Laura Alfaro

Warren Alpert Professor of Business Administration

Laura Alfaro is the Warren Alpert Professor of Business Administration. She is also a Faculty Research Associate in the National Bureau of Economic Research's International Macroeconomics and Finance Program, Member of the Latin-American Financial Regulatory Committee (CLAAF), Faculty Associate at Harvard's Weatherhead Center for International Affairs, and member of the David Rockefeller Center for Latin American Studies’ (DRCLAS) policy committee. In 2008, she was honored as a Young Global Leader by the World Economic Forum.  She served as Minister of National Planning and Economic Policy in Costa Rica from 2010-2012. 

Laura Alfaro is the Warren Alpert Professor of Business Administration. She is also a Faculty Research Associate in the National Bureau of Economic Research's International Macroeconomics and Finance Program, Member of the Latin-American Financial Regulatory Committee (CLAAF), Faculty Associate at Harvard's Weatherhead Center for International Affairs, and member of the David Rockefeller Center for Latin American Studies’ (DRCLAS) policy committee. In 2008, she was honored as a Young Global Leader by the World Economic Forum.  She served as Minister of National Planning and Economic Policy in Costa Rica from 2010-2012.

Professor Alfaro is the author of multiple articles published in leading academic journals, and of Harvard Business School cases related to the field of international economics and in particular international capital flows, foreign direct investment, and sovereign debt. She has taught in General Management Program, the Program for Leadership Development, and in other executive education offerings as well the first year and second year MBA program and doctoral program. She earned her Ph.D. in Economics from the University of California, at Los Angeles (UCLA), where she was recipient of the Dissertation Fellowship award. She received a B.A in economics with honors from the Universidad de Costa Rica and a 'Licenciatura' from the Pontificia Universidad Catolica of Chile where she graduated with highest honors. She was awarded a Francisco Marroquin Foundation scholarship. 

Articles

  1. Sovereigns, Upstream Capital Flows and Global Imbalances

    We construct measures of net private and public capital flows for a large cross-section of developing countries considering both creditor and debtor side of the international debt transactions. Using these measures, we demonstrate that sovereign-to-sovereign transactions account for upstream capital flows and global imbalances. Specifically, we find (1) international net private capital flows (inflows minus outflows of private capital) are positively correlated with countries' productivity growth; (2) net sovereign debt flows (government borrowing minus reserves) are negatively correlated with growth only if net public debt is financed by another sovereign; (3) net public debt financed by private creditors is positively correlated with growth; and (4) public savings are strongly positively correlated with growth, whereas the correlation between private savings and growth is flat and statistically insignificant. These empirical facts contradict the conventional wisdom and constitute a challenge for the existing theories on upstream capital flows and global imbalances.

    Keywords: current account; aid/government debt; reserves; puzzles; productivity; Sovereign Finance; Developing Countries and Economies; Macroeconomics;

    Citation:

    Alfaro, Laura, Sebnem Kalemli-Ozcan, and Vadym Volosovych. "Sovereigns, Upstream Capital Flows and Global Imbalances." Journal of the European Economic Association (forthcoming). (Also NBER Working Paper 17396. Online Appendix. See International capital flows database for the data on measures of net private and public capital flows for a large cross-section of developing countries.) View Details
  2. Deregulation, Misallocation, and Size: Evidence from India

    This paper examines the impact of the deregulation of compulsory industrial licensing in India on firm size dynamics and reallocation of resources within industries. Following deregulation, resource misallocation declines, and the left-hand tail of the firm size distribution thickens significantly, suggesting increased entry by small firms. However, the dominance and growth of large incumbents remains unchallenged. Quantile regressions reveal that the distributional effects of deregulation on firm size are significantly non-linear. The reallocation of market shares toward a small number of large firms and a large number of small firms is characterized as the "shrinking middle" in Indian manufacturing. Small- and medium-sized firms may continue to face constraints in their attempts to grow.

