Progress 10/01/02 to 09/30/07
Outputs
I have completed a number of research papers related to the project (see the list of publications below). I have also completed the preparation of databases related to research on labor shares and offshoring. Finally, I have prepared databases on China and India for analysis regarding globalization and labor market outcomes. Dissemination has included a number of presentations on the topic of globalization and labor market outcomes. I gave presentations at the following institutions in 2007: Stanford University (talk on offshoring), UC Berkeley (talk on offshoring and seminar on Globalization and Poverty), University of Michigan (talk on offshoring), Yale University (talk on globalization and poverty, talk on offshoring), Columbia University (talk on offshoring), New School for Social Research (talk on offshoring), Harvard University (talk on foreign investment and trade), and the Universityof Paris (talk on offshoring).
Impacts
I published preliminary results from the project on offshoring in several journals in 2007. The project on labor standards and the effects of the anti-sweatshop movement was adopted as a case study by Harvard Business School., The research on offshoring and US employment focuses on identifying firms as either horizontal or vertically integrated. I use the extent of within firm trade between the parent and the affiliate as a way to distinguish horizontal from vertically integrated firms. This distinction allows me to understand why there is substitution between employment at home and abroad for some types of firms and complementarity for others. This is an important development and has allowed me to reconcile the existing literature, which reported contradictory results. I show that employment at home and abroad are complementary for vertical activities but substitutes for horizontal activities. I also developed a database to analyze the impact of offshoring on U.S.
jobs. My new research measures the impact of offshoring by US manufacturing enterprises on domestic wages. I separate the effects of offshoring in high income locations and low-income regions, paying particular attention to the impact of affiliate activity located in China. This disaggregation into location allows me to assess the claims that the establishment of subsidiaries in low income regions or in China has put downward pressure on the wages of US workers, especially those with limited education. To control for educational background and worker characteristics, I merge datasets with individual characteristics of workers, from the CPS, with the Bureau of Economic Analysis (BEA) data. The BEA data, which is available annually from 1982 to 2002, has the only comprehensive coverage of the offshore activities of US firms.
Publications
- Harrison, A. with Margaret McMillan, 2007, Outlining a Research Agenda on the Links Between Globalization and Poverty,
- Harrison, A.with Margaret McMillan and Clair Null, 2007, US Multinational Activity Abroad and US Jobs: Some Stylized Facts, Industrial Relations.
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Progress 01/01/06 to 12/31/06
Outputs
I have completed my analysis of the impact of foreign investment flows on host country credit constraints. Two papers published in top economics journals (one in the Journal of International Economics and the other in the Journal of Development Economics) showed that the gains from foreign investment inflows depended critically on the policy environment already in place. If there were pre-existing distortions due to interest rate ceilings and credit rationing, incoming foreign investors exacerbated those distortions by crowding out domestic investors in local credit markets. This is evidence consistent with the notion of 'policy complementarity': policies towards foreign investment lead to beneficial outcomes when combined with other policies which create a less distorted environment vis-a-vis domestic credit. I have also completed several other papers and a book examining the impact of globalization on inequality and poverty. The book's themes were highlighted in the
Washington Post, the New York Times, and the recent NBER Digest. The evidence in the book suggests that foreign investment is generally associated with reductions in poverty but increasing inequality. New research emerging from these studies will now focus on the effects of outward foreign investment on the home country, examining labor market effects of outbound foreign investment. Preliminary results suggest that outward foreign investment reduces labor demand at home, but that other factors have a more significant effect.
Impacts
This project has assessed the extent to which foreign investors confer benefits on domestic markets in the host countries where they locate. The evidence suggests that foreign investment, while not associated with reducing credit constraints, does confer some other important benefits. For example, the evidence suggests that increasing foreign investment in the host country is associated with falling poverty. In addition, the evidence is consistent with higher wages and better working conditions for workers employed by foreign multinationals. Foreign firms do not infer benefits in terms of relaxed credit because they have an incentive to borrow on local credit markets in order to mitigate exchange rate risk.
Publications
- McMillan, M, Harrison, A. 2007. Outlining a Research Agenda on the Links between Globalization and Poverty. Forthcoming in Journal of Economic Inequality forthcoming
- McMillan, M. Harrison, A., Null, C. 2006. US Multinational Activity Abroad and US Jobs: Some Stylized Facts. Industrial Relations.
- McMillan, M., Harrsion, A. 2006. Dispelling Some Myths about Offshoring. Academy of Management Perspectives. Volume 20, Number 4, pages 6-22.
- Harrison, A. 2007. Globalization and Poverty. Forthcoming in the National Bureau of Economic Research, University of Chicago Press, Chicago.
