Research

Openness to Foreign Firms, Industrialization and Aggregate Growth

Abstract. This paper investigates the impact of openness to foreign firms on aggregate productivity in the context of Vietnam, a fast-growing economy. The analysis focuses on Vietnam's policy reforms between 2000 and 2015, aimed at reducing barriers for foreign firms in the manufacturing sector. I use firm-level data and develop a multi-sector model of structural transformation and production heterogeneity in which domestic and foreign firms make decisions on entry and technology investment while facing different institutional distortions. Consistent with the reforms' objective, I find that measured distortions affecting foreign firms were initially larger but substantially decreased to domestic levels over time. The model shows that this reduction in measured distortions to foreign firms substantially increases manufacturing productivity by 64 percent via two channels: (1) improving resource allocation across foreign and domestic firms and (2) incentivizing technology upgrades and more entry of higher-productivity foreign firms. Using difference-in-differences estimation leveraging staggered policy rollouts across locations, I also find significant indirect positive effects of the reforms on agricultural and service productivity. These indirect effects further amplify economy-wide productivity gains through structural transformation.

Heterogeneous Paths of Structural Transformation [SSRN], Rej&R at International Economic Review

Abstract. I establish new facts and explanations on the heterogeneous paths of structural transformation across countries. First, many countries exhibit flat-manufacturing profiles without noticeable signs of deindustrialization, which differ from the conventional steep-manufacturing hump-shaped profiles in advanced economies. Second, substantial heterogeneity exists in the labor allocation within services sector as flat-manufacturing countries tend to allocate substantially more labor into low-skilled services compared to steep-manufacturing countries. Third, heterogeneous structural transformation paths are prevalent among both earlier and later developers and not subject to the timing of development. Using a standard model of structural transformation, I find that observed differences in sectoral productivity growth are not quantitatively sufficient to generate the heterogeneous paths of structural transformation across countries. Instead, differences in relative productivity levels between manufacturing and low-skilled services account for around the majority, around 70%, of the heterogeneity, suggesting that country-specific factors are key. I show that the observed heterogeneous paths of structural transformation contribute substantially to economic growth outcomes across countries.

The Micro and Macro Productivity of Nations [NBER Working Paper], submitted
with Stephen Ayerst and Diego Restuccia

Abstract. We examine aggregate productivity differences across nations using cross-country firm-level data and a quantitative model of production heterogeneity with distortions featuring operation decisions (selection) and productivity-enhancing investments (technology). Empirically, less developed countries feature higher distortions and larger dispersion in firm-level productivity, mostly resulting from the higher prevalence of unproductive firms. Quantitatively, measured cross-country differences in the elasticity of distortions with respect to firm productivity generate the bulk of empirical patterns and over two-thirds of cross-country labor productivity differences. Both selection and technology channels are important. Variation in static misallocation also plays an important role, albeit smaller.

Lobbying, Innovation and Aggregate Productivity
with Nasir Hossein Dad

Abstract. We study the impact of firms lobbying activities on innovation and aggregate productivity in the United States. We build a quantitative model where firms make decisions about lobbying and R&D investments to grow. Lobbying can either complement R&D by increasing its returns or substitute for R&D as an alternative way to boost profits, making the net effect theoretically ambiguous. To determine which effect dominates on average, we use firm-level lobbying data and a shift-share instrumental variable strategy to estimate the causal effect of lobbying on R&D expenditure. We find that lobbying significantly reduces R&D expenditure at the firm level. We calibrate the model to the U.S. economy and find that eliminating lobbying would lead to a 3.5% increase in aggregate productivity. The gains are primarily driven by improvement in firm-level productivity distribution, through an increase in firm-level innovation. We then use the model to evaluate the impacts of U.S. Senator Elizabeth Warren’s proposal to tax lobbying progressively and find that such a policy could increase aggregate productivity in the U.S. by 1.57%.

Resource Allocation, Technology Adoption, and Productivity: A Quantitative Analysis with Panel Farm-Level Data [Slides]
with Diego Restuccia

Abstract. We examine how resource allocation across production units shapes technology adoption and productivity growth, combining a unique panel dataset of the universe of Canadian farms spanning 1986 to 2006 with a quantitative model of heterogeneous producers. The period features the advent and rapid diffusion of a major new seeding technique, zero tillage, whose use expanded from zero percent of cultivated land in 1986 to 60 percent by 2006. We document substantial technology adoption, land consolidation, and productivity growth, facilitated by an economic environment characterized by relatively high allocative efficiency, whereby more productive farms operate at a larger scale. Empirically, we find that adopting zero-tillage raises farm-level productivity substantially. Through quantitative analysis, we estimate that zero-tillage adoption accounts for roughly 35 percent of the near doubling of agricultural productivity over the period and 45–70 percent of the observed structural transformation. We show that high allocative efficiency was crucial for the widespread adoption of technology, which would have nearly disappeared with correlated distortions commonly documented in developing countries. We also show that technological progress can be a powerful driver of catch-up growth in developing economies with low correlated distortions.

Farm Size, Climate Adaptation and Unequal Climate Damages Across Countries
with Tasso Adamopoulos, Hyungju (Henry) Kim, Matteo Rapagna and Diego Restuccia

Abstract. We examine how climate damages differ across countries at different stages of development through differences in farm structure and adaptation. Low-income countries are characterized by smaller, more subsistence-oriented farms and higher agricultural employment, facing greater exposure to food insecurity. Using farm-level evidence from Italy, we document that smaller farms invest substantially less in adaptation technologies and consequently experience larger climate-related productivity losses. We incorporate this evidence into a structural transformation model with heterogeneous farm sizes, climate-induced declines in agricultural productivity, and endogenous adaptation investment. We calibrate the model to Italian farm-level and aggregate data and use it to quantify the macroeconomic implications of climate damages across countries. Under plausible climate and growth scenarios, limited adaptation investment slows the reallocation of labor out of agriculture in developing countries, delaying structural transformation. This mechanism also slows convergence in aggregate labor productivity and under a less optimistic growth scenario can lead to widening cross-country income gaps.

The Macroeconomics of Poverty across Countries
with Nezih Guner, Juan Carlos Ruiz-Garcia, Diego Restuccia and Guillaume Vandenbroucke