    Keywords: Business Ventures; Size; Emerging Markets; Supply and Industry; Manufacturing Industry; India;

    Citation:

    Alfaro, Laura, and Anusha Chari. "Deregulation, Misallocation, and Size: Evidence from India." Journal of Law & Economics (forthcoming). (Revised February 2014.) View Details
  3. Sovereign Debt Restructuring: Evaluating the Impact of the Argentina Ruling

    Recent rulings in the ongoing litigation over the pari passu clause in Argentinian sovereign debt instruments have generated considerable controversy. Some official-sector participants and academic articles have suggested that the rulings will disrupt or impede future sovereign debt restructurings by encouraging holdout creditors to litigate for full payment instead of participating in negotiated exchange offers. This paper critically examines this claim and argues that the incentives for holdout litigation are limited because of (1) significant constraints on creditor litigation, (2) substantial economic and reputational costs associated with such litigation, and (3) the availability of contractual provisions and negotiating strategies that mitigate the debtor's collective action problems. It also argues that the fact-specific equitable remedy in the Argentina case was narrowly tailored to Argentina's unprecedented disregard for court opinions and for international norms of negotiating sovereign debt restructurings and is therefore unlikely to be used in future debt restructurings.

    Citation:

    Alfaro, Laura. "Sovereign Debt Restructuring: Evaluating the Impact of the Argentina Ruling." Harvard Business Law Review (forthcoming). View Details
  4. Surviving the Global Financial Crisis: Foreign Ownership and Establishment Performance

    We examine the differential response of establishments to the recent global financial crisis with particular emphasis on the role of foreign ownership. Using a worldwide establishment panel dataset, we investigate how multinational subsidiaries around the world responded to the crisis relative to local establishments. We find that first, multinational subsidiaries fared on average better than local counterfactuals with similar economic characteristics. Second, among multinational subsidiaries, establishments sharing stronger vertical production and financial linkages with parents exhibited greater resilience. Finally, in contrast to the crisis period, the effect of foreign ownership and linkages on establishment performance was insignificant in non-crisis years.

    Keywords: Globalization; Financial Crisis; Multinational Firms and Management; Data and Data Sets; Business Subsidiaries; Production; Finance; Performance; Ownership;

    Citation:

    Alfaro, Laura, and Maggie Chen. "Surviving the Global Financial Crisis: Foreign Ownership and Establishment Performance." American Economic Journal: Economic Policy 4, no. 3 (August 2012): 30–55. (Also NBER Working Paper No. 17141.) View Details
  5. India Transformed: Insights from the Firm Level 1988–2007

    Using firm-level data, this paper analyzes the transformation of India's economic structure following the implementation of economic reforms. The focus of the study is on publicly listed and unlisted firms from across a wide spectrum of manufacturing and services industries and ownership structures such as state-owned firms, business groups, and private and foreign firms. Detailed balance sheet and ownership information permit an investigation of a range of variables such as sales, profitability, and assets. Here we analyze firm characteristics shown by industry before and after liberalization and investigate how industrial concentration, the number, and size of firms of the ownership type evolved between 1988 and 2007. We find great dynamism displayed by foreign and private firms as reflected in the growth of their numbers, assets, sales, and profits. Yet, closer scrutiny reveals no dramatic transformation in the wake of liberalization. The story, rather, is one of an economy still dominated by the incumbents (state-owned firms) and, to a lesser extent, traditional private firms (firms incorporated before 1985). Sectors dominated by state-owned and traditional private firms before 1988-1990, with assets, sales, and profits representing shares higher than 50%, generally remained so in 2005. The exception to this broad pattern is the growing importance of new and large private firms in the services sector. Rates of return also have remained stable over time and show low dispersion across sectors and across ownership groups within sectors.

    Keywords: Financial Statements; Management Analysis, Tools, and Techniques; Transformation; Economics; Ownership; Assets; Sales; Profit; Stock Shares; Private Sector; Investment Return; Manufacturing Industry; Service Industry; India;

    Citation:

    Alfaro, Laura, and Anusha Chari. "India Transformed: Insights from the Firm Level 1988–2007." India Policy Forum 6 (2009). (Also NBER Working Paper w15448. Featured in The Economist. Economics focus. "Dancing elephants. Is Indian capitalism becoming oligarchic?" Jan 27th 2011.) View Details
  6. Plant-Size Distribution and Cross-Country Income Differences

    We investigate, using plant-level data for 79 developed and developing countries, whether differences in the allocation of resources across heterogeneous plants are a significant determinant of cross-country differences in income per worker. For this purpose, we use a standard version of the neoclassical growth model augmented to incorporate monopolistic competition among heterogeneous plants. For our preferred calibration, the model explains 58% of the log variance of income per worker. This figure should be compared to the 42% success rate of the usual model.

