Category: World Economy

What Determines the Location Choice of Foreign Investment in R&D ?

There is an ongoing discussion on this blog about attracting foreign investment in R&D in Ireland. In a recent research paper we analysed the location decisions of foreign affilates in the R&D sector incorported in the European Union over 1999-2006. Our research results suggest that, on average the location probability increases with market potential, agglomeration economies, R&D intensity and proximity to centres of  research excellence.  The determinants of the location choice of R&D foreign affiliates vary depending on the country of origin of the foreign investor. Thus, it appears that agglomeration externalities and business R&D intensity had a higher positive effect on the propensity to locate in an EU region in the case of multinationals from North America in comparison to European based multinationals. Proximity to centres of research excellence had a positive and significant effect on the location choice for North American R&D multinationals but no significant effect in the case of  European R&D multinationals.

Our research results suggest a number of policy implications. First, policy aiming at increasing the R&D intensity of regions are likely to foster the attractiveness of regions to R&D foreign investment. Second, positive externalities from clustering of R&D foreign affiliates outweigh competition effects. Third, given the heterogeneous behaviour of foreign investors, differentiated policy depending on target partner countries can increase the success of such policies.

O’Rourke on trade in the Financial Times

Kevin’s comparison of the trajectory of trade in the Great Depression and the current depression (which I think was stimulated by a post on this blog) gets good coverage in the Financial Times today.

G20 and Reforming Banking Regulation

The communiqué for the latest G20 summit is available here. It contains lots of the usual waffle about co-operation on this that and the other, but I think the most important element of the discussions relates to the reform of banking regulation.

Continue reading “G20 and Reforming Banking Regulation”

Why did world trade fall so rapidly during the present crisis?

Lots of explanations have been advanced as to why world trade fell so rapidly during 2008-9 — far more rapidly than at the start of the Great Depression. Problems associated with trade finance, and the vertical disintegration of modern manufacturing production, are the two that come up most frequently.

I’d like to offer another, more banal explanation: the composition of world trade is very different today than 80 years ago. In 1929, just 44 per cent of world merchandise trade involved manufactured goods. That proportion increased to 70 per cent in 2007. The reason this matters is that manufacturing is more volatile than the rest of the economy, and it was the output of and trade in manufactures, rather than primary products, which collapsed during the Great Depression.

Between 1929 and 1930, the volume of world trade in manufactures fell almost 15%, while trade in non-manufactures actually increased by 1% (I have to say I wonder about that, but this what what my source says). Weighting these two indices by the shares of manufactures and non-manufactures in total world trade, you get an implied fall in total world trade of 6 per cent in 1930 versus the 7.5 per cent actually experienced. Repeating the exercise, but this time using 2007 weights rather than 1929 weights, yields a counterfactual decline in world trade of 10 per cent in 1930 — equal to the decline the WTO is predicting for 2009. The changing composition of world trade can thus explain a lot, it seems.

An implication is that whenever the world economy recovers, world trade will recover with it, unless a surge of protectionism occurs in the meantime.

Learning from the Financial Crisis: Globally and Locally

Colm McCarthy’s suggestion that an inquiry into what went wrong is gaining some level of support in political circles.  While there is plenty of material to digest in terms of what went wrong locally, there is also a lot of interest in understanding what went wrong in the international financial system.  Part of the debate concerns the role of economists, especially in terms of forecasting such crises.

A reader recommends this blog post which is critical of mainstream macroeconomic models.  Of course, Willem Buiter of the LSE issued a notorious critique a while back.

More recently,  a group associated with the British Academy wrote a letter to the Queen to answer her question to Luis Garicano of the LSE as to “if these things are so large, how come everyone missed it?”, while Robert Lucas defended mainstream macroeconomics in the Economist magazine in this article.

An important dimension of this debate is the relative roles of economists in policy organisations, the financial sector and academia in assessing the risks of a crisis and speaking out on these risks. While some of the debate has focused on the role of academic economists, it is maybe more difficult to evaluate from the outside the performance of economists in policy organisations in providing risk assessment, since their advice is often confidential.   In this regard,  the external evaluations of the performance of the IMF in previous international crises sets an interesting precedent, with the Independent Evaluation Office now playing this role on a regular basis.

In relation to Ireland,  the testimony of Kevin Cardiff of the Department of Finance at a recent Oireachtas Committee hearing is quite interesting in explaining the evolution of the thinking of the Department in the run up to the crisis.  You can read the transcript here.