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Three Essays on the Impact of Openness , FDI and Business Law on Economic Growth

The first essay explores the relationship between openness and growth. As, Rodriguez and Rodrik (2000) argue, the relation between openness and growth is still an open question. One of the main problems in the assessment of the effect is the endogeneity of the relation. In order to address this issue, this paper applies the identification through heteroskedasticity methodology to estimate the effect of openness on growth while properly controlling for the effect of growth on openness. The results suggest that openness would have a positive effect on growth, although small. This result stands, despite the equally robust effect from growth to openness. The second essay investigates the impact of legal differences between countries on the export performance of countries' industries. "High-quality" business law can reduce the cost of external finance by removing informational asymmetries and therefore, benefiting externalfinance dependent industries disproportionally. This difference in benefit creates a source of comparative advantage for externally-finance dependent industries located in countries with "high quality" business law. The results indicate that the quality of business law does affect the relative export performance of externally-finance dependent industries. It is also found that the level of financial development also disproportionately benefits externally-finance dependent industries, especially those industries with naturally "small" sized firms. The third essay examines the impact of FDI on productivity growth. The endogenous nature of FDI and productivity growth presents an obstacle for estimating the impact of one on the other, and lead to biased results from the standard econometric models when use for establishing a causal relationship. However, the endogeneity problem can be overcome by the use of a valid instrument. This paper uses the Chinese government's FDI policy shift of the early 1990s as an instrument for the Chinese FDI in a 2SLS analysis. The results indicate that an increase in the level of FDI as a share of existing capital stock causes an increase in the growth rate of productivity, and that foreign capital is far more productive than domestic capital even after controlling for the province fixed-effects. Thesis Supervisor: Olivier Blanchard Title: Class of 1941 Professor Economics Thesis Supervisor: Roberto Rigobon Title: Professor of Sloan School of Management