    Keywords: Factories, Labs, and Plants; Developing Countries and Economies; Wages; Resource Allocation; Mathematical Methods;

    Citation:

    Alfaro, Laura, Andrew Charlton, and Fabio Kanczuk. "Plant-Size Distribution and Cross-Country Income Differences." In NBER International Seminar on Macroeconomics 2008, edited by Jeffrey A. Frankel and Christopher Pissarides. Cambridge, MA: National Bureau of Economic Research, 2009. View Details
  7. Nominal versus Indexed Debt: A Quantitative Horse Race

    The main arguments in favor of and against nominal and indexed debt are the incentive to default through inflation versus hedging against unforeseen shocks. We model and calibrate these arguments to assess their quantitative importance. We use a dynamic equilibrium model with tax distortion, government outlays uncertainty, and contingent-debt service. Our framework also recognizes that contingent debt can be associated with incentive problems and lack of commitment. Thus, the benefits of unexpected inflation are tempered by higher interest rates. We obtain that costs from inflation more than offset the benefits from reducing tax distortions. We further discuss sustainability of nominal debt in developing (volatile) countries.

    Keywords: Borrowing and Debt; Motivation and Incentives; Inflation and Deflation; System Shocks; Taxation; Risk and Uncertainty; Framework; Problems and Challenges; Interest Rates; Cost; Developing Countries and Economies; Service Operations;

    Citation:

    Alfaro, Laura, and Fabio Kanczuk. "Nominal versus Indexed Debt: A Quantitative Horse Race." Journal of International Money and Finance 29, no. 8 (December 2010): 1706–1726. (Also Harvard Business School Working Paper No. 05-053 and NBER Working Paper No. 13131.) View Details
  8. Does Foreign Direct Investment Promote Growth? Exploring the Role of Financial Markets on Linkages

    Do multinational companies generate positive externalities for the host country? The evidence so far is mixed varying from beneficial to detrimental effects of foreign direct investment (FDI) on growth, with many studies that find no effect. In order to provide an explanation for this empirical ambiguity, we formalize a mechanism that emphasizes the role of local financial markets in enabling FDI to promote growth through backward linkages. Using realistic parameter values, we quantify the response of growth to FDI and show that an increase in the share of FDI leads to higher additional growth in financially developed economies relative to financially under-developed ones.

    Keywords: Foreign Direct Investment; Multinational Firms and Management; Financial Markets; Value; Stock Shares; Development Economics;

    Citation:

    Alfaro, Laura, Sebnem Kalemli-Ozcan, Areendam Chanda, and Selin Sayek. "Does Foreign Direct Investment Promote Growth? Exploring the Role of Financial Markets on Linkages." Journal of Development Economics 91, no. 2 (March 2010): 242–256. (Also Harvard Business School Working Paper No. 07-013 and NBER Working Paper No. w12522.) View Details
  9. Intra-Industry Foreign Direct Investment

    We use a new firm-level dataset that establishes the location, ownership, and activity of 650,000 multinational subsidiaries. Using a combination of four-digit-level information and input-output tables, we find the share of vertical FDI (subsidiaries that provide inputs to their parent firms) to be larger than commonly thought, even within developed countries. Most subsidiaries are not readily explained by the comparative advantage considerations whereby multinationals locate activities abroad to take advantage of factor cost differences. Instead, multinationals tend to own the stages of production proximate to their final production, giving rise to a class of high-skill, intra-industry vertical FDI.

    Keywords: Business Subsidiaries; Competency and Skills; Foreign Direct Investment; Geographic Location; Multinational Firms and Management; Industry Structures; Production;

    Citation:

    Alfaro, Laura, and Andrew Charlton. "Intra-Industry Foreign Direct Investment." American Economic Review 99, no. 5 (December 2009): 2096–2119. (Also Harvard Business School Working Paper No. 08-018 and NBER Working Paper No. 13447.) View Details
  10. Debt Maturity: Is Long-Term Debt Optimal?

