the influence of competitive positioning and rivalry on emerging market risk assessment rating agencies play a pivotal role in international credit transactions their sovereign risk assessments are largely thought to reflect objective evaluations of the creditworthiness of potential borrowers we test this assumption by examining the role that competitive positioning and dynamics play in the risk assessments these agencies provide our analyses of agency risk assessments for emerging market sovereign borrowers indicate that they are significantly related to agency positioning as an incumbent or insurgent new entrant to agency specialization in sovereigns from particular geographic regions and in some instances to the level of agency rivalry in a specific sovereign market our findings suggest both significant general and contingent links between foreign investment risk assessment and competitive positioning and rivalry among agencies

infrastructure and development a critical appraisal of the macro level literature this survey reviews the existing macro level empirical literature on the link between infrastructure and development outcomes in a critical light after providing a general framework that casts the relevant terms of the controversy on the real effect of infrastructure on growth in the context of an aggregate production function it signals what are the relevant empirical questions to be addressed this guides the systematic review of a number of empirical studies and the discussion of the main econometric challenges to the identification of the effect of infrastructure on output and productivity finally building on related research in particular in contract theory and political economy the paper spells out several promising research avenues

residual state ownership policy stability and financial performance following strategic decisions by privatizing telecoms we question previous research assuming that privatizing firm performance generally benefits from decreasing state ownership and the passage of time both of which purportedly align principal agent incentives promoting organizational decision making that increases shareholder value when state ownership shifts from majority and controlling to minority and non controlling the performance impact may be positive in the short run particularly where there is instability in the local investment policy environment consistent with this proposition we develop and test hypotheses derived from a minority and non controlling or residual state ownership framework grounded in credible privatization and institutional theory we propose that 1 residual state ownership positively affects shareholder returns after strategic decisions by privatizing firms because it signals state support for managerial initiatives 2 the passage of time since initial privatization negatively affects shareholder returns after strategic decisions by privatizing firms because initial undertakings in support of the privatizing firm are reversed and 3 home country investment policy stability moderates these two effects greater stability obviates the need for residual state ownership and slows policy reversals over time we find empirical support for our residual state ownership framework in event study analyses of cumulative abnormal returns cars associated with 196 major investments announced from 1986 to 2001 by 15 privatizing telecoms from around the world cars are positive at 5 25 state ownership levels but turn negative at higher state ownership levels cars turn sharply negative within 1 2 years from initial privatization dates increasing policy stability diminishes positive ownership and negative time effects on cars results confirm the potential supporting role that residual state ownership can play in enhancing strategic decision making and financial performance by privatizing firms particularly where there is instability in the home country investment policy environment

small firms borrowing constraints and reputation abstract this paper presents a simple model relating firm age with firm size and access to credit markets lending to new firms is risky because lenders have had no time to accumulate observations about them as a result interest rates are high and loans are small for entering firms as firms need credit to operate credit markets impose a limit on the scale of operation of new firms reputation building by the firms allows markets to overcome these difficulties over time large firms face lower interest rates than small firms and credit market fluctuations are shown to have different effects on firms of different size

incumbent employees resistance to implementing privatization policy abstract the recent anti privatization trend in latin america france and south africa is a reminder that employees resist privatization because pre privatization firms tend to be over manned and to pay excessive wages we study the effect of employees resistance on the successful implementation of privatization in a stylized model in which the government interacts with employees of an unknown type the analysis clarifies some of the difficulties associated with the implementation process furthermore although common sense dictates that the government negotiates with the employees before finding an outside buyer we show that sometimes it is better off contacting an investor first

the costs of financial crises resource misallocation productivity and welfare in the 2001 argentine crisis the costs of financial crises financial crises in emerging market countries appear to be very costly both output and a host of partial welfare indicators decline dramatically the magnitude of these costs is puzzling both from an accounting perspective factor usage does not decline as much as output resulting in large falls in measured productivity and from a theoretical perspective towards a resolution of this puzzle we present a framework that allows us to i account for changes in a country s measured productivity during a financial crises as the result of changes in the underlying technology of the economy the efficiency with which resources are allocated across sectors and the efficiency of the resource allocation within sectors driven both by reallocation amongst existing plants and by entry and exit and ii measure the change in the country s welfare resulting from changes in productivity government spending the terms of trade and a country s international investment position we apply this framework to the argentine crisis of 2001 using a unique establishment level data set and find that more than half of the roughly 10 decline in measured total factor productivity can be accounted for by deterioration in the allocation of resources both across and within sectors we measure the decline in welfare to be on the order of one quarter of one years gdp

are there dynamic gains from a poor area development program poor area development programs in which the government transfers extra resources to unusually poor areas have been widely used to fight poverty there has been some research on such programs but little is known about their impact on household living standards over time the authors address the issue for a sizable poor area development program in rural china china s program had a significant impact on rural living standards in the targeted areas of the sample the consumption growth model suggests that households living in the targeted areas had a higher rate of consumption growth than one would have otherwise expected nonetheless the authors found that while the gains in growth were enough to prevent an absolute decline in average living standards they were not enough to reverse the strong underlying divergent tendencies in the rural economy

crisis and competition in expert organizational decision making credit rating agencies and their response to turbulence in emerging economies firms often delegate elements of strategic decisions to outside experts who promise objective assessments which are especially valuable in unstable environments however experts themselves may be prone to skewed decision making as the stability of their own industry environment changes and as their positioning within the industry shifts we examine this possibility in the context of expert credit rating agencies agencies and their risk ratings of emerging market sovereign borrowers ratings published from 1987 to 1998 a period that includes both industry stability 1987 1996 and industry turbulence set off by financial crises in several emerging market countries 1997 1998 after controlling for macroeconomic and related objective risk factors linked to the sovereigns themselves we find several points 1 agency ratings during crisis induced industry turbulence are negatively skewed indicating undue pessimism among these experts in line with decision making perspectives predicting negative reaction by experts in an effort to retain legitimacy with salient stakeholders in this case investors and public regulators 2 this negative shift is greater for incumbent firms and regionally focused firms possibly because of the loss of previous informational advantages and 3 this negative shift during crisis induced turbulence is greater as industry rivalry among these experts increases in particular market segments possibly indicating the development of competitive bandwagons among experts together our results suggest that objective assessments by expert organizations are vulnerable to substantial distortion from the confluent effects of industry instability and expert positioning within the industry particularly positioning affecting rivalry among experts ironically experts may be most likely to mislead clients in unstable industry environments when experts command greater attention and should show greater fidelity to disinterested objectivity

