ESSAYS ON INTERNATIONAL FINANCE AND DEVELOPMENT
ESSAYS ON INTERNATIONAL FINANCE AND DEVELOPMENT
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Paranagua de Vasconcelos Teixeira, Marcelo
De Leo, Pierre
Motivated by exposure to different financing programs from the International Finance Corporation (IFC), in this dissertation I explore three relevant topics from the perspective of a Development Finance Institution (DFI), focusing on outcomes that spam across the development of local capital markets, attraction of foreign direct investment, poverty reduction and firm growth in developing economies.The first chapter studies the pioneering role of DFIs in issuing local currency bonds in several developing economies’ domestic capital markets, investigating the potential effects on capital markets development and attraction of foreign direct investment flows. Results on bonds markets show an increase on number of listings of both public and domestic corporate bonds following a pioneer issuance, while also pointing to an increase in the number of domestic corporate bond issuers. The analysis of effects on the equity markets of local exchanges shows an increase in the number of domestic companies with listed equities following the pioneer issuances, and an even stronger increase in the number of foreign companies with listed equities in the domestic exchange, suggesting that the potential signaling effect from the pioneer local currency bond issuances is stronger for international agents than for domestic agents. Lastly, the analysis of the effects on the attraction of FDI shows that FDI net inflows decrease after such pioneer issuances, which suggests that FDI and capital markets development would be substitutes. However, when I disaggregate sample countries by different stages of market development, as proxied by countries’ income level, I find that the decrease in FDI is mostly seen in low and lower-income countries, while in upper-middle countries FDI inflows and capital market development would be less of a substitute, pointing to a transition from substitutability to complementarity as capital markets and institutions become more mature. The second chapter analyzes – through an innovative structural simulation modeling approach that links investments in one or more industries to the World Bank Group (WBG) twin goals of ending extreme poverty and improving shared prosperity – the expected impacts that private investment strategies could have in the Philippines, focusing on impacts on poverty and inequality, while also including standard macroeconomic effects like economic growth and employment. A key factor in this model is the presence of both formal and informal markets, which captures the high and persistent job informality observed in the data. While FDI inflows drive the growth of formal activity in the economy and creates higher paying direct jobs, the indirect and induced effects are weakened by the high presence of informal firms in the supply chain, which are less productive and pay smaller wages. By comparing FDI investments into manufacturing, agriculture, services, and tourism, results show that a “trickle-down” growth approach based on the continuation of the status quo does not deliver the poverty and shared prosperity targets of the WBG twin goals. While poverty declines due to additional investment, considerably higher investments would be needed to reach the 3 percent WBG (global) poverty target. Moreover, inequality increases over time and no substantial progress is observed in terms of shared prosperity in any of the investment-driven scenarios. Finally, the third chapter estimates the relationship between working capital and firm growth for a large sample of companies across developing economies, underlying the rationale and expected impact of providing working capital financing in these countries. The paper presents a measure of excess working capital – the difference in the level of working capital for a firm relative to the median of its relevant peers by sector and economic context – and finds evidence of a non-linear relationship between excess working capital with firm growth. Companies with relatively lower levels of working capital but closer to industry and economic environment norms would benefit the most in terms of sales growth, followed by firms with the lowest levels of working capital. Companies with working capital levels above the norm benefit the least from additional working capital. These facts constitute evidence of the existence of a notional optimal level of working capital, conditional to industry and economic context, consistent with existing literature, mostly focused on developed countries. Additional results show that the marginal impact of increasing working capital on growth is larger for firms in more developed countries. Along these lines, these findings can serve as a basis to explain (partially, at least) firm performance during the COVID-19 crisis and going forward, as well as being an input to improving the allocation of working capital financing in the recovery and beyond.