    We model and calibrate the arguments in favor and against short-term and long-term debt. These arguments broadly include: maturity premium, sustainability, and service smoothing. We use a dynamic equilibrium model with tax distortions and government outlays uncertainty, and model maturity as the fraction of debt that needs to be rolled over every period. In the model, the benefits of defaulting are tempered by higher future interest rates. We then calibrate our artificial economy and solve for the optimal debt maturity for Brazil as an example of a developing country and the U.S. as an example of a mature economy. We obtain that the calibrated costs from defaulting on long-term debt more than offset costs associated with short-term debt. Therefore, short-term debt implies higher welfare levels.

    Keywords: Borrowing and Debt; Investment Return; Development Economics; Taxation; Risk and Uncertainty; Cost; Interest Rates; Developing Countries and Economies; Welfare or Wellbeing; United States; Brazil;

    Citation:

    Alfaro, Laura, and Fabio Kanczuk. "Debt Maturity: Is Long-Term Debt Optimal?" Review of International Economics 17, no. 5 (2009): 890–905. (Also Harvard Business School Working Paper, No. 06-005 and NBER Working Paper No. 13119.) View Details
  11. Optimal Reserve Management and Sovereign Debt

    Most models currently used to determine optimal foreign reserve holdings take the level of international debt as given. However, given the sovereign's willingness-to-pay incentive problems, reserve accumulation may reduce sustainable debt levels. In addition, assuming constant debt levels does not allow addressing one of the puzzles behind using reserves as a means to avoid the negative effects of crisis: why do not sovereign countries reduce their sovereign debt instead? To study the joint decision of holding sovereign debt and reserves, we construct a stochastic dynamic equilibrium model calibrated to a sample of emerging markets. We obtain that the reserve accumulation does not play a quantitatively important role in this model. In fact, we find the optimal policy is not to hold reserves at all. This finding is robust to considering interest rate shocks, sudden stops, contingent reserves and reserve dependent output costs.

    Keywords: Borrowing and Debt; Motivation and Incentives; Decisions; Emerging Markets; Balance and Stability; Earnings Management; Policy; Interest Rates; International Finance; Cost;

    Citation:

    Alfaro, Laura, and Fabio Kanczuk. "Optimal Reserve Management and Sovereign Debt." Journal of International Economics 77, no. 1 (February 2009): 23–36. (Also Harvard Business School Working Paper, No. 07-010, 2006 and NBER Working Paper No. 13216.) View Details
  12. FDI, Productivity, and Financial Development

    This paper examines the effect of foreign direct investment (FDI) on growth by focusing on the complementarities between FDI inflows and financial markets. In our earlier work, we found that FDI is beneficial for growth only if the host country has well-developed financial institutions. In this paper, we investigate whether this effect operates through factor accumulation and/or improvements in total factor productivity (TFP). Factor accumulation—physical and human capital—does not seem to be the main channel through which countries benefit from FDI. Instead, we find that countries with well-developed financial markets gain significantly from FDI via TFP improvements. These results are consistent with the recent findings in the growth literature that shows the important role of TFP over factors in explaining cross-country income differences.

    Keywords: Human Capital; Income Characteristics; Performance Productivity; Financial Markets; Foreign Direct Investment; Financial Institutions; Cross-Cultural and Cross-Border Issues;

    Citation:

    Alfaro, Laura, Sebnem Kalemli-Ozcan, and Selin Sayek. "FDI, Productivity, and Financial Development." Special Issue on Multinational Enterprises and Foreign Direct Investment World Economy 32, no. 1 (January 2009): 111–135. View Details
  13. Why Doesn't Capital Flow from Rich to Poor Countries? An Empirical Investigation

    We examine the empirical role of different explanations for the lack of capital flows from rich to poor countries—the "Lucas Paradox." The theoretical explanations include cross country differences in fundamentals affecting productivity and capital market imperfections. We show that during 1970-2000, low institutional quality is the leading explanation. Improving Peru's institutional quality to Australia's level implies a quadrupling of foreign investment. Recent studies emphasize the role of institutions for achieving higher levels of income but remain silent on the specific mechanisms. Our results indicate that foreign investment might be a channel through which institutions affect long-run development.

