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This paper investigates the role of knowledge-based capital for participation and value appropriation in global value chains (GVC) for a sample of European countries over 1995–2011. We distinguish between different forms of participation in GVC entailing a different degree of capability to create value added domestically and examine how different intangible assets contribute to countries' engagement and value appropriation in GVC. We find that knowledge-based capital is positively correlated with participation and value appropriation along the value chain. This finding is robust to introducing separately R&D and non-R&D intangibles. In particular, training and organizational capital have the largest positive effect on value appropriation [JEL Classification: F23, O30].

We analyse productivity differentials across about 63,000 manufacturing firms located in 103 Italian counties, in order to shed light on the relation between the business environment and firm performance. We find that a limited set of local variables related to institutional quality, local credit development, market access and innovation environment significantly contribute to explaining manufacturing productivity differentials in Italy. Our empirical findings confirm that firm competitiveness reacts to the local business environment on a multidimensional scale. This suggests that better targeted regional policies at the national and EU level, including measures for fostering convergence or decentralizing wage negotiations, should take into account the interdependence between productivity and the economic environment.

We investigate the effect of the political regime on bilateral FDI flows from advanced to emerging countries in the period 1992–2004. We control for country size, per capita income and privatization proceeds in the host country, and use a random-effect Tobit model to exploit information from zero entries. Our results suggest that democracy does have a positive effect on the amount and probability of FDI flows from developed to emerging countries. Moreover, we find that the effect of democracy on FDI also works through the total factor productivity channel, not only the political risk one as suggested in the literature.

Talking about Europe means talking about all the reasons for its lack of coordination, market malfunctions, problems in the public sector, the banking sector and so on.

We apply the gravity model to Turkey's trade flows over 1967–2001. First, we check whether this model fits Turkey's geographical pattern of trade in goods. Second, provided that the model works, we assess whether Turkey already has a “special” trade relation with the EU, namely whether merchandise exchanges between the two parties exceed what the gravity approach predicts. The main findings are: (i) the gravity model provides a good fit of Turkey's trade patterns, and (ii) despite the 1963 Association agreement and the customs union launched in 1996, there is no evidence of additional trade between Turkey and the EU.

We analyse productivity growth differentials across 68.000 Italian manufacturing firms over 2001-2010, in order to disentangle internal and external productivity drivers. A two-stage procedure is implemented for extracting fixed effects for 103 home counties of the firms (stage one), and regressing them upon a number of external factors that could affect productivity dynamics (stage two). We find that the local environment matters for firm performance with external drivers, such as financial conditions, social capital and market potential, explaining about two-thirds of the cross-county productivity dispersion.

We use a spatial model of endogenous growth to investigate the likely impact of discriminatory integration among two advanced countries on their own welfare as well as on the welfare of an outsiders transition economy. On the one side, since per capita income convergence depends on relative market access and local market size, piece-wise integration causes insider-outsider divergence. This phenomenon is exacerbated by slow transition. On the other side, simultaneous exclusion from the integration process and ongoing transition have unpredictable effects on the structural adjustment, which might even exhibit swinging behaviour. Since in practice such swings imply large adjustment costs, careful integration design is required. Under this respect, the asymmetric phasing out of trade barriers built in the Europe Agreements works in the right direction.

This paper studies episodes of current-account reversal in developing countries (DCs) in the period 1965–1994. First, a number of persistent shifts (“reversals”) in the current-account balance dynamics are identified by structural break and segmented trend tests; then, the relationship between these reversals and a set of fundamentals suggested by the intertemporal approach to the current account is investigated in a panel-data set-up. We find that fundamentals play a different role in episodes of persistent deterioration or improvement of the current-account balance in DCs.

In this, his final book, Gavin Boyd has brought together a distinguished group of experts on the nature and extent of transatlantic policy coordination and its implication for corporate strategy. This remarkably relevant set of papers offers a discussion on the economic and financial linkage between Europe and North America, as well as the trade and investment rules governing this interaction.

This article contributes to the ongoing debate on international capital mobility in the LDCs. The extent of capital mobility has been assessed in a time-series context, performing unit root tests on the adjusted current account for thirty-seven developing countries. The results show that the hypothesis of capital mobility cannot be rejected in a large number of countries.

