Steinwender, Claudia
(2014)
International and innovation activities of firms.
PhD thesis, London School of Economics and Political Science.
Abstract
The economic environment in which a firm operates is constantly changing. This thesis contains three essays to examine how firms adapt their innovation and international
activities to a variety of external changes. The first paper, “Information Frictions and the Law of One Price: ‘When the States and the Kingdom became United’”, shows how information frictions affect the exporting behavior of merchants, exploiting a unique historical experiment: the transatlantic telegraph, established in 1866. Using a newly collected data set on cotton trade based on historical newspapers, I find that information frictions result in large and volatile deviations from the Law of One Price. There are also real effects, because exports
respond to information about foreign demand shocks, and average exports increase after the telegraph and become more volatile. I provide a model in which exporters
use the latest news about a foreign market to forecast expected selling prices when their exports arrive at the destination. Their forecast error is smaller and less volatile the more recent the available information. The welfare gains from the telegraph are estimated to be around 8% of annual export value.
The second paper, “Survive another day: Using changes in the composition of investments to measure the cost of credit constraints” is joint work with Luis Garicano.
We introduce a novel empirical strategy to measure the credit shocks that were triggered by the recent financial crisis: Theoretically, we show that credit shocks affect long term investments by more than short term ones. Credit shocks can then be measured within firms by the relative drop of long run relative to short run investments; using firm-times-year fixed effects to absorb idiosyncratic demand shocks. Using data on Spanish
manufacturing firms we find that credit constraints are equivalent to an additional tax rate of around 11% on the longest lived investment.
While the trade literature has established a positive impact of globalization on the productivity of firms, there is lacking consensus about the underlying mechanism at work: Trade theory focuses on a market access mechanism, but empirical papers point out that import competition matters as well. The third paper, “The roles of import competition and export opportunities for technical change”, conducts a “horse race” between the two mechanisms. Using Spanish firm level data, I find robust evidence that access to export markets leads to productivity increases, but only for firms that were already highly productive before. The evidence on import competition is weaker and very heterogeneous, pointing towards an omitted variable bias in earlier papers.
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