Essays on the impact of conflict and regulations on the private sector in developing countries
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My dissertation explores the effect of ethnic conflict, or regulations meant to avoid ethnic strife, on firm employment and productivity in developing countries. The first chapter investigates the impact of the conflict in Cote d'Ivoire that began in 2000, using a census of all registered firms for the years 1998-2003. We use structural estimates of the production function and exploit spatial variations in conflict intensity to derive the cost of conflict on firms in terms of productivity loss. The results indicate that the conflict led to an average 16-23% drop in firm total factor productivity and the decline is 5-10 percentage point larger for foreign firms. These results are consistent with anecdotal evidence of attacks on and looting of foreigners and their businesses during the conflict. We also find evidence to support the hypothesis that firms responded by hiring less foreign workers. The second chapter studies affirmative action policies in Malaysia, focusing on a specific policy in the private sector. In particular, I examine the impact of a regulatory change which no longer requires foreign-owned manufacturers above a certain size to reserve 30% equity for (ethnic) Malay shareholders. I set up a theoretical model to show that the original policy results in a range of firms to stay inefficiently small. Removing this equity requirement for foreign firms leads to two effects: (i) foreign firms become less likely to be sized constrained, and (ii) their average size increases relatively to other firms. These predictions are supported by empirical evidence from difference-in-difference estimations, based on firm-level data from the Malaysia Productivity and Investment Climate Survey in 2002 and 2007. Finally, chapter three examines the relationship between labor standards and market power in imports in a cross-country context. The hypothesis is that since labor standard policies can act as a substitute for import tariffs, all else equal, bigger importers would have lower labor standards. IV estimation with geography-based instruments finds evidence consistent with theory. In general, countries with higher market shares in labor intensive imports tend to have weaker Free Association and Collective Bargaining rights. Moreover, the effect is stronger among GATT members.