multinationals and industrial policy are there benefits to the host country from multinational investments does potential value from these investments make active industrial policy worthwhile we answer the first question affirmatively having reviewed economic principles and evidence concerning the effects of projects locating in or not being off shored from a country on the second policy can have a limited effect in influencing location decisions but it is doubtful that it is cost effective implementation faces lack of information risk of capture and in many cases non rigorous processes competition between jurisdictions means that much policy is investment diversion not investment creation there is a case for supra national controls as with eu state aid regulations for policy to be used only for well defined market failures and for better implementation and more rigorous ex ante appraisal and ex post evaluation copyright 2013 oxford university press

wasteful public spending and state aid control the conventional academic rationale for supranational intervention to curb state aids to industry appeals to transfrontier spillovers however competition policy practitioners often speak in terms of curbing wasteful spending regardless of whether or not any international spillovers are involved although it is often argued that such wasteful spending calls not for supranational state aid control but rather for better domestic political accountability this paper argues that wasteful spending may be a by product of accountability not a symptom of its absence specifically we describe a model in which politicians fund projects that are wasteful as a way to signal their diligence and voters rationally reward them for this we discuss implications for the role of state aid control mechanisms 2006 by the european economic association

the economics of density evidence from the berlin wall this paper develops a quantitative model of internal city structure that features agglomeration and dispersion forces and an arbitrary number of heterogeneous city blocks the model remains tractable and amenable to empirical analysis because of stochastic shocks to commuting decisions which yield a gravity equation for commuting flows to structurally estimate agglomeration and dispersion forces we use data on thousands of city blocks in berlin for 1936 1986 and 2006 and exogenous variation from the city s division and reunification we estimate substantial and highly localized production and residential externalities we show that the model with the estimated agglomeration parameters can account both qualitatively and quantitatively for the observed changes in city structure we show how our quantitative framework can be used to undertake counterfactuals for changes in the organization of economic activity within cities in response for example to changes in the transport network

infrastructure privatization and changes in corruption patterns the roots of public discontent abstract this paper offers a theory of how the degree of corruption that prevails in a society responds to changes in the ownership structure of major public service providers we show that there are cases in which privatization even though it fosters investments in infrastructure also opens the door to more corruption the public dissatisfaction towards privatization is then crucially affected by the changes in the degree and pattern of corruption our model thus helps understand the seemingly paradoxical situation prevailing in latin america where most studies find that privatizations have been efficiency enhancing and have fostered investments and at the same time popular dissatisfaction with the process is extremely high especially among the middle class we show that this line of explanation is consistent with the evidence from surveys in the region

strategic investments by us firms in transition economies studies in international business have considered both theoretical and empirical analyses of investment strategies by multinational firms in transition economies however there is scant research on the impact of firm specific factors on the likelihood timing and mode of entry decisions in these economies we provide evidence on three aspects of the strategic decisions by us firms to invest in transition economies first we find that firms entering the region have greater advertising intensity and sales growth than industry peers that did not enter the region suggesting that market seeking considerations motivate expansion second we find that earlier entry is undertaken by firms with fewer industry competitors and higher sales growth suggesting that the desire to secure market share ahead of competitors motivates entry timing finally we investigate the choice of entry mode into the region and find that firms from concentrated industries are more likely to enter the region with high equity commitment consistent with market seeking motives we also find that firms incorporate the degree of progress with market oriented reforms in making decisions concerning entry timing and mode

testing theories of capital structure and estimating the speed of adjustment this paper examines time series patterns of external financing decisions and shows that publicly traded u s firms fund a much larger proportion of their financing deficit with external equity when the cost of equity capital is low the historical values of the cost of equity capital have long lasting effects on firms capital structures through their influence on firms historical financing decisions we also introduce a new econometric technique to deal with biases in estimates of the speed of adjustment toward target leverage we find that firms adjust toward target leverage at a moderate speed with a half life of 3 7 years for book leverage even after controlling for the traditional determinants of capital structure and firm fixed effects

public employment and labour market performance public employment does it increase unemployment we explore the consequences of public employment for labour market performance theory suggests that public employment may not only crowd out private employment but also increase overall unemployment if by offering attractive working conditions it draws additional individuals into the labour force empirical evidence from a sample of oecd countries in the 1960 2000 period suggests that on average creation of 100 public jobs may have eliminated about 150 private sector jobs slightly decreased labour market participation and increased by about 33 the number of unemployed workers theoretical considerations and empirical evidence however suggest that the crowding out effect of public jobs on private jobs is only significant in countries where public production is highly substitutable to private activities and the public sector offers more attractive wages and or other benefits than the private labour market

the performance of privatized firms in the czech republic abstract with the growing importance of privatizations as a part of government policy most empirical studies of these privatizations conclude that firm performance immediately improves following privatization privatization has been the most important part of the transition from the centrally planned economies of central and eastern europe and has a larger impact on those economies than privatizations in other countries however few studies have looked at the performance of firms following mass privatization this study uses 453 separate firms 101 firms privatized in both waves for a total of 554 observations in the first and second waves of czech voucher privatization using methodology from previous studies we find that while the overall effects from privatization are positive the effects vary by privatization wave size and industry firms privatized in the first wave performed worse decline in performance following privatization than firms privatized in the second wave we also fail to find ownership concentration or debt as an important factor in restructuring the firm i believe that the results are consistent with two hypotheses first economic and political structure surrounding the privatization waves plays an important part in the success of privatization stable environments both political and economic help privatized firms restructure and improve operating performance as well as attract foreign investors and capital even in less developed countries but in transitional economies undergoing mass privatization in rapidly changing and developing economic and political environments hinder firms from restructuring and improving performance following privatization results are also consistent with the hypothesis that firms with a longer preparation period prior to privatization an implicit seasoning improve performance following privatization

catching the wave alertness responsiveness and market influence in global electronic networks this paper introduces the concepts of alertness and responsiveness as key capabilities for firms in fast moving information intensive environments such as global currency trading hypotheses drawn from the resource based view of the firm from network theory and from austrian economics are tested on objective cross section and time series data for the population of 4 088 banks engaged in foreign exchange trading on the reuters dealing system results strongly support the hypotheses that banks that are alert i e use their information networks in ways that expand the range of information they are exposed to and responsive those that act quickly in volatile markets tend to exercise greater market influence in this industry

