Industrial Development in the Global Economy: Innovation and Investment of Mexican Firms

Globalization has a major impact on industrial development through its impact on firm innovation and investment. By employing novel data and/or better empirical strategies, this dissertation addresses the key questions of how globalization affects the innovative activities and investments of firms in developing countries. More specifically, I use Mexican plant- and firm-level data to examine how innovative activities and investment responded to two major globalization phenomena in Mexico, i.e. trade liberalization and the late-1994 currency crisis.;In Chapter 1, I address one of most important questions on empirical literature on trade and growth: does trade liberalization affect firms' incentive to innovate by creating tougher market competition? Though this is a central question in the literature, empirically identifying the effects of international competition on innovative activities has been challenging in the past for at least two reasons. First, it is unusual to be able to obtain direct information on the innovative activities of plants. Second, it is also difficult to find an exogenous source of variation of tariffs for plants.;This study overcomes these challenges and provides causal evidence on the effects of increased international competition on a direct measure of innovative activities, namely R&D expenditures. I do this by constructing a new combination of Mexican plant-level datasets that contain direct information on innovative activities and by using credibly exogenous variation in exposure to international competition from tariff reduction through free trade agreements. The key finding is that the reduction of tariffs on goods produced by Mexican plants induced them to increase total R&D expenditure, in particular process R&D expenditure. This suggests that trade liberalization stimulates innovative activities in plants, especially cost-cutting incentives, through increased competition.;In Chapter 2, I investigate the impact of trade on the environment from a new perspective, i.e. whether trade liberalization affects the incentives of firms to undertake more investment in the environment and efficient energy use. Empirically identifying the effects of international trade on the environmental efforts of plants is challenging for the same reasons given regarding the impact of international trade on innovative activities.;This study overcomes these difficulties and thus provides causal evidence on the effects of international trade on a direct measure of innovative activities, namely, investment at the plant level in efficient energy use and the environment. I employ a similar empirical methodology as in Chapter 1. The key finding is that the reduction of tariffs on goods produced by Mexican plants induced them to decrease investment in efficient energy and the environment, while the reduction of the tariffs on goods used as intermediate products by Mexican plants induced these plants to increase investment. The results suggest that trade liberalization either encourages or discourages plant investment through distinct channels; therefore, separating the channels is important. The result that tougher competition reduces investment in efficient energy and the environment contrasts with the results concerning R&D in Chapter 1, in which the suggestion is that competition affects the incentives to innovate and invest through distinct channels. One possibility is that the increase in total R&D and process R&D brought new production process with more pollution-decreasing technology which reduces the need for plants to invest in efficient energy. Consistent with this story, and in contrast to the results on investment on efficient energy, I find that increased competition stimulated energy efficiency in terms of electricity use. Accordingly, the results of Chapters 1 and 2 together illustrate the value of being able to observe different types of innovative effort and investment at the same time.;Drawing on joint work with Miguel Messmacher, Chapter 3 tackles one of the most important questions concerning the mechanism underlying declining corporate investment during currency crises. Economists have paid increasing attention to the role of foreign (US dollar) debt in this phenomenon. We point out that the role of domestic debt is also important because financial crises of domestic banks often accompany currency crises. Possessing a relationship with these troubled banks may then preclude firms from investing. We analyze Mexican firm-level balance sheet data and conclude that firms with more domestic debt reduced investment as much as those with more foreign debt and this effect is stronger in more finance-dependent industries. Although we do not have direct evidence on bank balance sheets and the bank-firm relationship, this suggests that the channel through which firms borrow from troubled domestic banks may be as important as the channel for firms with foreign debt. The findings suggest that foreign debt can affect crises in two ways: through firms' balance sheets, as argued in the extant literature, and through banks' balance sheets and the bank-firm relationship, as this chapter suggests. Our findings then help illustrate the potential role of bank supervision and bank bailout policies in currency crises.