Search

In this paper, we discuss a new method for constructing a cyclically adjusted budget balance. We use the method to evaluate the budget balance for Sweden during the period 1991–2005. Traditionally, methods for cyclical adjustment have focused on the output gap. In this paper we also adjust for deviations of tax bases from their trend levels. Furthermore, we adjust for effects of the unemployment gap on government spending. For Sweden, we find that these additional adjustments have a significant impact on the cyclically adjusted budget balance, especially for the periods 1992–1995 and 2000–2001.

The Knowledge Capital Model (KC-model), described in Markusen (2002), encompasses both market size (horizontal) as well as factor endowment (vertical) explanations to why multinational production occurs. Although the KC-model seems intuitively appealing, the empirical support has, so far, been weak and even confused. In this study, we find strong, robust and consistent support for the KC-model. In contrast to previous studies, our skill measures follow directly from the model. We also use an enlarged dataset, where the date coverage is significantly improved. Our results also give estimated surfaces remarkably similar to theoretical simulations of the KC-model. In addition, the results give important insights into why previous studies have yielded such diverse results.

This study explores how relative skilled-wage premia affect FDI. Contrary to previous studies based on factor endowment differences, we find strong support for vertical FDI, in the sense that more FDI is conducted in countries where unskilled labor is relatively cheap. In addition, we find t hat relative skill-premia also affect FDI activities that have previously been associated with horizontal FDI, i.e. local affiliate sales. Consequently, the potential effects of changes in the relative wage costs on international production reallocation within MNEs are large. In fact, if not for the 8% rise in the US skilled wage premium relative to the average host country between 1986-1994, annual US affiliate sales abroad in relation to US GDP would have been half a percentage point higher.

Multinational enterprises (MNEs) are important in transmitting technology across national borders. Not only do they allow for transfer of technology within the firm, but it is also believed that they are important channels for international R&D spillovers as well. This paper analyses empirically whether inward and outward foreign direct investment (FDI) work as channels for international R&D spillovers. We utilize firm-level as well as industry-level data for Swedish manufacturing in the analysis. We find no evidence of FDI-related R&D spillovers - neither at the firm-level nor at the industry-level in Swedish manufacturing. The only variable that consistently affects total factor productivity is own investment in R&D.

This paper uses a dataset on the foreign activities by Swedish manufacturing firms to examine the performance of German affiliates compared with affiliates in other locations. It is found that German affiliates, on average, have higher labour productivity, R&D expenditure per employee and skill-intensity. There is also evidence suggesting that German affiliates are more oriented towards selling in the local market than affiliates in other European countries. We also analyse the effect of labour costs in the Swedish multinational enterprises? (MNEs?) decision to locate in Germany. We find that the location decision is sensitive to the level of wage costs in Germany and in other potential locations in high-income Europe, but not to the level of wage costs in Sweden or low-income countries in Europe. Finally, we find that the cross-wage elasticity showing the effect of increases in labour costs in other high-income locations in Europe on employment in German affiliates of Swedish MNEs is positive, indicating substitutability between the German workers and the workers employed in other high-income countries in Europe.

This study uses data on Swedish multinationals to estimate cross elasticities of labour demand in different locations. With a vertical decomposition of the firm's activities, whether there is substitution or complementarity between employment in different parts of the firm will depend on whether wage changes lead to a relocation of activities or simply to changes in marginal costs and/or demand for inputs in other parts of the firms. We find that there is some evidence of a substitutionary relationship between employment in the Swedish parts of the firms and employment in other high-income locations, but we do not find any evidence of substitution stemming from employment in low-income locations. We find mainly a relationship of complementarity between employment in different affiliates.

This paper analyzes the relationship between the budget balance and the cyclical situation of the economy. There are two main purposes. In the first analysis, we develop a method for economic policy, and induced changes that arise due to changes in the economy. The discretionary component of the change in the budget balance measure changes in fiscal stance and can be used as a fiscal policy indicator. As a measure of changes in fiscal policy, the proposed indicator has two advantages over existing indicators used by international organizations. First, the adjustment of changes in the economy is attached to important tax bases, rather than to the GDP, leading to higher accuracy when tax bases are not perfectly component does not include the effect on the budget balance of structural changes in the economy (as measured by potential output), that are not directly related to fiscal policy. The induced change component can be used to evaluate the cyclical sensitivity of public finances with respect to changes in the economy, when fiscal policy is unchanged. We also suggest how a decomposition of the level of the primary budget balance into a structural and cyclical component can be conducted. The second main purpose of the study is to empirically investigate the cyclical sensitivity of public finances in the Nordic countries. The analysis focuses on the peroid 1980 to 1997. We use three different methods for evaluating the sensitivity of public finances. Overall, public finances in all the Nordic countries are sensitive to cyclical changes in the economy. The estimated sensitivity of the budget balance as a share of GDP with respect to GDP growth is 0.6-0.8 for Sweden, 0.5-0.75 for Denmark, 0.4-0.6 for Finland and Norway and 0.2-0.6 for Iceland, given constant fiscal policy. It is likely, however, that our estimates are biased downward as data problems lead us to underestimate the sensitivity while countercyclical fiscal policy may lead to even more sensitive public finances. In the empirical analysis we also study how different types of shocks affect public finances. The result show that a domestic savings shock has the strongest effect on public finances, while an aggregate demand shock affects public finances less and en export shock has the smallest effect on public finances. We conclude the paper by discussing the problems associated with analysing the effect of fiscal policy on the economy by use of simple indicators, as well as a few brief remarks on the normative question of how sensitive the budget should be to economic fluctuations.

FDI has received surprisingly little attention in theoretical and empirical work on openness and growth. This paper presents a theoretical growth model where MNCs directly affect the endogenous growth rate via technological spillovers. This is novel since other endogenous growth models with MNCs, e.g. the Grossman-Helpman model, assume away the knowledge-spillovers aspect of FDI. We also present econometric evidence (using industry-level data from seven OECD nations) that broadly supports the model. Specifically, we find industry-level scale effects and international knowledge spillovers that are unrelated to FDI, but we also find that bilateral spillovers are boosted by bilateral FDI.

Two models where productivity growth is caused by spillovers from R&D are analysed using a sample of nine manufacturing industries in six large OECD-countries between 1979 and 1991. The first model is based on traditional productivity analysis where growth in R&D stocks causes productivity growth. The second model is based on the endogenous growth literature where the level of R&D expenditures is assumed to increase productivity growth. The empirical results indicate stronger support for the latter model. The pattern of spillovers is also investigated. The results suggest that spillovers from R&D exist within industries, both nationally and internationally. There is, however, little evidence of spillovers between industries. The empirical evidence further suggests that intra-industry spillovers are confined to industries that are relatively R&D-intensive. Finally, direct foreign investment seem to facilitate the diffusion of R&D results, but we do not find any effect on growth from R&D embodied in intermediate products.