what is happening to the impact of financial deepening on economic growth i introduction among the strongest elements of the modern economists canon is that financial sector development has a significant impact on economic growth a generation ago economists like goldsmith 1969 1 and mckinnon 1973 began to draw attention to the benefits of financial structure development and financial liberalization by the early 1990s mckinnon 1991 12 could write with confidence that now however there is widespread agreement that flows of saving and investment should be voluntary and significantly decentralized in an open capital market at close to equilibrium interest rates since the 1990s a burgeoning empirical literature has illustrated the importance of financial sector development for economic growth despite the growing consensus however we find that the link between finance and growth in cross country panel data has weakened considerably over time at the very time that financial sector liberalization spread around the world the influence of financial sector development on economic growth has diminished the seminal empirical work that established the growth finance link is king and levine 1993 which extended the cross country framework introduced in barro 1991 by adding financial variables such as the ratios of liquid liabilities or claims on the private sector to gross domestic product gdp to the standard growth regression they found a robust positive and statistically significant relationship between initial financial conditions and subsequent growth in real per capita incomes for a cross section of about 80 countries in the subsequent decade numerous empirical studies expanded upon this using both cross country and panel data sets for the post 1960 period 2 in this paper we reexamine the core cross country panel result and find that the impact of financial deepening on growth is not as strong with more recent data as it appeared in the original panel studies with data for the period from 1960 to 1989 we consider various explanations for this clear shift first we suggest that financial deepening has a positive effect on growth if not done to excess rapid and excessive deepening as manifested in a credit boom can be problematic even in the most developed markets because it can both weaken the banking system and bring inflationary pressures we test this hypothesis by looking at the finance growth nexus among countries that have or have not experienced financial sector crises we find that once crisis episodes are removed the finance growth relationship remains intact its weakening over time thus seems to be a result of an increased incidence of crises in later years our second and related hypothesis is that the widespread liberalization of financial markets that occurred in the late 1980s and early 1990s made financial deepening less effective this is reminiscent of robert lucas s 1975 critique of econometric policy evaluation advanced three decades ago policies that have promoted and or forced increases in financial depth over the past two decades may have altered the basic structural relationship between finance and growth this could occur if the observed benefits of financial deepening led many countries to liberalize before the associated legal and regulatory institutions were sufficiently well developed as a consequence the impact of financial deepening on growth would become smaller our evidence does not indicate that recent liberalizations are responsible for the breakdown of the finance growth link however there may be an indirect link as premature financial development can lead to financial crises that have real effects third we examine the role of global equity markets that have grown in importance and prominence in the years over which the finance growth relationship disappeared however we do not find any evidence to suggest that equity market growth has substituted for the role of credit markets and banks in particular

how well do supranational regional grouping schemes fit international business research models international business ib research has long acknowledged the importance of supranational regional factors in building models to explain phenomena such as where multinational corporations mncs choose to locate yet criteria for defining regions based on similar factors vary substantially thus undermining consensus regarding which regional grouping schemes fit ib research models better in response we develop and empirically validate a theory of comparative regional scheme assessment for model building purposes assuming that 1 schemes can be classified based on their source of similarity and 2 schemes within the same similarity class can be assessed for their structural coherence based on group contiguity and compactness schemes with better structural coherence will also exhibit better fit with ib research models we document support for our theory in comparative analyses of regional schemes used to explain where us based mncs locate operations around the world geography culture and trade and investment based schemes with better structural coherence exhibit better initial fit with mnc location models and less change in fit after modest scheme refinement using a simulated annealing optimization algorithm our approach provides criteria for comparing similar regional grouping schemes and identifying best in class schemes tailored to models of mnc location choice and other ib research models

job moving residential moving and commuting a search perspective abstract we address the interrelationships between residential mobility labor market mobility and commuting the paper takes its starting point in recent findings in economic research which emphasise that job and residence relocation decisions imply forward looking decision making we examine job and residential mobility by means of bivariate models and interpret the outcomes in light of the search model

soft budget constraints and the property rights theory of ownership abstract modeling the government make or buy decision hart and colleagues hart o shleifer s and vishny r w 1997 the proper scope of government theory and an application to prisons quarterly journal of economics 112 1127 1161 assume government providers are exogenously more replaceable than private providers instead we posit government managers soft incentives arise endogenously from their lack of control rights because of rationally softer budget constraints

on the virtues of privatization when government is benevolent abstract this paper shows that privatizing a public firm can be welfare improving even if the government is a welfare maximizer we consider a setup where the firm s owner a profit maximizing entrepreneur or a benevolent government employs a manager who can invent and implement an innovative production technology wage arrangements are optimal given the verifiable information all parties behave rationally and the information structure is the same in both governance modes nevertheless privatization turns out to be preferable in a wide variety of situations government ownership yields the first best if producing under the old technology is not viable

are there lasting impacts of aid to poor areas abstract the paper re visits the site of a large world bank financed rural development program in china 10 years after it began and four years after disbursements ended the program emphasized community participation in multi sectoral interventions including farming animal husbandry infrastructure and social services data were collected on 2000 households in project and non project areas spanning 10 years a double difference estimator of the program s impact on top of pre existing governmental programs reveals sizeable short term income gains that were mostly saved only small and statistically insignificant gains to mean consumption emerged in the longer term though in rough accord with the average gain to permanent income the use of community based beneficiary selection greatly reduced the overall impact given that the educated poor were under covered the main results are robust to corrections for various sources of selection bias including village targeting and interference due to spillover effects generated by the response of local governments to the external aid

hidden impact household saving in response to a poor area development project abstract the possibility that poor households may prefer to save the income gains from a development project raises concerns about how well standard evaluation methods using data collected over relatively short periods can capture the true welfare impacts by the widely used difference in difference method the southwest china poverty reduction project had little current impact on the proportion of people in beneficiary villages consuming less than us 1 day despite a public outlay of us 400 million however the program had much larger impacts on incomes than consumptions uncertainty about the project s future impact probably made it hard for participants to infer the gain in permanent income so they saved a high proportion of the current income gains

finance and the sources of growth the authors evaluate whether the level of development in the banking sector exerts a causal impact on economic growth and its sources total factor productivity growth physical capital accumulation and private saving they use 1 a pure cross country instrumental variable estimator to extract the exogenous component of banking development and 2 a new panel technique that controls for country specific effects and endogeneity they find that banks do exert a large causal impact on total factor productivity growth which feeds through to overall gdp gross domestic product growth the long run links between banking development and both capital growth and private savings are more tenuous