    Keywords: International Finance; Wealth and Poverty; Development Economics; Income Characteristics; Capital Markets; Cross-Cultural and Cross-Border Issues; Australia; Peru;

    Citation:

    Alfaro, Laura, Sebnem Kalemli-Ozcan, and Vadym Volosovych. "Why Doesn't Capital Flow from Rich to Poor Countries? An Empirical Investigation." Review of Economics and Statistics 90, no. 2 (May 2008): 347–368. View Details
  14. Capital Flows and Capital Goods

    Studying the relation between equity market liberalization and imports of capital goods, we examine one channel through which international financial integration can promote growth. For the period 1980–1997, we find that after controlling for other policies and fundamentals, stock market liberalizations are associated with a significant increase in the share of imports of machinery and equipment. We hypothesize this can be attributed to the consequences of financial integration, which allows access to foreign capital, and provide evidence consistent with this channel. Our results suggest that increased access to international capital allows countries to enjoy the benefits embodied in capital goods.

    Keywords: Cash Flow; Equity; Financial Markets; Economy; Distribution Channels; Machinery and Machining; Capital;

    Citation:

    Alfaro, Laura, and Eliza Hammel. "Capital Flows and Capital Goods." Journal of International Economics 72, no. 1 (May 2007): 128–150. (Link to working paper version.) View Details
  15. Sovereign Debt As a Contingent Claim: A Quantitative Approach

    We construct a dynamic equilibrium model with contingent service and adverse selection to quantitatively study sovereign debt. In the model, benefits of defaulting are tempered by higher future interest rates. For a wide set of parameters, the only equilibrium is one in which the sovereign defaults in all states; additional output losses, however, sustain equilibria that resemble the data. We show that due to the adverse selection problem, some countries choose to delay default to reduce loss of reputation. Moreover, although equilibria with no default imply in greater welfare levels, they are not sustainable in highly indebted and volatile countries.

    Keywords: Sovereign Finance; Borrowing and Debt; Interest Rates; Balance and Stability; Risk and Uncertainty; Risk Management; Mathematical Methods; Management Style; Segmentation; Debt Securities; Banking Industry;

    Citation:

    Alfaro, Laura, and Fabio Kanczuk. "Sovereign Debt As a Contingent Claim: A Quantitative Approach." Journal of International Economics 65, no. 2 (March 2005). View Details
  16. Inflation, Openness, and Exchange Rate Regimes

    This paper further tests Romer's (1993) extension of Kydland and Prescott's (1977) predictions for dynamic-inconsistency problems in open economies. In a panel data set of developed and developing countries from 1973 to 1998, I find that openness does not play a role in restricting inflation in the short-run. On the other hand, a fixed exchange-rate regime plays a significant role. The results are robust to controlling for other variables that determine inflation, performing sensitivity analysis, and using a de facto exchange-rate regime classification.

    Keywords: Forecasting and Prediction; Economy; Currency Exchange Rate; Developing Countries and Economies; Inflation and Deflation;

    Citation:

    Alfaro, Laura. "Inflation, Openness, and Exchange Rate Regimes." Journal of Development Economics 77, no. 1 (June 2005). View Details
  17. FDI and Economic Growth: The Role of Local Financial Markets

    The purpose of this paper is to examine the various links among foreign direct investment, financial markets and growth. We model an economy with a continuum of agents indexed by their level of ability. Agents have two choices: they can work for the foreign company in the FDI sector and use their wealth to earn a return or they can choose to undertake entrepreneurial activities, which are subject to a fixed cost. Better financial markets allow agents in the economy to take advantage of knowledge spillovers from FDI. The empirical evidence suggests that FDI plays an important role in contributing to economic growth. However, the level development of local financial markets is crucial for these positive effects to be realized.

    Keywords: Foreign Direct Investment; Financial Markets; Economic Growth; Cost; Wealth; Investment Return; Knowledge;

    Citation:

    Alfaro, Laura, Areendam Chanda, Sebnem Kalemli-Ozcan, and Selin Sayek. "FDI and Economic Growth: The Role of Local Financial Markets." Journal of International Economics 64, no. 1 (October 2004). View Details
  18. Multinationals and Linkages: An Empirical Investigation

    Several recent papers have used plant-level data and panel econometric techniques to carefully explore the existence FDI externalities. One conclusion that emerges from this literature is that it is difficult to find evidence of positive externalities from multinationals to local firms in the same sector (horizontal externalities). In fact, many studies find evidence of negative horizontal externalities arising from multinational activity while confirming the existence of positive externalities from multinationals to local firms in upstream industries (vertical externalities). In this paper we explore the channels through which these positive and negative externalities may be materializing, focusing on the role of backward linkages. In particular, we criticize the common usage of the domestic sourcing coefficient as an indicator of a firm's linkage potential and propose an alternative, theoretically derived indicator. We then use plant-level data from several Latin American countries to compare multinationals' linkage potential to that of domestic firms. We find that multinationals' linkage potential in Brazil, Chile and Venezuela is higher than for domestic firms. For Mexico, we cannot reject the hypothesis that foreign and local firms have similar linkage potential. Finally, we discuss the relationship between this finding and the conclusions that emerge from the recent empirical literature.

