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August 2014, 2014 KDI Journal of Economic Policy Conference
Job Creation and Business Investment as Pathways to a Creative Economy-
Chapter 1New-to-Market Product Innovation and Firm Performance: Using Innovation Survey from Japan
This study evaluates the economic impact of new-to-market product innovation in Japan by using firm-level data obtained from the Community Innovation Survey conducted in Japan. It accounts for possible technological spillovers from innovation activities, and examines the extent to which new-to-market product innovation contributes to firm performance. Casual observations from the data reveals that newto- market product innovation are likely to contribute higher sales for the firm with less cannibalization with existing products, generate higher degree of technological spillovers to other innovations, and be brought by firms that corroborate with universities and other academic institutions. An econometric analysis on simultaneous equations confirms these observations.
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Chapter 2The Contribution of Research and Innovation to Productivity and Economic Growth
This paper examines the impact of investment in research and innovation on Australian market sector productivity. While previous studies have largely focused on a narrow class of private sector intangible assets as a source of productivity gains, this paper shows that there is a broad range of other business sector intangible assets that can significantly affect productivity. Moreover, the paper pays special attention to the role played by public support for research and innovation in the economy. The empirical results suggest that there are significant spillovers to productivity from public sector R&D spending on research agencies and higher education. No evidence is found for productivity spillovers from indirect public support for the business enterprise sector, civil sector or defence R&D. These findings could have implications for government innovation policy as they provide insights into possible productivity gains from government funding reallocations.
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Chapter 3Assessing an Efficiency Defense: The Case of Intel’s Marketing Campaign
Antitrust authorities typically try to establish exclusivity and the anticompetitiveness of loyalty rebates through pricing, but do not address the strategic use of advertising and, more generally, marketing campaigns. In this paper we focus on non-price anticompetitive behavior arising from marketing. We propose a Test of Advertising Predation (TAP) that can be used to detect non-price predatory behavior. The TAP test is based on structural approach and allows us to disentangle the potential positive impact of a marketing program from the anticompetitive predatory effect. We apply the TAP test to the Intel case, but it can be used to guide antitrust authorities in future cases, as it provides a more general framework for testing for the anticompetitive use of marketing campaigns. We use the test to examine whether Intel’s choice of processor marketing via PC firms is consistent with predatory behavior, and find evidence that the “Intel Inside” marketing campaign had predatory effects.
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Chapter 4Entrepreneurship, Small Businesses, and Economic Growth in Cities
This paper examines the impact of entrepreneurship on urban economic growth. I use the homestead exemption levels in state bankruptcy laws from 1975 to instrument for entrepreneurship and examine urban growth between 1993 and 2002. I find that a ten percent increase in the birth of small businesses increases MSA employment by 1.1 to 2.2%, annual payroll by 3.1 to 4.0%, and wages by 1.8 to 2.0% after ten years. I find no growth impact from entrepreneurship backed by the federal Small Business Loan program and further find that government-backed entrepreneurship crowds out privately financed entrepreneurship one for one.
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Chapter 5Changes in Competition of Small vs. Large Firms resulting from International Trade
Using Korean plant-level manufacturing data, this paper examines the effect of lowering trade barriers on changes in markups of small and large firms, exporters and non-exporters. We find that large firms decide on higher markups in each sector as they have greater market power in integrated markets. Also, exporters set higher markups through higher observable productivity than non-exporters. Even after controlling for productivity and other firm characteristics, markups are proportional to market share, which can be interpreted to mean that market power only influences firm price strategy. Interestingly, the markup distribution, which is more closely related to the competition from globalisation, has been decreasing over time while the performance gap measured as sales has been stable over time. We caution that even if the performance gap measured in absolute terms may be widening, this does not imply that the level of competition between large and small firms is weakening.
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Chapter 6Endogenous Product Characteristics in Merger Simulation: A Study of the U.S. Airline Industry
Standard merger simulations focus solely on price changes while constraining the set of product characteristics to be identical pre- and post-merger. Recent papers have begun to address this issue (see, e.g. Fan, August 2013 AER). To overcome the limitations of traditional simulations, I endogenize both prices and product characteristics by specifying a two-stage oligopoly game. After estimating demand and supply system, I simulate the effect of the Delta and Northwest Airlines merger on prices, product characteristics, and welfare. The simulation results show that (i) the merged firm tends to increase product differentiation post-merger; (ii) the higher product differentiation reduces the firm’s incentive to raise prices; (iii) the changes in characteristics and prices increase not only the merged firm’s profit but also consumer welfare. I also compare the predicted to actual postmerger outcome and find that endogenizing product characteristics is essential to better predict the actual outcome.
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Chapter 7Knowledge, Entrepreneurship and Creation of New Competence: Foundations of the Creative Economy
Entrepreneurship studies the birth of a new product or service. How a new product or service is conceived and who is involved in the process is the subject of this study. Discovery and exploitation of entrepreneurial opportunity are commonly referred as to Kirznerian entrepreneurship (Kirzner, 1973). Perhaps the best known concept of entrepreneurship in economics is Schumpeter’s entrepreneurship (Schumpeter, 1934). Schumpeter regards the entrepreneur as the innovator who creates new products, processes, markets, sources of supply, or industrial combinations. This study examines the roles of knowledge in Kirznerian discovery of entrepreneurial opportunity and exploitation, and in Schumpeterian innovation. The entrepreneur is a risk taker for profit (Knight, 1921), and the paper will study how knowledge is used to discover entrepreneurial opportunities and reduce the Knightian risk and uncertainty. The paper builds a philosophical foundation for the creative economy.