riding the wave of urban growth in the countryside spread backwash or stagnation the advisability of an urban centered growth strategy to reap the benefits of urban agglomeration economies is much debated rural areas benefit when the growth spreads to the hinterlands especially within daily commuting distance yet in distant peripheral locations urban growth may create a backwash as households relocate to the urban center this study examines spread vs backwash as separate from long run distance from urban center trend effects using a novel canadian gis database the unique nation wide approach yields a spread and backwash rural growth topography that varies by distance from the urban center by urban population vs income growth and by size of rural community

the liability of good reputation a study of product recalls in the u s automobile industry in this paper we explore opposing theoretical claims about how organizational reputation affects market reactions to product defects on the one hand good reputation could be a disadvantage because expectations about product quality are more likely to be violated by defects in highly reputed products on the other hand a good reputation could be an advantage because of strong inertial effects on reputation orderings we empirically test these competing hypotheses using data on product recalls in the u s automobile industry from 1975 to 1999 our results support for the idea that reputation can be an organizational liability in that highly reputed firms suffer more market penalty as a result of their product recalls we also propose that the reputational effects are moderated by two important factors substitutability and generalism specialism our results show that having few substitutes with an equivalent level of reputation or a focused product identity stemming from specialism buffers the negative market reactions to product recalls we conclude with a discussion on the implications of these results for institutional reputation and status theories

wage stagnation rising inequality and the financial crisis of 2008 the most widely embraced explanations of the financial crisis of 2008 have centered upon inadequate regulation stemming from laissez faire ideology combined with low interest rates although these widely acknowledged causal factors are true beneath them lie deeper determining forces that have received less notice wage stagnation and a dramatic increase in inequality in the u s over the preceding 35 years wage stagnation and heightened inequality generated three dynamics that made the economy vulnerable to systemic dysfunction the first is that they constrained consumption reducing profitable investment potential in the real economy and thereby encouraging an every wealthier elite to flood financial markets with credit helping keep interest rates low encouraging the creation of new credit instruments and greater indebtedness and fueling speculation the second dynamic is that consumption externalities were generated forcing individuals to struggle harder to find ways to maintain the welfare of their families and maintain their relative social status the consequence was that over the preceding three decades household saving rates plummeted households took on ever greater debt and worked longer hours the third dynamic is that as the rich took larger shares of income and wealth they gained more command over ideology and hence politics reducing the size of government cutting taxes on the rich and reducing welfare for the poor deregulating the economy and failing to regulate newly evolving credit instruments flowed out of this ideology

one for all and all for one privatization and universal service provision in the postal sector universal service provision has a special role for the public utilities sector in many organization for economic co operation and development oecd countries these public utilities have largely been subject to privatization during the last 3 decades efficiency effects of privatization are widely documented while the impacts on the quality and accessibility of the universal service are not much examined by using a unique dataset on privatization for 21 countries over the period 1980 2007 for the postal sector we are able to show that privatization in particular formal privatization has led to a decrease in the quality of the universal service

testing limits to policy reversal evidence from indian privatizations abstract we examine the effect of regime change on privatization in the 2004 indian election the pro reform bjp was unexpectedly defeated by a less reformist coalition stock prices of government controlled companies that had been slated for privatization by the bjp dropped 3 5 relative to private firms government controlled companies that were under study for possible privatization fell 7 5 relative to private firms this is consistent with investor belief of a point of no return where advanced reforms are more difficult to reverse further analysis suggests that layoffs combined with the privatization announcement served as a credible commitment to privatize

leviathan resists the endogenous relationship between privatization and firm performance using a panel dataset of privatized cement firms in turkey this paper models and finds support for the simultaneous relationship between privatization and firm performance it is found that favorable short run performance weak market potential higher employment lower socio economic development concentrated voter preferences and weaker representation of right wing parties in the firms locality delay the timing of privatization the paper also finds that privatization increases output in the medium term by reducing the labor stock and promoting the adoption of more advanced technology such that production shifts from constant to decreasing returns to scale

the direction of causality between financial development and economic growth abstract this paper employs the geweke decomposition test on pooled data of 109 developing and industrial countries from 1960 to 1994 to examine the direction of causality between financial development and economic growth the paper finds that 1 financial development generally leads to economic growth 2 the granger causality from financial development to economic growth and the granger causality from economic growth to financial development coexist 3 financial deepening contributes more to the causal relationships in the developing countries than in the industrial countries 4 the longer the sampling interval the larger the effect of financial development on economic growth 5 financial deepening propels economic growth through both a more rapid capital accumulation and productivity growth with the latter channel being the strongest

towards an equilibrium level of market reform how politics affects the dynamics of policy change in this article we examine the dynamics of economic reforms that are implemented by incumbent policy makers interested in maintaining their political power we use a sample of 86 countries over a time period going from 1980 to 2001 and find that the achievement of an equilibrium level of market liberalization is highly costly our results are robust to endogenity and model specification

economic linkages between urban and rural regions what s in it for the rural urban rural interdependences are modelled based on wages cost of living and interregional migration and commuting rural to urban commuting generates a scenario where the relative level of urban

the effects and policy implications of state aids to industry an economic analysis state aids making eu policy properly reflect geography and subsidiarity the use of state aids to industry is a poorly understood part of competition policy currently the eu commission presumes that state aids distort competition yet it approves 98 of applications often for social or distributional reasons we argue that proper regulation of state aids should focus on two issues the externalities generated and the inefficiencies arising from failures in competition between governments we thus develop a new framework for eu policy and compare its implications with the existing practice of the eu commission timothy besley and paul seabright

currency crashes in emerging markets an empirical treatment we use a panel of annual data for over 100 developing countries from 1971 through 1992 to characterize currency crashes we define a currency crash as a large change of the nominal exchange rate that is also a substantial increase in the rate of change of nominal depreciation we examine the composition of the debt as well as its level and a variety of other macroeconomic factors external and foreign crashes tend to occur when output growth is low the growth of domestic credit is high and the level of foreign interest rates are high a low ratio of fdi to debt is consistently associated with a high likelihood of a crash

ownership and firm innovation in a transition economy evidence from china we examine innovation performance of firms in a transition economy from an ownership perspective we focus specifically on the relationship between ownership structures and firm innovation performance drawing on data from 548 chinese firms we find volume of patent registration to be most strongly influenced by foreign ownership in the firm along with firm affiliation within a business group the influence of state and institutional ownership on innovation performance is positive but lagged contrary to expectations insider ownership leads to lower innovation performance and concentrated ownership has no significant impact our study has two principal contributions firstly we utilize a comprehensive treatment of ownership characteristics overcoming weakness in previous studies that have used a more narrow focus on ownership type secondly we contribute to understanding of how firms in transition economies build indigenous capabilities for innovation by drawing attention to the interplay of foreign and domestic control of agents innovation

