Publications

RESEARCH SPOTLIGHT

What Would Happen if Business Travel Stopped?Black silhouettes of people in an airport with orange sunrise through window


International travel is ubiquitous in business firms. In light of the recent shutdowns of air travel due to COVID-19 and the prevalence of virtual communication, however, one might question its value. New research from Michele Coscia, Franke Neffke, and Ricardo Hausmann - recently published in Nature Human Behaviour - shows that business travel, and its subsequent transfer of knowhow, actually drives economic growth. Further, the researchers quantify the value of business travel by estimating the loss in global GDP if it were to stop.

RECENT PUBLICATIONS

Shen, J.H., Wang, H. & Lin, S.C.-C., 2021. Productivity Gap and Inward FDI Spillovers: Theory and Evidence from China. China & World Economy , 29 (2) , pp. 24–48. Publisher's VersionAbstract
This paper constructs a two-stage sequential game model to shed light on the spillover effect of inward FDI on the efficiency of domestic firms in host countries. Our model shows that, given an optimal joint-venture policy made by foreign firms, the impact of the spillover effect of inward FDI is contingent upon the productivity gap between the domestic firms and foreign ones. In particular, we demonstrate that the spillover effect of inward FDI varies negatively with the productivity gap between domestic low-productivity firms and foreign firms but works in the opposite way for high-productivity firms. This suggests that once the productivity gap widens, the entry of foreign firms will increase the efficiency of high-productivity firms but reduce the efficiency of low-productivity firms. In support of our theoretical model, we provide robust empirical results by using the dataset of annual survey of Chinese industrial enterprises.
Toward an empirical investigation of the long-term debt and financing deficit nexus: evidence from Chinese-listed firms
Jiang, X., Shen, J.H. & Lee, C.-C., 2021. Toward an empirical investigation of the long-term debt and financing deficit nexus: evidence from Chinese-listed firms. Applied Economics. Publisher's VersionAbstract
As the literature has studied the financing method of Chinese-listed firms for a long time, but with inconclusive indications, this research thus adopts non-financial Chinese-listed firms’ data from 2003 to 2015 to investigate the relationship between long-term debt financing and financing deficit. We pay particular attention to three channels (ownership concentration, market timing, and state ownership) that potentially affect the adoption of long-term debt financing when there is a financing deficit. The empirical analysis documents a positive relationship between financing deficit and changes in the long-term debt ratio in our sampled firms for both static and dynamic panel models. Moreover, among the three channels we show that state ownership has the strongest positive impact on the adoption of long-term debt financing, followed by ownership concentration, while the weakest channel is the market timing’s negative effect. In general, our empirical analysis finds that the important external financing method of long-term debt is most likely to be impacted by the state ownership aspect.
O'Clery, N., Yildirim, M.A. & Hausmann, R., 2021. Productive Ecosystems and the arrow of development. Nature Communications , 12. Publisher's VersionAbstract

Economic growth is associated with the diversification of economic activities, which can be observed via the evolution of product export baskets. Exporting a new product is dependent on having, and acquiring, a specific set of capabilities, making the diversification process path-dependent. Taking an agnostic view on the identity of the capabilities, here we derive a probabilistic model for the directed dynamical process of capability accumulation and product diversification of countries. Using international trade data, we identify the set of pre-existing products, the product Ecosystem, that enables a product to be exported competitively. We construct a directed network of products, the Eco Space, where the edge weight corresponds to capability overlap. We uncover a modular structure, and show that low- and middle-income countries move from product communities dominated by small Ecosystem products to advanced (large Ecosystem) product clusters over time. Finally, we show that our network model is predictive of product appearances.

Listen to the authors discuss their findings in this Growth Lab Podcast.

Jäggi, A., Schetter, U. & Schneider, M.T., 2021. Inequality, Openness, and Growth through Creative Destruction.Abstract
We examine how inequality and openness interact in shaping the long-run growth prospects of developing countries. To this end, we develop a Schumpeterian growth model with heterogeneous households and non-homothetic preferences for quality. We show that inequality affects growth very differently in an open economy as opposed to a closed economy: If the economy is close to the technological frontier, the positive demand effect of inequality on growth found in closed-economy models may be amplified by international competition. In countries with a larger distance to the technology frontier, however, rich households satisfy their demand for high quality via importing, and the effect of inequality on growth is smaller than in a closed economy and may even be negative. We show that this theoretical prediction holds up in the data, both when considering growth in export quality at the industry level and when considering growth in GDP per capita.
Macroeconomic Rationales for Public Investments in Science
Gersbach, H., Schetter, U. & Schneider, M.T., 2020. Macroeconomic Rationales for Public Investments in Science. Economic Inquiry , 59. Publisher's VersionAbstract
What is the economic rationale for investing in science? Based on an open economy model of creative destruction, we characterize four key factors of optimal investment in basic research: the stage of economic development, the strength of the manufacturing base, the degree of openness, and the share of foreign‐owned firms. For each of these factors, we analyze its bearings on optimal basic research investment. We then show that the predicted effects are consistent with patterns observed in the data and discuss how the factor‐based approach might inform basic research policies.
Shen, J.H., 2020. Supply-Side Structural Reform and Dynamic Capital Structure Adjustment: Evidence from Chinese-Listed Firms. Pacific-Basin Finance Journal , 65. Publisher's VersionAbstract