We analyze productivity growth differentials across the EU in the perspective of intangible, as well as tangible, capital accumulation. Based on a new international dataset on intangibles, we identify three main EU regions corresponding to the Northern area, Central Europe and the Mediterranean area. We find that intangible capital accumulation has strongly contributed to labor productivity growth in the best performing European economies/regions. Moreover, we find evidence that intangible capital accumulation, especially in software and R&D, is associated with spillover effects.

We analyze productivity growth differentials across the EU in the perspective of intangible, as well as tangible, capital accumulation. Based on a new international dataset on intangibles, we identify three main EU regions corresponding to the Northern area, Central Europe and the Mediterranean area. We find that intangible capital accumulation has strongly contributed to labor productivity growth in the best performing European economies/regions. Moreover, we find evidence that intangible capital accumulation, especially in software and R&D, is associated with spillover effects.

This paper provides evidence about the diffusion of intangible investment across the EU27 member countries and investigates the role of intangible capital as a source of growth to improve our understanding of the international differences in the mix of drivers of productivity growth across Europe. Our study shows that the capitalization of intangible assets, allow identifying additional sources of long-run growth. We show that intangibles have been a relevant source of growth across European countries and that they cannot be omitted from national accounts. In particular, the ―unexplained‖ component of macro-economic dynamics, the Total Factor Productivity, becomes less important, while physical capital turns out to be strongly complementary with intangible capital.

We introduce the effect of the political regime in a model of North-South bilateral foreign direct investment (FDI), and test whether it matters for the nature of FDI inflows to emerging markets. Alternative political regimes in the host country may affect the incentive for foreign investors to implement horizontal rather than vertical FDI, if the political expropriation risk is different for the two kinds of investment. We test the model in a panel of 14 source countries and 24 host countries over 1992-2004, and find that autocracies are likely to receive relatively more FDI of the vertical type, while democracies are more likely to be associated with horizontal FDI inflows.

We model the effect of democracy on North-South bilateral foreign direct investment (FDI), and test its impact in a panel of 14 source countries and 24 host countries over 1992-2004. As a benchmark, we adopt a setup that combines variables commonly associated with horizontal FDI (economic dimension of the countries; distance) and variables associated with vertical FDI (per capita income as a proxy for capital endowments). Democracy in the host country has a positive effect of North-South FDI flows, especially when we control for privatization programs. As for the type of democracy, a parliamentary regime could have a positive impact on FDI inflows vis-a-vis a presidential one.

We apply the gravity model to Turkey's trade flows over 1967-2001. First, we check whether this model fits Turkey's geographical pattern of trade in goods. Second, provided that the model works, we assess whether Turkey already has a "special" trade relation with the EU, namely whether merchandise exchanges between the two parties exceed what the gravity approach predicts. The main findings are: i) the gravity model provides a good fit of Turkey's trade patterns; and ii) despite the 1963 Association agreement, and the customs union launched in 1996, there is no evidence of additional trade between Turkey and the EU.

Many measures of the impact of Information and Comunication Technology (ICT) on growth have been provided for the United States; much fewer analyses have been proposed for European countries, due also to scarcity of disaggregated data. In this paper we make use of very detailed sectoral data for Italy to study both the aggregate evolution and the sectoral diffusion of ICT investment expenditure during the 1990s. In the aggregate we find that the 1992 recession strongly halted ICT investment, and only in 1999 the Italian economy recovered the same rate of ICT capital formation. Second, mixed evidence on diffusion is shown by the sectoral expenditure on ICT capital goods: although the ICT fraction of total investment has increased in all the relevant macro-sectors (industry, commerce and advances services), the number of total sectors investing in ICT has not risen between 1992 and 2000. Finally, an econometric analysis of sectoral ICT determination shows that, besides capital intensity and interest rates, R&D expenditure is a strong predictor of ICT investment expenditure. Hence, since R&D-intensive sectors are usually associated with the highest growth potential, ICT expenditure by those sectors may trigger a virtuous growth dynamics.

The aim of this paper is to identify the stage of IT adoption in individual European economies, and to analyse the determinants of IT investment in a panel of EU countries. We first analyse the dynamics of IT investment expenditure in 15 European countries from 1992 until 2001 and, by means of a cluster analysis, we draw a picture of IT diffusion in Europe. By clustering the European countries according to their shares of IT spending over GDP, we identify three fairly stable groups of fast, medium and slow adopters. We then build an econometric equation of the determinants of IT investment to be estimated with panel data for five European economies over 1980-2001. We consider both aggregate IT investment, and investment in hardware or software taken alone. Financial conditions, income growth and comparative advantage turn out to affect IT investment, but we find that the determinants of hardware investment only partially overlap with those of software.