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

thresholds in the process of international financial integration abstract the financial crisis has re ignited the fierce debate about the merits of financial globalization and its implications for growth especially for developing countries the empirical literature has not been able to conclusively establish the presumed growth benefits of financial integration indeed a new literature proposes that the indirect benefits of financial integration may be more important than the traditional financing channel emphasized in previous analyses a major complication however is that there seem to be certain threshold levels of financial and institutional development that an economy needs to attain before it can derive the indirect benefits and reduce the risks of financial openness in this paper we develop a unified empirical framework for characterizing such threshold conditions we find that there are clearly identifiable thresholds in variables such as financial depth and institutional quality the cost benefit trade off from financial openness improves significantly once these threshold conditions are satisfied we also find that the thresholds are lower for foreign direct investment and portfolio equity liabilities compared to those for debt liabilities

estimating the benefits of targeted r d subsidies we study the expected welfare effects of targeted r d subsi dies using project level data from finland we model the application and r d investment decisions of firms and the subsidy granting decision of the public agency in charge of the program our model and institutional environment allow us to identify different benefits and costs of the r d subsidy program we find that expected effects of subsidies are very het erogeneous and estimated application costs low on average the social rate of return on targeted subsidies is 30 to 50 but spillover effects of subsidies are smaller than effects on firm profits

varieties of capitalism and the internationalization of state owned enterprises this article sheds light on how the internationalization of state owned enterprises is influenced by the state involvement in ownership and by the home country s institutional settings integrating international business literature with the debate on the varieties of capitalism we contend that state dominated enterprises internationalize more less than privately owned enterprises in coordinated liberal market economies whereas they exhibit an inconstant behavior in state influenced market economies our analysis on a sample of enterprises pertaining to 20 oecd countries supports our hypotheses this article adds to studies on the influence of institutions on firms internationalization and has implications for both managers and policymakers

rising household debt its causes and macroeconomic implications a long period analysis the article analyses the rise in household indebtedness from the point of view of its causes and long run macroeconomic implications the analysis is focussed on the us case differently from life cycle interpretations of the phenomenon and from interpretations in terms of erratic deviations of current income flows from their long run trend the rising household debt is viewed as the outcome of persistent changes in income distribution and growing income inequalities through household debt low wages appear to have been brought to coexist with relatively high levels of aggregate demand thus providing the solution to the contradiction between the necessity of high and rising consumption levels for the growth of the system s actual output and a framework of antagonistic conditions of distribution which keeps within limits the real income of the vast majority of society the question of the long run sustainability of this substitution of loans for wages is finally discussed copyright the author 2008 published by oxford university press on behalf of the cambridge political economy society all rights reserved oxford university press

does privatization remove restrictive working practices evidence from uk establishments this study investigates the links between privatization and changes in working practices using data from the uk 1990 workplace employees relations survey privatization raises the probability of an establishment of experiencing reduced job demarcation and or increased flexibility in the use of the workforce by managers after exploration no clear association is found between ownership and the level of restrictive working practices

privatization public offerings and political objectives this paper empirically analyses the political and economic objectives underlying privatization on the stock market particularly the factors of sips underpricing are explained and the study analyses whether the change of political parties in government play a role on the issue the paper has two main findings first larger initial returns occurred in the early stages of privatization second the change of government from left wing to right wing did not lead to significantly higher levels of underpricing the results show that governments are quite pragmatic with respect to underpricing maximizing proceeds from sips shows to be more important than ideological differences between parties in government

toward a theory of regulation for developing countries following jean jacques laffont s lead the efficient operation and expansion of infrastructures in developing countries is crucial for growth and poverty reduction however recent reforms aimed at improving the performance of these sectors have had limited success evidence suggests that in many instances this was because the traditional regulatory theory relied on by policymakers was not suitable for the institutional context in developing countries this article surveys more recent theoretical work focusing on problems with regulation in these countries at the heart of the survey is the work of jean jacques laffont who in the last decade of his life set about developing a theoretical framework for regulation in developing countries we consider the implications of his work which focused on the key institutional limitations faced in developing countries we then discuss where experience suggests that there are important omissions from this modeling bringing in extensions and alternative approaches pursued by other authors we conclude by summarizing the key ways in which regulatory policy will be different when institutions are weak overall we find that an understanding of the institutional context and its implications are crucial when designing a regulatory framework for developing countries

the politician and his banker should the european union grant state aid through an institution like the european investment bank this paper evaluates the efficiency of different measures for granting state aid we use a theoretical model with firms that differ in their creditworthiness and compare different types of subsidies with indirect subsidization through public banks we find that in a large parameter range the politician prefers public banks to direct subsidies because they avoid windfall gains to entrepreneurs and they economize on screening costs for similar reasons they may increase social welfare relative to subsidies one important prerequisite for this result is that public banks must not be allowed to fully compete with private banks however from a welfare perspective a politician uses public banks inefficiently often

pandering and pork barrel politics abstract we develop a model of pork barrel politics in which a government official tries to improve her reelection chances by spending on targeted interest groups the spending signals that she shares their concerns we investigate the effect of such pandering on public spending pandering increases spending relative to a non accountable official one who does not have to run for reelection if either the official s overall spending propensity is known or if it is unknown but the effect of spending on the deficit is opaque to voters by contrast an unknown spending propensity may induce the elected official to exhibit fiscal discipline if spending is transparent

assessing the losses in euro area potential productivity due to the financial crisis in this article we show that the recent financial crisis has significantly affected the potential total factor productivity tfp of the four largest euro area economies as well as that of the rest of the euro area we used a reduced form equation of tfp based on an approach recently developed by cahn and saint guilhem 2010 our empirical findings show that the permanent impact on potential tfp varies across countries from 3 9 points to 1 3 points in q2 2012 when these losses are incorporated tfp gaps develop closely in line with capacity utilization rates cur moreover in the case of france including cur in our tfp model improves the quasi real time reliability of tfp gap estimates

