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.
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.
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.
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.
By exploiting variation both in mortgage payoffs and mortgage interest rate resets, we find that a decline in mortgage payments induces a significant increase in nondurable goods spending, even when households have substantial amounts of liquidity. Following mortgage payoff, households increase consumption expenditures by 61% of the original payment. In comparison, households increase consumption by only 36% in response to a transitory payment adjustment induced by interest rate changes. Households with a higher payment-to-income ratio have a significantly lower marginal propensity to consume (MPC). These results have practical implications for policy markers seeking to design consumption boosting policies and are important for understanding how changes in monetary policy may affect consumer spending patterns.
We study the factors behind the public sector premium in Albania and Sri Lanka, the group heterogeneity in the premium, the sources of public sector wage compression, and the impact of this compression on the way individuals self-select between the public and the private sector. Similar to other countries, the public sectors in Albania and Sri Lanka pay higher wages than the private sector, for all but the most valued employees. While half of the premium of Sri Lanka and two-thirds of it in Albania are explained by differences in the occupation-education-experience mix between the sectors, and the level of private sector informality, the unexplained part of the premium is significant enough to affect the preferences of working in the public sector for different groups. We show that the compressed distributions of public sector wages and benefits create incentives for positive sorting into the public sector among most employees, and negative sorting among the most productive ones.
Listen to a podcast with author Ljubica Nedelkoska as she discusses the factors behind public sector wage premiums.
This policy analysis attempts to answer three questions: First, what is the extent of smuggling and customs tax evasion in the Philippines? Second, how can customs improve its risk management system in the short term to minimize officers’ discretion and improve trade facilitation without abdicating its other mandates of revenue generation and border control? Third, what types of reforms and political commitment are necessary in the long term to restore public trust in the Bureau of Customs?
While foreign direct investment may play a transformative role in the development of economies, foreign-owned firms are also said to be more “footloose” than comparable local firms. This paper uses a semi-parametric approach to examine the link between firm ownership and exit rates, tracking a set of export-oriented firms operating in Sri Lanka in years between 1978 and 2017. We find that foreign firms are in fact 42-56% more likely to exit than local firms, but only for their first years of existence. In their later years, foreign firms are actually less likely to exit than local firms, though this late advantage is not statistically significant when conditioned on the firms’ initial characteristics (such as employment size). This pattern supports the theory that foreign firms face a steeper early learning curve in adapting to local conditions.
In August 2017, CID began focused work with Sri Lanka’s Ministry of Primary Industries (MPI), specifically with their Agriculture Sector Modernization Project(ASMP) team. MPI requested Harvard assistance in the analysis of constraints and opportunities in the agriculture and fisheries sector, specifically in non-plantation, export-oriented activities. As a first step, CID worked with MPI research officers to compare the more than twenty agricultural and fishery subsectors being considered under the ASMP. These subsectors were analyzed across over 53 quantitative and qualitative variables, measuring market demand, feasibility, current strength, and poverty considerations. The analysis ultimately identified spices (especially pepper), aquaculture (especially shrimp) and plantains and bananas as especially promising subsectors for future research and ASMP activities. More broadly, the analysis identified the basic market and feasibility considerations that can provide a starting point for value chain analyses and public-private strategic planning. This presentation was prepared jointly by MPI project officers and CID Growth Lab researchers in order to inform MPI initiatives, both within the ASMP and beyond.