    Keywords: Foreign Direct Investment; Factories, Labs, and Plants; Relationships; Multinational Firms and Management; Brazil; Chile; Venezuela; Mexico;

    Citation:

    Alfaro, Laura, and Andres Rodriguez-Clare. "Multinationals and Linkages: An Empirical Investigation." Economía (spring 2004). View Details
  19. Capital Controls: A Political Economy Approach

    This paper examines the economic consequences of political conflicts that arise when countries implement capital controls. In an overlapping-generations model, agents vote on whether to open or close an economy to capital flows. The young (workers) receive income from wages only while the old (capitalists) receive income from savings only. We characterize the set of stationary equilibria for an infinite horizon game. Assuming dynamic-efficiency, when the median representative is a worker (capitalist), capital-importing countries will open (close) while capital-exporting countries will close (open). These predicted patterns are consistent with data on liberalization policies over time and across various countries.

    Keywords: Economy; Voting; Conflict of Interests; Capital; Government and Politics; Wages; Saving; Forecasting and Prediction;

    Citation:

    Alfaro, Laura. "Capital Controls: A Political Economy Approach." Review of International Economics 12, no. 4 (September 2004). View Details
  20. Capital Controls, Risk and Liberalization Cycles

    The paper presents an overlapping-generations model where agents vote on whether to open or close the economy to international capital flows. Political decisions are shaped by the risk over capital and labor returns. In an open economy, the capitalists (old) completely hedge their savings income. In contrast, in a closed economy, the workers (young) partially insulate wages from the productivity shocks.There are three possible equilibrium outcomes: economies that eventually remain open; those that eventually remain closed; and those that cycle between open and closed. In line with the stylized facts, cycles are more common in economies with intermediate development levels.

    Keywords: Business Cycles; Development Economics; Voting; Risk and Uncertainty; Cash Flow; Saving; Investment; Economy; Wages;

    Citation:

    Alfaro, Laura, and Fabio Kanczuk. "Capital Controls, Risk and Liberalization Cycles." Review of International Economics 12, no. 3 (August 2004). View Details
  21. On the Political Economy of Temporary Stabilization Programs

    This paper provides a political economy explanation for temporary exchange-rate-based stabilization programs by focusing on the distributional effects of real exchange-rate appreciation. I propose an economy in which agents are endowed with either tradable or nontradable goods. Under a cash-in-advance assumption, a temporary reduction in the devaluation rate induces a consumption boom accompanied by real appreciation, which hurts the owners of tradable goods. The owners of nontradables have to weigh two opposing effects: an increase in the present value of nontradable goods wealth and a negative intertemporal substitution effect. For reasonable parameter values, owners of nontradables are better off.

    Keywords: Government and Politics; Economy; Balance and Stability; Programs; Currency Exchange Rate; Cash; Value; Distribution;

    Citation:

    Alfaro, Laura. "On the Political Economy of Temporary Stabilization Programs." Economics & Politics (July 2002). View Details

Book Chapters

  1. Growth and the Quality of Foreign Direct Investment: Is All FDI Equal?

    In this paper we distinguish different "qualities" of FDI to re-examine the relationship between FDI and growth. We use "quality" to mean the effect of a unit of FDI on economic growth. However, this is difficult to establish because it is a function of many different country and project characteristics, which are often hard to measure. Hence, we differentiate "quality FDI" in several different ways. First, we look at the possibility that the effects of FDI differ by sector. Second, we differentiate FDI based on objective qualitative industry characteristics including the average skill intensity and reliance on external capital. Third, we use a new dataset on industry-level targeting to analyze quality FDI based on the subjective preferences expressed by the receiving countries themselves. Finally, we use a two-stage least squares methodology to control for measurement error and endogeneity. Exploiting a new comprehensive industry level data set of 29 countries between 1985 and 2000, we find that the growth effects of FDI increase when we account for the quality of FDI.

