Management Practices”, which investigates inflows of foreign direct investments into a country. The paper examines whether there exists source country heterogeneity in foreign subsidiaries in Sweden. Using detailed data on all Swedish firms for the period 1996-2009, the authors find that foreign affiliates differ in their productivity depending on the source country. Furthermore, results presented by Norbäck show that management practices are important determinants of these productivity variations. David Hummels, Purdue University, discussed the paper and questioned how much of the differences in source country acquisition effects are due to the strength of selection and whether management practices themselves predict which firms are acquired.

Optimal International Investment Agreements

Thomas Tangerås, IFN, presented the paper “Economics and Politics of International Investment Agreements”. Tangerås discussed the fact that international investments increasingly transpire between developed countries, compared to the past when investment flows were going mostly from developed to developing countries. The paper presents a theoretical model of the optimal design and implications of international investment agreements aimed at protecting foreign investors against host country policies. The paper suggests that incentives to form agreements and their distributional consequences depend on countries’ unilateral commitment and the direction of investment flows. Foreign investors benefit from agreements between developed countries at the expense of the rest of society, but not from agreements between developed and developing countries.

Thomas Tangerås“Economics and Politics of International Investment Agreements” is a study authored by Henrik Horn and Thomas Tangerås, IFN. The latter presented the study in Vaxholm.

Globalization and Income Inequality

Another strand of the literature on international trade studies the link between globalization and income inequality. Mario Larch, University of Bayreuth, presented the paper “Convex Vacancy Creation Costs and On-the-Job Search in a Global Economy”. The paper develops a theoretical model, which combines convex vacancy/job creation costs and on-the-job search. It explains how trade liberalization affects trade patterns, wages, and wage inequality. The model suggests that studies using structural estimation to evaluate trade liberalization and if it can explain the rise in wage inequality should not only capture firm level employment and wage patterns, but also firms’ export behavior. The existing theoretical trade models distinguish only between non-exporting and exporting firms. 

LarchMario Larch, University of Bayreuth, participated in the Stockholm Conference and presented his paper “Convex Vacancy Creation Costs and On the Job Search in a Global Economy”.

Another paper, “Globalization and CEO Pay: Good Managers or Good Luck?”, presented by David Hummels, Purdue University, focuses on the very top income earners by empirically investigating the link between CEO pay and globalization in Denmark during the years 1995-2008. Using an instrumental variable approach, the paper finds that changes in global exposure and increased firm size strongly increase CEO compensation. This both in absolute terms and relative to other workers with a particularly large effect for bigger firms. Hummels explained in Vaxholm how these increased CEO payments are tied to increases in sales driven by changes in global markets that are unrelated to CEO ability. Thus, this implies that managers are being compensated for good luck, rather than for performing more demanding tasks. Joacim Tåg, IFN, who was the discussant of the paper, questioned whether increased CEO pay can really be only attributed to luck. According to Tåg, optimal contracts might be ex-ante written so that CEOs are motivated and compensated for extra effort when it is needed.

David Hummels
David Hummels, Purdue University, talking about his research: “Globalization and CEO Pay: Good Managers or Good Luck?”

Job Polarization

Carl Davidson, Michigan State University, presented the paper “Networks, Ladders and Education: Labor Market Strategies in the Presence of Globalization”. This paper develops a theoretical model where workers differ over time in skills acquired, and firms differ in the technologies they use. The workers then self-select into different recruiting networks based on their productivity measures and the signals embedded in each recruit’s job application. The model suggests that when workers can acquire skills through education, globalization can lead to shrinkage of the middle class. This shift in the distribution of employment simply follows the manners in which globalization affects firms’ hiring strategies and workers’ decisions on how to acquire skills.

Along the same lines, another paper “Delving into the Demand Side: Changes in Workplace Specializations and Job Polarization” was presented by Matias Cortes, University of Manchester. The paper uses workplace level data in Great Britain and documents widespread and increasing occupational specialization within establishments. Cortes described how changes in the specialization profiles of workplaces account for most of the changes in the aggregate occupational shares between 1998 and 2011. The researchers find, however, no evidence of a decline in routine employment among establishments that report the adoption of new technologies. Instead, the paper reveals new evidence suggesting that an increase in non-routine cognitive work is linked to the growth of outsourcing of cognitive tasks. Fredrik Heyman, IFN, who was discussing the paper, emphasized the importance of investigating the combined effects of technology and outsourcing on specialization, and mentioned the potential influence of offshoring.

KaffepausCoffee break during the two day conference in Vaxholm in the Stockholm archipelago.

Esther Ann Bøler, Imperial College London, presented the paper “Technology-Skill Complementarity in a Globalized World”, which evaluates the contributor of R&D investments on skill demand among firms in Norway. Investments in R&D might lead to increased demand for skilled labor through two channels: directly – by increased demand for skilled R&D workers, and indirectly – by a shift in production technology that favors skilled labor. Analyzing a tax credit policy change that affects the incentives to innovate for a subset of Norwegian firms, the paper confirms that the reform, which had a large and positive effect on R&D investments, increased the skill demand indeed. The estimated growth rate of skill-biased productivity is sizeable enough to account for the most of the observed increase in the skill premium in Norway over the sample period 1997-2010.

Farid Toubal, CREST, provided further evidence supporting the link between skill biased technological change and increased demand for skilled workers by presenting preliminary results from the paper “Techies, Productivity and Skill: Firm Level Evidence from France”. The results show that workers in technical occupations have a large, positive effect on skill boosting productivity and that technology adoption mediated by these workers causes the upgrade of firm-level skills.

Privatizations and Workers

Related to the job polarization literature, Martin Olsson, IFN, presented the paper “Privatizations, Routine Job Tasks and Labor Quality”. The paper investigates how increased privatizing in Sweden has affected workers performing routine tasks and workers defined as less talented. If state owned enterprises delay investments in new technologies, privatizations could trigger such investments, making workers performing routine job tasks redundant. Olsson presented results showing that workers performing routine tasks are twice as likely to end up unemployed after privatization, compared to workers performing non-routine tasks. In addition, less talented workers are 20% less likely to enter unemployment compared to talented workers. The discussant of the paper, Matias Cortes, University of Manchester, stated that the analysis of occupations and skills seems to be related to two independent stories. He also questioned whether the number of workers in privatized firms are sufficient to consider increased privatizations as an important driver of polarization in general.

Business Dynamism and Productivity

 “Changing Business Dynamism and Productivity: Shocks vs. Responsiveness”, presented by Javier Miranda, U.S. Census Bureau, explores the link between declining business dynamism and declined productivity growth in high-tech sectors in the U.S. during the post-2000 period. Focusing on dynamism within firm age groups, the paper analyzes changes in productivity versus the way businesses respond to productivity changes. Using a large dataset on establishment-level total factor productivity, the authors find that aggregate patterns of reallocation in the manufacturing sector are closely related to changes in the marginal responses of individual businesses to their own productivity. Particularly in detailed industries with large increases in import penetration from low wage countries as well as young high-tech plants have exhibited large declines in responsiveness in the post-2000 period. The paper concludes that the productivity slowdown in the post-2000 period cannot only be explained by a decline in the pace of innovation and technological change, but also by an increase in frictions or distortions in the U.S. economy. 

Diskussion; Javier mIRANDA, fREDRIK HEYMAN OCH kATARINA nILSSON M FL“Changing Business Dynamism and Productivity: Shocks vs. Responsiveness” was the title of a study presented by Javier Miranda, U.S. Census Bureau.

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