capital investments and price agreements in semicollusive markets we consider a semicollusive market where firms compete in a long run variable such as investment in capital or capacity and collude with respect to a short run variable such as price or market shares our concern is with the potential destabilizing effect of the long run competition on the short run collusion we show that under a certain refinement of the equilibrium the set of equilibria is reduced to include just the one in which the collusive agreement is stable we then lend some support to the phenomenon of an inverse association between advertising and competition by investigating the conditions under which overcapitalization occurs in the above equilibrium

do or die strategic decision making following a shock event little attention has been directed towards investigating how senior managers and boards approach strategic decision making when dealing with shock events as compared to strategic decision making in a stable environment this paper presents evidence to suggest that strategic decision making following a shock event involves a more intuitive less analytical and less consultative approach while decision making in a stable environment is characterised by a more cooperative formal and analytical process decision making following a shock event tends to be simplified and fast whereas decision making in a stable environment tends to be comprehensive and slow furthermore the strategic role of the board transforms following a shock event from a limited involvement in strategy setting to a strong involvement in the setting of strategy this research has important management implications signifying that crisis management must increasingly focus on building an organisation s ability to reach swift decisions in crisis situations and avoid analysis paralysis

the information technology revolution and the stock market evidence since 1968 the ratio of stock market capitalization to gdp has varied by a factor of 5 in 1972 the ratio stood at above unity but by 1974 it had fallen to 0 45 where it stayed for the next decade it then began a steady climb and today it stands above 2 we argue that the it revolution was behind this and moreover that the capitalization gdp ratio is likely to decline and then rise after any major technological shift the three assumptions that deliver the result are

full privatization through controlling rights transfer in china the extent of its success this article investigates the effect of the second step of privatization in china which is full privatization through controlling rights transfer after share issue partial privatization it finds that fully privatized firms perform worse than state controlled enterprises expropriation by private block shareholders is greater than that by state block shareholders furthermore increase in expropriation is negatively related to performance change the results suggest that full privatization may not yield the expected efficiency gains in transition economies with weak legal system they also emphasize the importance of preventing private block shareholders from exploiting minority shareholders in the process of full privatization

how do mncs vote in developing country elections research on multinational corporations mncs and host government political risk in developing countries has largely ignored local electoral politics economic policies and the mnc investment ince

financial crisis and global imbalances its labour market origins and the aftermath the objective of this paper is to articulate how the 2007 09 economic crisis is rooted in the uneven income distribution and inequality caused by the current finance led model of growth the process of financialisation that took place in the 1980s in the usa and then in the european union was coupled with labour flexibility wage moderation and soaring profits the flexibility agenda of the labour market and the end of wage increases along with the contraction of indirect wages i e public social expenditure diminished workers purchasing power this was partly compensated with increased borrowing opportunities and the boom of credit consumption all of which helped workers to maintain unstable consumption capacity however in the long term unstable consumption patterns derived from precarious job creation job instability and poor wages have weakened aggregate demand hence labour market issues such as flexibility uneven income distribution poor wages and the financial crisis are two sides of the same coin both have a direct impact on the economic crisis and the current global imbalances copyright the author 2012 published by oxford university press on behalf of the cambridge political economy society all rights reserved oxford university press

the effectiveness of r d subsidies a meta regression analysis of the evaluation literature widespread and increasing public subsidy for research and development r d has given rise to a large and growing number of evaluation studies while economic theory identifies market failures that justify public support theory also suggests reasons why returns might be disappointing similarly the empirical literature investigated 52 micro level studies published since 2000 on either input or output r d reports a wide range of findings the lack of conclusiveness both of theory and of the evaluation literature motivate this meta regression analysis mra this study contributes to policy debate by identifying a representative subsidy effect after controlling for publication selection bias and for a wide range of sample and study heterogeneities mra findings reject crowding out of private investment by public subsidy but reveal no evidence of substantial additionality in addition among the research practices explaining the heterogeneous effects reported in this literature those related to the treatment of unobservable firm heterogeneity are particularly important

privatization financial development property rights and growth abstract this study analyzes how prevailing institutional arrangements i e property rights contracting rights political institutions and corporate governance practices affect privatized firms performance capital markets development and economic growth most of the studies surveyed show that privatization enhances privatized firms performance efficiency and profitability which percolates to economic growth privatized firms performed better in countries with better regulatory and legal frameworks partial privatization may be beneficial in countries with weak institutions namely the french civil law countries the stronger the economic and the governing institutions the easier it is for privatized firms to thrive and contribute to economic growth overall privatization allows firms to achieve improved efficiency while driving the development of the financial sector

learning to carry the cat by the tail firm experience disasters and multinational subsidiary entry and expansion we investigate whether firm experience with discontinuous risks particularly high impact disasters that are episodic and difficult to anticipate moderates the relationship between disasters foreign entry and expansion decisions using a panel data set with 57 500 observations from 106 large european multinational corporations and their subsidiaries operating across 109 countries from 2001 to 2007 we find that although discontinuous risk was negatively related to firm entry and expansion firms that had experience with high impact disasters were more likely to expand in countries experiencing disasters

financial intermediation capital composition and income stagnation the case of europe abstract we look into the role of financial intermediation in inducing the european financial crisis of 2008 by exploring the effects of overall lending and the allocation of credit to specific categories of borrowers namely households vs firms we find that for the eu26 during the period 1995 2008 excessive household leverage through mortgage lending exerted a crowding out effect on availability of credit to support innovation and productive investment the crowding out effect ultimately translated into a gdp growth that was decoupled from real household income in this article we explain that shifting credit towards mortgages and away from corporate projects is consistent with rational behaviour based on historical trends aimed at minimizing short term risk for each individual bank nevertheless as a whole the sum of individual risk reducing attitudes generated a long term systemic risk

a causal model of linkages among environmental dimensions macro organizational characteristics and performance an integrative model of relationships among environmental dimensions diversification strategy firm size structural divisionalization and economic performance was developed and tested using environmental and organizational data from 110 large manufacturing firms the results suggested that among those organizations 1 higher levels of environmental instability were associated with lower levels of divisionalization and diversification 2 strategy followed structure and 3 size did not mediate the strategy structure relationship furthermore both environmental instability and diversification were positively related to market determined performance and instability was negatively related to operating performance the results provided support for portions of each of three models the external control strategic management and inertial models