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Progress 01/01/05 to 12/31/05
Outputs
Firms often cite financing constraints as one of their primary obstacles to investment. Direct foreign investment (DFI), by bringing in scarce capital, may ease host-country firms' financing constraints. Alternatively, if foreign firms borrow heavily from domestic banks, DFI may exacerbate financing constraints by crowding host country firms out of domestic capital markets. The goal of this project is to identify the impact of incoming foreign investment on domestic firms' credit constraints. The project has identified different conditions under which foreign investment has offsetting effects on domestic credit constraints. A cross-section time series analysis for a number of countries suggests that foreign investment eases credit constraints for multinational firms. However, a case study focusing on the Ivory Coast shows that when domestic markets are characterized by financial distortions, such as ceilings on local interest rates, foreign investors exacerbate those
distortions and crowd domestic investors out of local credit markets. This implies that foreign investors should be carefully managed under distorted regimes, and can have adverse effects on domestic firms under such conditions. Two papers have been completed and published in the top developing and international economics journals. The project has been expanded to examine the effects of foreign expansion abroad in the form of creating foreign affiliates on domestic employment at home. This allows us to answer whether different modes of globalization hurt employment and wages at home, or whether foreign expansion in fact helps the domestic labor force.
Impacts
While many policy makers are optimistic about the gains from attracting foreign investment, that optimism may be misguided if foreign investors crowd domestic credit markets and reduce access to much needed financing for domestic enterprises. This project shows that foreign investors only confer gains to domestic competitors when the domestic banking sector is not distorted. Under regimes with distorted interest rates which set borrowing rates too low, foreign investment can be harmful for local enterprises competing for rationed foreign credit. Consequently, this research provides a warning for governments seeking to maximize the gains from incoming foreign investors.
Publications
- Harrison, A., Scorse, J. 2005. "Improving the Conditions of Workers? Minimum Wage Legislation and Anti-Sweatshop Activism" California Management Review, Winter 2005.
- Harrison, A., Tang, H. 2005. "Liberalization of Trade: Why so Much Controversy?," in Economic Growth in the 1990s: Learning from a Decade of Reform, edited by N. Roberto Zagha, World Bank, Washington, D.C., April 2005.
- Bartel, A., Harrison, A. 2005. "Ownership versus Environment: Disentangling the Sources of Public Sector Inefficiency," Review of Economics and Statistics, February 2005, 87(1): 135-147.
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Progress 01/01/04 to 12/31/04
Outputs
In 2004, I expanded the scope of the original project to focus on other outcomes associated with the expansion of foreign direct investment. While the original project focused primarily on the fact that foreign direct investment could ameliorate local credit constraints by making available new sources of capital or could in fact crowd domestic firms out of domestic credit markets, I am now also looking at the impact of foreign investment on (1) poverty alleviation and (2) general labor market conditions. Preliminary evidence suggests that foreign investors have played an important role in alleviating poverty in countries as diverse as Poland, India, China, Indonesia, and Mexico, contrary to some anecdotal accounts of "exploitation" by multinational companies. These conclusions and the accompanying evidence will be published by me as a book by the University of Chicago Press. Second, in 2004, I also embarked on an additional extension examining the impact of DFI on
general labor market conditions. To the extent that firms find it easier to relocate across countries than individuals do, this may give capital greater bargaining power than workers in negotiations on compensation, leading to a fall in the compensation going to workers relative to firms. In 2004, I assembled data to test these theories at both the firm level, using previously unexploited BEA data available in Washington, D.C. and cross-country data available from the UN.
Impacts
Through this project, I expect the agricultural sector to benefit in the long term from evidence that direct foreign investment either exacerbates or alleviates credit constraints.
Publications
- Harrison, A.E. 2004. Impact of Globalization: Comments and Discussion, in Brookings Trade Forum 2004. Edited by Susan Collins, Washington, D.C.: Brookings.
- Harrison, A.E. and Tang, H. 2004. Liberalization of Trade: Why so Much Controversy?, in The Growth Experience: Lessons from the 1990s, World Bank, Washington, D.C.
- Harrison, A.E. 2004. Globalization and Poverty: An Overview, forthcoming, in Globalization and Poverty, Chicago: University of Chicago Press.
- Harrison, A.E. 2004. Editor. Globalization and Poverty, Chicago: University of Chicago Press.
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Progress 01/01/03 to 12/31/03
Outputs
As can be seen from the above list of publications and presentations, we now have completed two studies analyzing the impact of foreign investment on domestic firm capital constraints. We have completed the modelling part of the exercise, using a dynamic optimization framework which yields a first order condition that can be used as a test of the validity of the model. Following the model development, we have tested it both on an african country, the Ivory Coast, as well as on a panel dataset across countries. Interestingly, the results differ for the two empirical exercises. For the Ivory Coast, a very poor country, the results suggest that french foreign investors crowded domestic investors out of domestic capital markets. Across middle income and higher income countries, however, the results suggest that foreign investment has eased credit constraints for domestic enterprises. We conclude that the benefits of foreign investment are likely to be higher in countries
without distorted domestic capital markets and where domestic investors are capable of competing with foreign entrants.
Impacts
Through this project, I expect the agricultural sector to benefit in the long term from evidence that direct foreign investment either exacerbates or alleviates credit constraints.
Publications
- Harrison, A. and McMillan, M., 2003. Does Foreign Direct Investment Affect Domestic Firm Credit Constraints? October 2003. Journal of International Economics, Volume 61, Issue 1, Pages 73-100.
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Progress 01/01/02 to 12/31/02
Outputs
No progress to date.
Impacts
(N/A)
Publications
- No publications reported this period
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