Insufficient export diversification is a binding constraint to economic growth in Sri Lanka
The Harvard CID growth diagnostic found that with wages in traditional export sectors now below average Sri Lankan wages, new higher-wage export industries are required
Overseas Sri Lankans (OSL) have the potential to create new export industries in Sri Lanka
Diasporas were involved in the export-led development of India, Taiwan, and China by bringing industry knowhow and market connections to their home countries
There are large, well-educated OSL communities living in the US, UK, Canada, and Australia that have the industry knowhow to assist in export-led growth in Sri Lanka
OSL can have the biggest impact on diversifying exports if they return to start firms in new export industries rather than working with firms while based overseas
OSL can play a useful role connecting the existent Sri Lankan IT export sector to overseas markets, but they cannot start firms in new export industries from abroad
If OSL return to start firms they can “seed” a new export industry that grows organically through the diffusion of knowhow
The pharmaceutical sector is an example of an industry with high potential to be “seeded” by returning OSL entrepreneurs
Preliminary policy recommendations focus on removing barriers and catalyzing latent motivations to facilitate OSL return entrepreneurship:
The Department for Immigration and Emigration should continue to ease border processes for OSL through dual citizenship and the OSL lifetime resident visa
The Board of Investment should orient part of its “one-stop-shop” to dealing specifically with OSL issues
The Ministry of Foreign Affairs should utilize its diplomatic network to engage potential OSL entrepreneurs to catalyze latent motivations to return
*This is an edited version of a Policy Analysis written in fulfilment of the requirements for the degree of Master in Public Administration in International Development, John F. Kennedy School of Government, Harvard University
In August 2016, the Government of Sri Lanka (GoSL) and the Building State Capability program of CID convened five teams of civil servants, tasking them with solving issues related to investment and export promotion. One of these teams, the “Targeting Team,” took on the task of formulating and executing a plan to identify promising new economic activities for investment and export promotion in Sri Lanka. With the assistance of CID’s Growth Lab, the Targeting Team assembled and analyzed over 100 variables from 22 datasets, studying all tradable activities and 29 representative subsectors. Their analysis highlighted the potential of investment related to electronics, electrical equipment and machinery (including automotive products), as well as tourism. Ultimately, the team’s recommendations were incorporated in GoSL strategies for investment promotion, export development, and economic diplomacy; extensions of the research were also used to help plan new export processing zones and target potential anchor investors.
This report summarizes the methodology and findings of the Targeting Team, including scorecards for each of the sectors studied.
Economies grow by adding new products and services to their production portfolio, not by producing more of the same kinds of products. The key to such diversification is access to know-how, but know-how often has to come from abroad. This is because it is often easier to move brains to new countries than to move new know-how into brains. In the experience of Singapore, India, Vietnam and most other dynamic economies, three channels of know-how transfer stand out: FDI, immigration and diaspora networks.
In this lecture, Professor Hausmann explores the relationship between economic development and the accumulation of know-how. In particular, he discusses how to tackle Sri Lanka’s limited export diversification.
Video - Acessing Know-how for Growth in Sri Lanka
Video - Full Q&A on Sri Lanka's export diversification
This note collects evidence related to possible constraints to economic growth, and their relation with GoSL’s industrial zone development agenda. We find that new zones are especially well-suited to help address Sri Lanka’s lack of industrial land and high policy uncertainty, both of which may be holding back growth. Less clear, however, are zones’ impact on Sri Lanka’s limited transport links beyond the Western Province. Finally, partnering with well-connected zone management companies may also help create opportunities to connect with firms in new, non-traditional sectors.
Throughout 2016, CID conducted a growth diagnostic analysis for Sri Lanka in collaboration with the Government of Sri Lanka, led by the Prime Minister’s Policy Development Office (PDO), and the Millennium Challenge Corporation (MCC). This presentation report aggregates collaborative quantitative and qualitative analysis undertaken by the research team. This analysis was originally provided to the Government of Sri Lanka in April 2017 in order to make available a record of the detailed technical work and CID’s interpretations of the evidence. A written executive summary is provided here as a complement to the detailed presentation report. Both the report and the executive summary are structured as follows. First, the analysis identifies Sri Lanka’s growth problem. It then presents evidence from diagnostic tests to identify what constraints are most responsible for this problem. Finally, it provides a summary of what constraints CID interprets as most binding and suggests a “growth syndrome” that underlies the set of binding constraints.