the structure of political institutions and effectiveness of corporate political lobbying this paper investigates how the structure of political institutions influences the effectiveness of corporate political lobbying by shaping the veto points and entry points that lobbying firms encounter and require respectively when attempting to influence public policies in so doing this study deepens our understanding of the strategic implications of institutional environments using large sample and cross country firm level data we find that the influence of firms lobbying activities on public policies is weakened when there are tighter constraints generated as a result of greater political partisan competition and more subnational government tiers we find that the negative association between the effectiveness of lobbying and political partisan competition is particularly pronounced in countries with lower electoral accountability and that the negative association between the effectiveness of lobbying and subnational government tiers is particularly pronounced in more centralized politi

share issue privatizations as financial means to political and economic ends abstract this study examines how political and economic factors affect the offer price share allocation and other terms governments choose when they privatize state owned enterprises via a public share offering using a 59 country sample of 630 share issue privatizations sips with total proceeds of over 446 billion during the period 1977 1997 we find that governments consistently underprice sip offers tilt their share allocation patterns to favour domestic investors impose control restrictions on privatized firms and typically use fixed price offers rather than book building or competitive tender offers all to further political and economic policy objectives

public and private sector wages interactions in a general equilibrium model it is common wisdom that public sector wages are not determined in the same way as private sector wages at the same time the empirical evidence available for oecd countries finds a strong positive correlation between public and private sector wages in this paper we develop a model that is consistent with a political economy view of the determination of public sector wages and employment while being consistent with the said empirical evidence public finance constraints are crucial in booms governments expand employment and wages while in downturns lack of tax revenues forces the government to cut back the wage bill

studying the effects of household and firm credit on the trade balance the composition of funds matters i introduction the implications of higher levels of financial development have been investigated in a large number of studies both in the empirical growth and in the financial crisis literatures 1 a widely used indicator of financial development is the relative importance of loans issued by commercial banks and other financial intermediaries to the entire private sector that is the private credit to gross domestic product gdp ratio following the definition by king and levine 1993a 1993b a higher level of private credit indicates better developed financial markets and easier credit access for businesses and households yet these two types of borrowers vary in terms of the use of credit and might have different effects on macroeconomic performance in this article we study the link between the components of private credit and the trade balance we focus on the distinction between household and corporate sector credit and investigate whether these two types of credit have adverse effects on the trade balance of goods and services this article builds on a theoretical framework by backus kehoe and kydland 1994 who study the dynamics of the trade balance we extend their work by assuming two types of households one being credit constrained due to enforcement problems we then ease the credit constraints on households and firms and study the hypothesized effects by comparative statics analysis more specifically we argue that an increase in household credit raises the demand for consumption goods whereas firm credit growth raises the demand for investment goods while both can have a negative impact on the trade balance the difference is important because borrowing to finance consumption does not add to the productive capacity of an economy and to greater export earnings frankel and rose 1996 firm credit on the other hand has the potential to increase investment by relaxing the credit constraints on firms thus increasing exports and trade balance exploring the decomposition of private credit in emerging countries is relevant for several reasons first the effects of the increased level of household credit in emerging economies are still ambiguous on the one hand better access to credit helps credit constrained households to smooth out their consumption on the other hand it boosts spending and hence decreases savings in an influential paper japelli and pagano 1994 show that liquidity constraints on households raise the saving rates they also find empirical evidence that an increase in household credit decreases saving rates for a sample of organization for economic cooperation and development oecd countries yet the effects of household credit in emerging economies have not been explored second if we find that household and firm credit have different impacts on the trade balance of goods and services this underlines the importance of the decomposition of private credit which will also have key implications for the financial development growth link the level of private credit in emerging economies has been rising steadily after the financial liberalization process that took place in early 1990s however higher levels of total private credit do not necessarily imply higher levels of firm credit in fact data for emerging economies show that household credit rather than firm credit has been rapidly increasing in the past decade the higher share of household credit in the total private credit can crowd out investment especially in countries where stock and bond markets are not well developed to finance investment finally a possible negative link between household credit and trade balance has important policy implications for emerging economies as argued by wood 1997 the international monetary fund continues to place most emphasis within its programmes on the stabilisation objective and therefore the core of imf programmes continues to be based upon the restriction of domestic credit creation

determinants of state aid to firms the case of the european automotive industry using an original database for the 1992 2008 period we investigate the determinants of state aid to the automotive industry in the european union eu we find evidence that eu policies have been effective in reducing state aid and re orienting it toward horizontal objectives however national politics still have considerable relevance during election years governments are more generous and this is particularly true in eu countries with proportional representation finally a strategic game between countries seems to take place whereby a country s decision to grant aid seems to be responsive to aid previously granted by other member states

firm growth and ownership in transition countries this paper uses data from firm level surveys to investigate firm performance for state owned privatized and de novo private firms in romania bulgaria and hungary after controlling for life cycle size and product market effects i find that de novo private firms outperform privatized and state owned ones c 1997 elsevier science s a

an evaluation of the swedish system of active labour market programmes in the 1990s we investigate the presence of short and long term effects from joining a swedish labor market program vis a vis more intense job search in open unemployment overall the impact of the program system is found to have been mixed joining a program has increased employment rates among participants a result robust to a misclassification problem in the data on the other hand it has also allowed participants to remain significantly longer on unemployment benefits and more generally in the unemployment system this being particularly the case for those entitled individuals entering a program around the time of their unemployment benefits exhaustion

an examination of changes in specialists posted price schedules new york stock exchange specialists disseminate information to market participants by displaying price schedules consisting of bid prices ask prices bid depths and ask depths we examine how specialists update these price schedules in a simultaneous equations model we find that changes in the best prices and depths on the limit order book have a significant impact on the posted price schedule while the effects of transactions and order activity are secondary furthermore we show that specialists revise prices and depths differently but find no evidence that they revise the price schedule in response to changes in inventory article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

courts and banks effects of judicial enforcement on credit markets the cost of enforcing contracts is a key determinant of market performance we document this point with reference to the credit market in a model of opportunistic debtors and inefficient courts according to the model improvements in judicial efficiency should reduce credit constraints and increase lending with an ambiguous effect on interest rates that depends on banking competition and on the type of judicial reform these predictions are supported by panel data on italian provinces in provinces with longer trials or large backlogs of pending trials credit is less widely available

economic growth and regional disparities in slovenia banerjee b and jesenko m economic growth and regional disparities in slovenia regional studies regional disparities in gross domestic product gdp per capita and labour utilization have widened in slovenia since 1999 however regional gaps in per capita household disposable income have declined because of higher social transfers to the poorest regions inter regional commuting and other factors econometric analysis shows that there is heterogeneity in steady states across regions and regional growth in per capita gdp and labour productivity are converging to these region specific steady states time series approach to convergence confirms stochastic trend convergence in both indicators for several regions labour productivity growth has been driven by capital deepening and growing importance of total factor productivity tfp improvement