In the past decade, we observed an acceleration of Western European integration, while the transition countries of Central Eastern Europe have not become members of the EU. In this paper, we conduct numerical simulations on the consequences of such a kind of differential integration within the European economic area with a spatial model of endogenous growth. Three main aspects are analysed: first, we look at the impact of inclusion in, or exclusion from, the EU on the localisation of "advanced" industries. Second, we consider the consequences for trade and capital flows (foreign direct investment) of the re-localisation of enterprises due to differential integration. Third, we analyse the welfare effects for insiders and outsiders from a dynamic viewpoint (that is, accounting for different growth regimes and transition). We find that, while outsiders always lose in welfare terms relative to insiders if transition is not accounted for, when transition is explicitely introduced it is possible for an outsider to perform better than the insiders. Hence, the model suggests that successful transition might provide a remedy against delayed accession to an integrated area.

The recent surge in capital inflows to developing countries shares several features of the experiences of the late nineteenth and early twentieth centuries, but a number of new characteristics as well. This chapter begins with a survey of international finance at the beginning of this century followed by a review of capital inflows since the 1960s. The final section briefly addresses three issues. First, what has been the role of financial liberalization among the determinants of the recent upswing in capital inflows, and what are its implications for the recipient economies? Second, can we say something on the ‘quality’ of the new flows? Third, what are the long-run relationships between external finance, growth, and welfare in developing economies?

This chapter deals with the long-run effects of international capital flows from the perspective of growth theory. Our main concern is with the impact of capital flows on growth and ‘convergence’, a concept which is variously defined according to the underlying theoretical framework; as in Chapter 3 we outline different models that are of general relevance, but we then apply them to the case of developing economies. As we focus on the long run, the use of external capital as an instrument for consumption-smoothing is neglected. However, while in Sections 4.1 and 4.2 we rule out the possibility that a country mortgages a constant stream of future (per capita) income to increase current consumption, this possibility is allowed for in the model of Section 4.3. This enriches the range of feasible outcomes stemming from integration in world capital markets.

This paper studies episodes of current-account reversal in developing countries (DCs) in the period 1965-1994. First, a number of persistent shifts ("reversals") in the current-account balance dynamics are identified by structural break and segmented trend tests; then, the relationship between these reversals and a set of fundamentals suggested by the intertemporal approach to the current account is investigated in a panel-data set-up. We find that fundamentals play a different role in episodes of persistent deterioration or improvement of the current-account balance in DCs, and focus on the countries involved in the recent external crises in East Asian.

The neoclassical growth model, in both its basic and its augmented version, provides an optimistic view of the consequences of capital movements for a developing economy: as foreign inflows are used to finance investment in physical capital, opening to capital mobility should make a developing country (DC) an attractive location for international investors (provided it is endowed with, and will accumulate, enough human capital according to the augmented model with partial mobility). Consequently, the main predictions of the neoclassical theory are that: First, the integration in international capital markets will foster the speed of convergence to the steady state and therefore raise the growth rate for those developing economies that become net capital importers. Second, the larger the (per capita) inflow of net foreign capital, the higher the ex ante marginal product of capital hence the more the underlying fundamentals of a DC are conducive to economic growth (see Section 4.1).

Part III of this volume — devoted to empirical studies of foreign capital in developing economies — starts with a chapter on capital mobility. The definition, and measurement, of the degree of integration in international capital markets is a widely debated issue with a number of related policy implications. Moreover, the evaluation of capital mobility in developing economies is a crucial prerequisite for the subsequent analyses of the determinants and consequences of capital flows in developing countries (DCs). If an individual economy is found to be insulated from world capital markets, it makes little sense to establish the role of foreign capital there. Conversely, if DCs are relatively well integrated in the international financial network, questions concerning the functions of capital flows become very relevant. The chapter is organised as follows: we first provide an introduction to the concept of capital mobility and highlight its major implications in terms of intertemporal allocation, financial diversification and economic policy (Section 5.1). We then review the debate on the measurement of capital mobility (Section 5.2). This is a ‘hot’ topic as many operational definitions and alternative empirical tests exist. A new methodology based on time-series econometrics is introduced in Section 5.3, and applied to the assessment of capital mobility in 33 DCs over 1960–88. In general, we cannot reject the hypothesis that several developing economies were integrated in international capital markets in this period. Some details on the statistical procedures adopted and the data sources can be found at the end of the chapter.