The literature extensively discusses the increasing commitment toward comprehensive structural reform of China’s economy as it targets to achieve high quality and sustainable economic growth. This research investigates the inherent relationship between supply-side structural reform (SSSR) and dynamic capital structure adjustment in Chinese-listed firms. Our results show that SSSR’s introduction has significantly improved the adjustment speed toward the optimal debt ratio, especially for firms with high indebtedness and low investment performance. Importantly, China’s bond market plays a crucial role through SSSR for firms’ debt ratio to adjust toward their optimal level. However, there is no such evidence among state-owned enterprises (SOEs), suggesting that the structural reform concerning corporate capital structure for SOEs is more challenging and longstanding when compared with non-SOEs.

Shen, J.H., 2020. Towards a Dynamic Model of the Industrial Upgrading with Global Value Chains. The World Economy. Publisher's VersionAbstract

This research constructs a simple dynamic model to illustrate the micro‐mechanism of industrial upgrading along the global value chains. Our model predicts that as firms move up from downstream to upstream stages, (a) there is higher profitability if and only if the following three conditions are satisfied. First, the increasing rate of sunk cost (including R&D expenditure) over sequential stages of production cannot be sufficiently large (endogenous sunk cost effect). Second, the decreasing rate of change of intermediate input demand with respect to the price set by firms at a production stage cannot be sufficiently high (intermediate input price effect). Third, the decreasing rate of change of intermediate input demand with respect to the pricing dynamics over the sequential stages of production cannot be sufficiently large (sequential pricing uncertainty effect); (b) total cost is lower if and only if the decreasing rate of change of input demand with respect to the price is sufficiently large; (c) output is higher if and only if and the decreasing rate of change of input demand with respect to the price is not sufficiently large; and (d) the price decreases. We show that the empirical patterns revealed in China are consistent with our model's predictions.

Coscia, M., et al., 2020. The Node Vector Distance Problem in Complex Networks. ACM Computing Surveys , 53 (6). Publisher's VersionAbstract

We describe a problem in complex networks we call the Node Vector Distance (NVD) problem, and we survey algorithms currently able to address it. Complex networks are a useful tool to map a non-trivial set of relationships among connected entities, or nodes. An agent—e.g., a disease—can occupy multiple nodes at the same time and can spread through the edges. The node vector distance problem is to estimate the distance traveled by the agent between two moments in time. This is closely related to the Optimal Transportation Problem (OTP), which has received attention in fields such as computer vision. OTP solutions can be used to solve the node vector distance problem, but they are not the only valid approaches. Here, we examine four classes of solutions, showing their differences and similarities both on synthetic networks and real world network data. The NVD problem has a much wider applicability than computer vision, being related to problems in economics, epidemiology, viral marketing, and sociology, to cite a few. We show how solutions to the NVD problem have a wide range of applications, and we provide a roadmap to general and computationally tractable solutions. We have implemented all methods presented in this article in a publicly available open source library, which can be used for result replication.

Hartog, M., Lopez-Cordova, J.E. & Neffke, F., 2020. Assessing Ukraine's Role in European Value Chains: A Gravity Equation-cum-Economic Complexity Analysis Approach.Abstract
We analyze Ukraine's opportunities to participate in European value chains, using traditional gravity models, combined with tools from Economic Complexity Analysis to study international trade (exports) and Foreign Direct Investment (FDI). This toolbox is shown to be predictive of the growth and entry of new exports to the EU's Single Market, as well as foreign direct investments from the Single Market in Ukraine. We find that Ukraine has suffered from a decline of trade with Russia, which has led not only to a quantitative but also a qualitative deterioration in Ukrainian exports. Connecting to western European value chains is in principle possible, with several opportunities in the automotive, information technology and other sectors. However, such a shift may lead to a spatial restructuring of the Ukrainian economy and a mismatch between the geographical supply of and demand for labor.
Schetter, U. & Tejada, O., 2020. On Globalization and the Concentration of Talent: A General Result on Superstar Effects and Matching.Abstract
We analyze how globalization affects the allocation of talent across competing teams in large matching markets. Focusing on amplified superstar effects, we show that a convex transformation of payoffs promotes positive assortative matching. This result holds under minimal assumptions on how skills translate into competition outcomes and how competition outcomes translate into payoffs. Our analysis covers many interesting special cases, including simple extensions of Rosen (1981) and Melitz (2003) with competing teams. It also provides new insights on the distributional consequences of globalization, and on the role of technological change, urban agglomeration, and taxation for the composition of teams.
revised October 2020
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