In brief, this growth diagnostic analysis shows that economic growth in Sri Lanka is constrained by the weak growth of exports, particularly from new sectors. Compared to other countries in the region, Sri Lanka has seen virtually no diversification of exports over the last 25 years, especially in manufactured goods linked through FDI-driven, global value chains. We found several key causes behind this lack of diversified exports and FDI: Sri Lanka’s ineffective land-use governance, underdeveloped industrial and transportation infrastructure, and a very high level of policy uncertainty, particularly in tax and trade policy. We believe that these issues trace back to an underlying problem of severe fragmentation in governance, with a critical lack of coordination between ministries and agencies with overlapping responsibilities and decision-making authority.
Many countries, like Sri Lanka, are trying to diversify their economies but often lack the capabilities to lead diversification programs. One of these capabilities relates to targeting new sectors to promote and pursue through a diversification policy: countries know they are ‘doomed to choose’ sectors to target,1 but lack effective capabilities to do the targeting. This paper narrates a recent (and ongoing) initiative to establish this kind of capability in Sri Lanka. The initiative adopted a Problem Driven Iterative Adaptation (PDIA) process, where a team of Sri Lankan officials worked with Harvard Center for International Development (CID) facilitators to build capabilities. The paper tells the story of this process, providing documented evidence of the progress over time and describing the thinking behind the PDIA process. It shows how a reliable targeting mechanism can emerge in a reasonably limited period, when a committed team of public officials are effectively authorized and engaged. The paper will be of particular interest to those thinking about targeting for diversification and to those interested in processes (like PDIA) which are focused on building state capability and fostering policy implementation in public contexts.
1 The term here comes from Hausmann, R. and Rodrik, D. 2006. Doomed to Choose: Industrial Policy as Predicament. Draft.
Many countries, like Sri Lanka, are trying to diversify their economies but often lack thecapabilities to lead diversification programs. One of these capabilities relates to engaging new investors—in new sectors—to bring their FDI and know-how to a new country and kick-start new sources of activity. This paper narrates a recent (and ongoing) initiative to establish this kind of capability in Sri Lanka. The initiative adopted a Problem Driven Iterative Adaptation (PDIA) process, where a team of Sri Lankan officials worked with Harvard Center for International Development (CID) facilitators to build capabilities over a six-month period. The paper tells the story of this process, providing documented evidence of the progress over time (and describing thinking behind the PDIA process as well). It shows how an investment engagement approach can emerge in a reasonably limited period, when a committed team of public officials are effectively authorized and engaged. The paper will be of particular interest to those thinking about investor engagement challenges and to those interested in processes (like PDIA) focused on building state capability and fostering policy implementation in public contexts.
Many countries, like Sri Lanka, are trying to diversify their economies but often lack thecapabilities to lead diversification programs. One of these capabilities relates to preparing the investment climate in the country. Many governments tackle this issue by trying to improve their scores on ‘Doing Business Indicators’ which measure performance on general factors affecting business globally (like how long it takes to open a business or pay taxes). Beyond these common indicators, however, investors face context specific challenges when working in countries like Sri Lanka that are not addressed in global indicators. Governments often lack the capabilities to identify and resolve such issues. This paper narrates a recent initiative to establish these capabilities in Sri Lanka. The initiative adopted a Problem Driven Iterative Adaptation (PDIA) process, where a team of Sri Lankan officials worked with Harvard Center for International Development (CID) facilitators to build capabilities over a six-month period. The paper tells the story of this process, providing documented evidence of the progress over time (and describing thinking behind the PDIA process as well). The paper will be of interest to those thinking about the challenges associated with creating a climate that is investor or business friendly and to those interested in processes (like PDIA) focused on building state capability and fostering policy implementation.
Sri Lanka has an excessively complex tariff structure that distorts the structure of the economy in important ways. It is a priority for the Government of Sri Lanka (GoSL) to rationalize the system in order to facilitate a transition to greater economic diversification, stronger export growth, and the emergence of new, higher paying jobs. Sri Lanka’s New Trade Policy makes this tariff rationalization a priority. It also recognizes that tariff rationalization should go hand in hand with new trade adjustment assistance measures to support the adjustment of firms and of people. The New Trade Policy outlines the basic contours of tariff rationalization and trade adjustment assistance measures but does not provide a detailed roadmap.