The last two decades of the twentieth century have witnessed several episodes of balance of payments crisis in developing countries (DCs), starting from a Polish moratorium on foreign debt in 1981 up to financial distress and currency devaluations in Eastern Asia and Russia in 1997–8; in between, Latin American and African economies have also heavily suffered from external crises. Nonetheless, an unprecedented amount of capital inflows reached developing countries (including the transition countries in Europe and Asia) in the 1990s, exposing the recipient economies to old problems and new challenges. As stated in Chapter 1, this volume does not deal with various short- and medium-term concerns associated with capital movements in developing economies, focusing rather on the relationship with long-run growth; however, it would be difficult not to mention some of the themes related to the financial strains of the end of the century in a work on capital movements in DCs. In this chapter we confine ourselves to only a few topics that are functional to some of the arguments of Parts II and III: in particular, this chapter provides a stylised description of the cyclical pattern of capital inflows to developing countries (Section 2.1), an account of historical trends especially centred on the twentieth century (Section 2.2) and finally a brief review of some academic and policy-oriented debates triggered by the surge in capital flows of the 1990s (Section 2.3). Readers interested in a more complete treatment of these topics can find extensive reference to the recent contributions in these fields.

Foreign capital to developing economies is definitely one of the topics of the day. From the debt crisis of the early 1980s, which severely affected Latin America, Africa and some countries in Eastern Europe and Asia, throughout the years of debt negotiations and rescheduling until the new surge in capital flows to middle-income economies in the first half of the 1990s, academic and financial communities have extensively debated this issue, and some aspects have been publicised in the leading financial press. At the dusk of the millennium, as a new wave of currency and debt crises hits developing economies, shaking the apparently ordered pattern of renewed flows in East Asia (1997–8), Russia (1998) and maybe other regions, the debate has turned increasingly emotional.

This chapter provides a theoretical investigation of the factors affecting the flows of net foreign capital in the long run, with special attention to the case of a developing economy. Our interest in long-run phenomena naturally leads us to adopt the theory of economic growth as the main reference in the study of the determinants of the net foreign asset position of a developing country (DC). Moreover, in the last ten years growth theory has undergone a radical process of renewal and has remarkably enlarged its scope, and this makes it an extremely promising tool for approaching the issue of capital movements. However, some old models are still very powerful and stand as starting points for more recent refinements: this is the case of the Solow (1956) model, for instance.

The empirics of Chapters 5–7 are centred on developing market economies, because these economies have been part of the world capital market for a long enough time to allow an application of growth models to the determinants and consequences of foreign capital. Other transforming economies have (re)joined international financial relations in the 1990s: the so-called transition economies of Central and Eastern Europe and Asia. This chapter deals with the determinants and the sustainability of foreign capital inflows in a sub-set of these economies.

This paper studies episodes of current-account reversal in developing countries (DCs) in the period 1965-1994. First, a number of persistent shifts ("reversals") in the current-account balance dynamics are identified by structural break and segmented trend tests; then, the relationship between these reversals and a set of fundamentals suggested by the intertemporal approach to the current account is investigated in a panel-data set-up. We find that fundamentals play a different role in episodes of persistent deterioration or improvement of the current-account balance in DCs.

External finance can provide a positive contribution to the transition process and can enhance welfare in former centrally planned economies, especially when domestic saving has not fully recovered after the initial contraction. However, as was pointed out at the beginning of the transition process, foreign debt could exert a strong constraint on the borrowing capacity of some central and eastern European countries. This paper analyzes the determinants of net external borrowing in ten transition economies during 1990-95 and assesses the impact of the outstanding stock of foreign liabilities on net financial inflows.

The issue of "structural convergence", defined as convergence in national patterns of trade specialization across countries that are quite similar in terms of economic size, per capita income, broad tecnological levels, factor endowments, is addressed in this paper with a focus on five large manufacturing sectors. We find that there is no evidence of a general trend towards convergence in trade specialization across the four largest European economies; moreover, the data point out that the role of foreign direct investment as an engine of "convergence" cannot be taken for granted. We also argue that an analysis of the sectoral features of production and investment is required in order to improve our understanding of international trade patterns.