    Keywords: Quality; Economic Growth; Foreign Direct Investment;

    Citation:

    Alfaro, Laura, and Andrew Charlton. "Growth and the Quality of Foreign Direct Investment: Is All FDI Equal?" In The Industrial Policy Revolution I: The Role of Government Beyond Ideology. no. 151-1, edited by Joseph E. Stiglitz and Justin Lin Yifu. IEA Conference Volume. London: Palgrave Macmillan, 2013. View Details
  2. Foreign Direct Investment and Growth

    This paper examines the evolution of the literature on the relationship between foreign direct investment (FDI) and growth in host countries, particularly developing countries. It provides a broad overview, with a focus on two elements that have recently become particularly important, (1) the role of complementary local conditions conducive to reaping the benefits of FDI (which relate to when FDI will generate growth) and (2) the mechanisms by which FDI creates positive externalities (which relate to how FDI generates growth).

    Keywords: economic growth; Spillovers; Complementarity; mechanism; Globalization; Foreign Direct Investment;

    Citation:

    Alfaro, Laura, and Matthew Johnson. "Foreign Direct Investment and Growth." Chap. 20 in The Evidence and Impact of Financial Globalization, edited by Gerard Caprio, 299–307. Elsevier, 2012. View Details
  3. Capital Flows in a Globalized World: The Role of Policies and Institutions

    Keywords: International Finance; Capital; Government and Politics; Policy; Financial Institutions;

    Citation:

    Alfaro, Laura, Sebnem Kalemli-Ozcan, and Vadym Volosovych. "Capital Flows in a Globalized World: The Role of Policies and Institutions." In Capital Controls and Capital Flows in Emerging Economies: Policies, Practices, and Consequences, edited by Sebastian Edwards. National Bureau of Economic Research Conference Report. University of Chicago Press, 2007. (Also NBER Working Paper No. 11696.) View Details

Other Publications, Comments, and Book Reviews

  1. Pseudo-flexible Exchange-rate Regimes

    According to the IMF, last decade saw a number of countries actively managing their exchange rates. Is this a good way for emerging economies to protect themselves from the large swings of international markets? This column presents a new "pseudo-flexible" exchange rate policy for emerging economies that is both sustainable and allows for accumulating reserves in conjunction with domestic debt, resulting in low exchange-rate volatility.

    Keywords: flexiblility; International Markets; managing exchange rates; Currency Exchange Rate;

    Citation:

    Alfaro, Laura, and Fabio Kanczuk. "Pseudo-flexible Exchange-rate Regimes." Vox (July 15, 2013). View Details
  2. Upstream Sovereigns

    With all the focus on Europe, it is easy to ignore the argument that global imbalances remain a drag on economic recovery. This column decomposes international capital flows into public and private components and claims that upstream flows from emerging to advanced economies and global imbalances in general are the result of the same underlying factor.

    Keywords: Globalized Economies and Regions; Business Cycles; Balance and Stability; Capital; Developing Countries and Economies;

    Citation:

    Alfaro, Laura, Sebnem Kalemli-Ozcan, and Vadym Volosovych. "Upstream Sovereigns." Vox (October 29, 2011). View Details
  3. Lawsuits and Empire: On the Enforcement of Sovereign Debt in Latin America

    The re-occurring phenomenon of sovereign default has prompted an enormous theoretical and empirical literature. Most of this research has focused on why countries ever chose to pay their debts (or why private creditors ever expected repayment). The problem originates from the fact that repayment incentives for sovereign debts are minimal since little can be used as collateral and the ability of a court to force a sovereign entity to comply has been extremely limited, especially given the lack of a supranational legal authority capable of enforcing contracts across borders. In this paper we contrast the market reaction to attempts to enforce sovereign debt contracts via U.S. "dollar diplomacy" in Latin America in the pre-World War II period and by legal action in the 1990s and early 2000s. We argue that dollar diplomacy created an effective and credible enforcement regime while legal actions by creditors, conversely, do not appear to have done so.