financing patterns around the world are small firms different using a firm level survey database covering 48 countries we investigate how financial and institutional development affects financing of large and small firms our database is not limited to large firms but includes small and medium size firms and data on a broad spectrum of financing sources including leasing supplier development and informal finance small firms and firms in countries with poor institutions use less external finance especially bank finance protection of property rights increases external financing of small firms significantly more than of large firms mainly due to its effect on bank finance small firms do not use disproportionately more leasing or trade finance compared with larger firms so these financing sources do not compensate for lower access to bank financing of small firms we also find that larger firms more easily expand external financing when they are constrained than small firms finally we find suggestive evidence that the pecking order holds across countries

the financial and operating performance of privatized firms during the 1990s this study compares the pre and postprivatization financial and operating performance of 85 companies from 28 industrialized countries that were privatized through public share offerings for the period from 1990 through 1996 we document significant increases in profitability output operating efficiency and dividend payments and significant decreases in leverage ratios for our full sample of firms after privatization and for most subsamples examined capital expenditures increase significantly in absolute terms but not relative to sales employment declines but insignificantly combined with results from two previous directly comparable studies these findings strongly suggest that privatization yields significant performance improvements during the past two decades the privatization of state owned enterprises has moved from being a radical almost desperate policy initiative of the thatcher government in britain to being an accepted economic policy for governments of all ideological stripes according to gibbon 1998 860 billion has been raised by governments worldwide through privatizations with the bulk of this total coming since 1987 and at least one commentator roche 1996 predicts that no less than 6 trillion will be raised through privatizations over the next two decades in 1997 alone sales of public enterprises totaled a record 161 billion worldwide with more than 110 billion of the total coming during the second half of the year and 1998 s total of almost 140 billion indicates that the pace shows no sign of slackening as we approach a new millennium

a theory of privatisation public enterprises around the world have proved to be highly inefficient primarily because they pursue strategies such as excess employment that satisfy the political objectives of politicians who control them privatization of public enterprises can raise the cost to politicians of influencing them since subsidies to private firms necessary to force them to remain inefficient are politically harder to sustain than wasted profits of the state firms in this way privatization leads to efficient restructuring of firms moreover privatization is more effective when combined with a tight monetary policy and when the new owners of firms are profit maximizing investors rather than their employees or even managers copyright 1996 by royal economic society

assessing the effect of public subsidies on firm r d investment a survey this survey examines the empirical literature on the relationship between public r d subsidies and private r d investment over the past five decades the survey reveals a considerable heterogeneity of empirical results that cannot be explained fully by methodological issues we aim to provide further explanations of the possible causes of that heterogeneity in particular we emphasise a set of issues that in our view are critical to understanding the potential effect of public r d subsidies on private r d spending special attention is paid to the dynamic aspects and composition of firm r d the constraints faced by the firm such as financial constraints and the amount and source of public subsidies none of these issues have been investigated in depth we formulate a set of research assumptions to guide future empirical research in this field

privatization and the economic performance of irish sugar greencore as one of ireland s largest agribusiness companies the irish sugar company played a key role in the country s economic development in the twentieth century the company was privatized in 1991 under the new name greencore and has since transformed from a largely commodity based agribusiness into an international convenience food company this article analyses the financial and economic performance of the company in the 10 years before and after privatization it finds that the change from public to private ownership was not strongly associated with improved financial performance and productivity as the company had experienced rapid growth and improvement in the pre privatization period these findings run counter to perspectives such as public choice theory that suggest a positive relationship between privatization and company performance performance in the post privatization period was strongly influenced by greater exposure to market forces in the company s expanding food division however it is sur

the politician and his banker how to efficiently grant state aid abstract politicians should spend money as efficiently as possible but what is the best method of granting state aid to firms we use a theoretical model with firms that differ in their success probabilities and compare different types of direct subsidies with indirect subsidies through bank loans we find that for a large range of parameters subsidies through banks entail higher social welfare than direct subsidies avoiding windfall gains to entrepreneurs and economizing on screening costs for selfish politicians subsidizing a bank has the additional advantage that part of the screening costs are born by private banks consequently from a welfare perspective politicians use subsidized banks inefficiently often

the impact of state aid on the survival and financial viability of aided firms we estimate the causal impact of restructuring aid granted by the european commission between 2003 and 2012 on the survival and financial viability of aided firms using a comprehensive dataset we find that restructuring aid increases a firm s average survival time by 8 to 15 years and decreases the hazard rate by 58 to 68 percent depending on the definition of firm survival further analysis finds strong support that in the longer run aid receiving firms have a significantly higher probability to improve their financial viability than the counterfactual group

government in transition abstract the speed of economic reforms is not the only important determinant of the success of the transition to a market economy the transition of government from a communist state to an institution supporting a market economy is as critical survey evidence shows that russia lags significantly behind poland in the transition of its government which may account for its inferior economic performance despite adopting similar economic reforms i argue that the lack of turnover of old communist politicians and the creation of inappropriate electoral and fiscal incentives for these politicians may account for the poor performance of the russian government and suggest some strategies for improving the situation

the information technology revolution and the stock market technological progress comes in waves the british industrial revolution 1760 1850 ushered in cort s puddling and rolling process for making iron crompton s mule for spinning cotton and the watt steam engine the second industrial revolution 1890 1930 witnessed the rise of electricity the internal combustion engine and the chemical industry the birth of information technology it may herald the start of a third industrial revolution a new technology or product is often developed by the single entrepreneur who initially finds it hard to get funds develop the product and find customers but if the product is good customers eventually line up and investors flock in other firms then move in to make the product and may drive the innovator out or acquire him whether he reaches the initial public offering ipo stage or is acquired by a listed firm though it takes time for the innovator to add value to the stock market indeed the innovation may at first reduce the market s value because some firms usually large or old will cling to old technologies that have lost their momentum figure 1 plots the market value of u s equity relative to gdp this paper argues that a the market declined in the late 1960 s because it felt that the old technologies either had lost their momentum or would give way to it and that b it innovators boosted the stock market s value only in the 1980 s if the stock market provides a forecast of future events then the recent dramatic upswing represents a rosy estimate about growth in future profits for the economy this translates into a forecast of higher output and productivity growth holding other things equal such as capital s share