Global shocks and networks: firm-level evidence on productivity, FDI and trade

Gamtkitsulashvili, Tea (2024) Global shocks and networks: firm-level evidence on productivity, FDI and trade. PhD thesis, London School of Economics and Political Science.

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Abstract

In recent decades, the benefits of globalisation have been accompanied by several adverse consequences, including income and spatial disparities, the economic dominance of a few large firms and countries’ exposure to foreign shocks. The global financial crisis propelled these issues to the centre of political and economic discussions, which were further heightened by recent global challenges such as US-China trade tensions, the Brexit vote, the Covid-19 pandemic, and Russia’s invasion of Ukraine. Within this evolving environment, significant questions arise regarding productivity divergence between the global frontier and domestic firms, adjustments of frontier firms’ foreign investments, and impact of geopolitical tensions on firms’ international trade. The thesis investigates these questions and adds to the existing literature in three ways. Firstly, the analysis centres on firms by examining firm-to-firm productivity spillovers, firms’ trade costs, and decision-making on Foreign Direct Investment (FDI) location choices. Secondly, the thesis introduces perspectives and theories from the economics of networks and social networks into the debates and analysis. Specifically, it brings the interactions among economic agents — individuals, firms, and nations — at the centre of these questions. Finally, it employs novel data to uncover the new mechanisms and compares them with established mechanisms in the literature. The thesis demonstrates that within a more interconnected but volatile global economy, firms rely on their international networks to tap into the benefits of globalisation and adjust to international disruptions. However, global shocks pose potentially larger challenges for firms in developing countries, which are less equipped to adjust to the rapidly evolving global landscape. Specifically, Chapter two delves into the role that social networks play in the productivity spillovers from MNCs to local firms, emphasizing their complementary relationship with geographical proximity and supply chain links. While MNCs’ FDI has a potential to offer valuable productivity benefits to local economies, these advantages are neither automatic nor universal. This chapter measures the impact of social networks established at the director level with MNCs on domestic firms productivity dynamics and shows how these connections are utilized to capitalize on opportunities arising from FDI. Notably, the effect is strengthened by geographical proximity. Additionally, technology dissemination through director-level networks is most rapid for same-sector firms, albeit less persistent. Productivity gains from connections with MNC subsidiaries in sectors backwardly and forwardly linked take longer to manifest, possibly due to the time needed to establish supply chain relationships with MNC subsidiaries. Overall, the findings suggest that executive-level social networks are crucial in influencing firms’ productivity dynamics, serving as a significant complement to spatial proximity and supply chain linkages. Chapters three and four explore the context of global shocks: the economic fragmentation and uncertainty following the Brexit referendum, and the geopolitical tensions arising from Russia’s invasion of Ukraine in February 2022. Chapter three investigates how firms’ social networks in foreign countries are utilized during periods of changing institutional and policy environments. It examines the Brexit vote, a significant example of economic fragmentation in recent decades among developed countries. The Chapter scrutinizes evolving factors affecting firms’ location decisions and underscores the changing role of cross-border social networks during times of uncertainty. Additionally, the Chapter evaluates different methods for assessing international social networks by comparing traditional measures in the literature with an innovative approach based on inter-firm connections at the director level. This method uncovers factors contributing to the growing relevance of social networks in firms’ foreign operations amid uncertainty. Chapter four delves into how geopolitical tensions influence firms international trade costs and specifically examines transport and trade networks channel. The analysis explores the ramifications of Russia’s invasion of Ukraine and the subsequent sanctions on the international trade costs faced by firms in Georgia, a neighboring country strategically located on a crucial trade route linking Europe and Asia, with robust economic ties to the EU. The analysis highlights the reorganization of trade and transport networks following the war and sanctions, which has inadvertently positioned various countries as key trade intermediaries. The Chapter reveals a sharp rise in import unit values from the EU to Georgia and attributes this rise to transport bottlenecks and reconfiguration of transport sector operations along the Middle Corridor connecting Europe and Asia. This research underscores the changes in the transport sector and the deficiencies in transport and logistics infrastructure as possible contributors to the heightened trade costs.

Item Type:	Thesis (PhD)
Additional Information:	© 2024 Tea Gamtkitsulashvili
Library of Congress subject classification:	H Social Sciences > HD Industries. Land use. Labor H Social Sciences > HF Commerce H Social Sciences > HG Finance
Sets:	Departments > Geography and Environment
Supervisor:	Crescenzi, Riccardo and Rodríguez-Pose, Andrés
URI:	http://etheses.lse.ac.uk/id/eprint/4818

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