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Chapter 8Canary in a Coal Mine – Analysis of Systemic Risk
We develop a measure of systemic risk based on symbolic transfer entropy (STE) in a network of 48 industries, both financial and real sectors, by incorporating the strength and asymmetry of information flows. Time variation of systemic risk in the United States shows that from 2001 systemic risk start to rise, peaking in 2004, and accelerating until the financial crisis of 2007/8. Year 2004 coincides with several financial events that potentially contribute to the crisis: sudden acceleration of subprime mortgage, financialzation of commodity, CDS activities, and others. Furthermore, we document that not only the economy-wide systemic risk of US economy has started to build up from 2004, but also the asymmetry of information flows between financial and real sector accelerated from the year 2004 and grow continuously until it reaches a peak in 2007. In addition, we find that systemic risks are closely linked to a battery of macro-economic variables, and show our systemic risk measure is robust with unemployment, treasury rate, return and volatility of stock index among other macroeconomic variables. Systemic risk has predictive power for future stock returns, and it can serve as a warning signal for the future. Interestingly, the contemporary systemic risk remains at high plateau similar to the financial crisis period of 2007/2008.
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Chapter 9Monetary Policy Transmission Via Risk-taking Channel in the Mortgage Market
This paper aims to analyze the transmission of accommodative monetary policy to the overall economy through the risk-taking channel operating in the mortgage market. To achieve this aim, the analysis procedure undergoes two steps. Firstly, the empirical relationship between short-term interest rates and LTV ratio is estimated using the U.S. data to verify the existence of the risk-taking channel. Secondly, the estimated relationship is incorporated into a DSGE model featuring a borrowing constraint and housing to construct the virtual economy in which the channel takes effect to analyze the impacts of a monetary policy shock on it. The results of the analysis suggest that under a low interest rate environment, the effects of the risk-taking channel should be taken into account in monetary policy analysis as it amplifies the impacts of a monetary policy shock. Furthermore, there is a scope for policy authorities to smooth both real and financial volatilities by lowering a ceiling on LTV ratio to discourage excessive risk-taking.
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Chapter 10Enhancing the Link between Higher Education and Employment
This study aims to improve the efficiency of fiscal assistance programs for higher education by investigating variables that influence college graduates' employment rates. An empirical analysis of 2010-2011 higher education statistics shows that two variables — educational expenditure per student and the number of students per full-time faculty member — consistently and significantly affect college graduates' employment rates, even after location and type of school are controlled. Although scholarship rates also affect employment rates positively, the number of students per industry-academe liaison officer do not have a statistically significant effect. Moreover, as educational expenditure per student or the student/faculty ratio increases beyond a certain level, graduate employment improves at an increasing rate. The two variables also affect the employment rate interactively. At a relatively higher level of per-student expenditure, employment rates increase even as the student/faculty ratio rises. However, at a relatively lower level of perstudent expenditure, employment rates decline as the student/faculty ratio rises. The policy implication is that fiscal assistance programs for higher education should accord a much greater weight to these key variables when selecting and assessing institutional recipients.
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Chapter 11Effect of College Major on Earnings and Gender Gap in Labor Markets: Evidence from Young Adults in South Korea
This paper measures the impact of college major on employment and earnings. We use a nationally representative dataset from Korea, where there is little concern for endogenous major choice due to the nature of the college admission system and high school curriculum. We find that “Engineering” and “Medicine and Public Health” majors dominate in all labor market outcomes, but, different from existing studies of the U.S., in South Korea, graduates with an “Education” degree perform better than those who majored in “Natural Science or Mathematics.” Finally, the large gender disparity in choice of major may account for approximately 50 percent of the gender gap in labor market outcomes.
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Chapter 12Economic Growth and Labor Market Institutions in East Asian Structural Transformation
This paper develops a new growth model by incorporating labor market friction and human capital accumulation into the multi-sector growth framework to analyze the underlying link between economic growth and labor market institutions in a transitional economy. The model, calibrated based on the Japanese and South Korean structural transformation episodes, demonstrates that lifetime employment (and the implied lengthy job tenure) has contributed to endogenous formation of a Ricardian comparative advantage in non-agricultural sector, by enhancing specific human capital accumulation and facilitating investment. It has enabled Japan and South Korea to achieve unprecedentedly rapid economic growth. The counterfactual experiment finds that had the job durations of a typical worker been 1 year (roughly one tenth of the actual average job duration) for 1960-1990 in the Japanese labor market and 1970-2000 in the Korean labor market, the non-agricultural GDP per capita in 1990 would have accounted for 71 and 76 percent of the actual values, respectively.
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Chapter 13Wage Dynamics with Private Learning-by-doing and On-the-job Search
This paper develops an equilibrium job search model in which the employed worker privately accumulates human capital and continually searches for a better paying job. Firms encourage production and discourage turnover by rewarding with bonus payments and long service allowances, respectively, workers with better performance and longer job tenure. Wage growth attends human capital accumulation (productive promotion) and job tenure (non-productive promotion) as well as job-to-job transition. The model is estimated using indirect inference to investigate the effect of human capital accumulation on individual wage growth. In NLSY79 data, the average wage of white male high school graduates after 20 years of market experience is 1.88 times higher than the average of the first full-time wages. A counterfactual experiment using the structural parameter estimates shows that the wage of a typical worker unable to accumulate human capital would grow by 41.8%.
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