This discussion paper was prepared at the invitation of the Ministry of Development Strategies and International Trade (MoDSIT) as part of the Center for International Development’s research project on sustainable and inclusive economic growth in Sri Lanka. The aim of the paper is to study policy tools that the GoSL could use to structure trade adjustment assistance in the context of tariff rationalization. In order to accomplish this aim, we begin by outlining the type of tariff rationalization that needs to take place in order to address key constraints to growth in a way that is sensitive to both government revenue needs and political economy considerations. We stress that tariff rationalization must be approached in a holistic way that treats the various tariffs and para-tariffs as interrelated, rather than an approach that attempts to address one part of the system at a time. A holistic approach would provide many degrees of freedom to solve the underlying problems in the system while increasing revenues and potentially generating strong public support. Critically, a holistic approach would allow for a single tariff rationalization plan to be phased in over a period of years in a predictable way, whereas attempts to rationalize the system one part at a time would lead to extreme uncertainty.
With the principles of smart tariff rationalization in place, we draw upon international lessons and Sri Lanka’s own institutional capabilities to recommend a two-tiered approach to helping industries and workers adjust. In each case, the first tier represents low-cost measures that can begin in the short term to help industries and workers, regardless of whether they will be negatively impacted by tariff rationalization, while the second tier of assistance applies only to trade-affected industries and workers and can be developed in the medium term. For industries, Tier 1 support involves the use of an innovative process of public-private problem solving of industry-specific constraints, and Tier 2 support involves the use of special safeguard measures to provide an objective and transparent process for determining which industries require longer phase out periods for tariff reductions versus the tariff rationalization plan. For workers, Tier 1 support involves improved access labor market information and training opportunities through the development of regional (or local) job centers. Tier 2 support provides government funding for training and job placement services. We conclude that this package of trade adjustment assistance measures could be used to complement a holistic tariff rationalization plan. But we caution that attempts to rush the implementation of these measures without careful design and communication could deeply undermine the potential for the reforms to work in solving underlying economic problems.
Immigration and Economic Transformation: A Concept Note
Ljubica Nedelkoska, Tim O’Brien, Ermal Frasheri, Daniel Stock
In May 2017, CID prepared a concept note that described the connection between immigration and knowhow transfer internationally and profiled the current state of low immigration levels and immigration policy issues in Sri Lanka. The note identifies immigration policy reform as an important area of opportunity for unleashing higher levels of entrepreneurship and the introduction of new knowhow for economic diversification in Sri Lanka, but stops short of providing specific recommendations. Instead, the note lays out broad ideas for making immigration policy more flexible and encourages the Government of Sri Lanka to activate a cross-government policy team that is capable of developing reforms that meet Sri Lanka’s particular needs.
A Comparative View on of Immigration Frameworks in Asia: Enhancing the Flow of Knowledge through Migration
Ermal Frasheri, Ljubica Nedelkoska, Sehar Noor, Tim O’Brien
Later in 2017, at the request of a policy team of the Government of Sri Lanka, CID conducted research to compare immigration policy frameworks in other countries in Asia to understand promising policy options for Sri Lanka. Our resulting research note focuses on Indonesia, Vietnam, Thailand, Malaysia, Hong Kong, and Singapore. We find that the immigration policies of the six countries vary across numerous dimensions as each country prioritizes attracting the talents, skills and resources it needs from abroad in different ways. These variations provide a range of examples that may be relevant to decision-makers in Sri Lanka. Additionally, we find an emerging pattern among the six countries where more developed economies tend to have more elaborate immigration systems and target a more diverse set of people. By looking at available data, we also confirm that more elaborate immigration systems are closely associated with more actual immigration, higher presence of foreign firms, and higher levels of foreign direct investment (FDI) among this group of countries. Based on the comparative analysis, together with the issues identified by the Department of Immigration and Emigration’s Gap Analysis, it is possible to identify a number of principles around which future immigration reform in Sri Lanka should be organized.