    Keywords: Lawsuits and Litigation; Insolvency and Bankruptcy; Sovereign Finance; Borrowing and Debt; Debt Securities; Motivation and Incentives; Markets; Equity; Banking Industry; Latin America;

    Citation:

    Ahmed, Faisal Z., Laura Alfaro, and Noel Maurer. "Lawsuits and Empire: On the Enforcement of Sovereign Debt in Latin America." Law and Contemporary Problems 73, no. 4 (fall 2010). View Details
  4. Multinational Firms, Agglomeration, and Global Networks

    Agglomeration effects are important but difficult to measure. This column uses a new database with precise geographical information to investigate the locational interdependence of multinational firms. Knowledge spillovers and capital- and labour-market externalities exert a significant effect on the co-agglomeration of multinational headquarters, while input-output linkages also play a significant role in the case of subsidiary co-agglomeration.

    Keywords: Geographic Location; Business Subsidiaries; Industry Clusters; Multinational Firms and Management; Network Effects;

    Citation:

    Alfaro, Laura, and Maggie Chen. "Multinational Firms, Agglomeration, and Global Networks." Vox (January 8, 2010). View Details
  5. The Transformation of India: Incumbent Control, Reforms, and Newcomers

    What microeconomic forces drove the structural transformation of India's economy in recent decades? This column studies firm-level data and portrays a dynamic economy driven by the growth of private and foreign firms. But the Indian economy did not go through an industrial shakeout phase driven by creative destruction. The endurance of incumbent firms prevented a dramatic microeconomic transformation.

    Keywords: Transformation; Microeconomics; India;

    Citation:

    Alfaro, Laura, and Anusha Chari. "The Transformation of India: Incumbent Control, Reforms, and Newcomers." Vox (December 12, 2009). View Details

Working Papers

  1. The Real Effects of Capital Controls: Financial Constraints, Exporters, and Firm Investment

    In aftermath of the global financial crisis of 2008–2009, emerging-market governments have increasingly restricted foreign capital inflows. The data show a statistically significant drop in cumulative abnormal returns for Brazilian firms following capital control announcements. Large firms and the largest exporting firms appear less negatively affected compared to external-finance-dependent firms, and capital controls on equity have a more negative announcement effect than those on debt. Real investment falls following the controls. Overall, the results suggest that capital controls segment international financial markets, increase the cost of capital, reduce the availability of external finance, and lower firm-level investment.

    Citation:

    Alfaro, Laura, Anusha Chari, and Fabio Kanczuk. "The Real Effects of Capital Controls: Financial Constraints, Exporters, and Firm Investment." Harvard Business School Working Paper, No. 15-016, September 2014. View Details
  2. Foreign Direct Investment: Effects, Complementarities, and Promotion

    In 1996, Intel Corporation announced the construction of a semiconductor assembly plant in Costa Rica. Production started in 1998. Intel's investment was six times what had been the annual foreign direct investment (FDI) in this Central American country of 3.5 million people (see Spar, 1998) and it marked the expansion of FDI in electronics, medical devices, and business services by companies such as Boston Scientific, Hewlett Packard, IBM, and Procter & Gamble. But Intel's investment in Costa Rica was also emblematic of the desire of Central American countries to move away from textile and clothing manufacturing into higher-end manufacturing and services, in hopes of boosting development efforts by promoting technology upgrades, knowledge spillovers, and linkages of foreign with domestic firms. In 2014, the company announced the restructuring of the facilities. Intel's Global Services Center as well as the company's Engineering and Design Center will remain in their current location in Costa Rica. These operations will gain relevance in Research & Development-related activities. As part of its global strategy, the company will relocate its assembly and test operation to Asia, where these activities will be concentrated. Headcount for R&D services operations currently reaches 1200 people and new positions were recently announced.

    Keywords: Foreign Direct Investment; Semiconductor Industry; Asia; Costa Rica;

    Citation:

    Alfaro, Laura. "Foreign Direct Investment: Effects, Complementarities, and Promotion." Harvard Business School Working Paper, No. 15-006, August 2014. (Chapter in preparation for edited book on Foreign Direct Investment, Interamerican Development Bank-IADB.) View Details
  3. Do Prices Determine Vertical Integration?*

    What is the relationship between product prices and vertical integration? While the literature has focused on how integration affects prices, this paper provides evidence that prices can affect integration. Many theories in organizational economics and industrial organization posit that integration, while costly, increases productivity. It follows from firms' maximizing behavior that higher prices induce more integration. The reason is that at low prices, increases in revenue resulting from enhanced productivity are too small to justify the cost, whereas at high prices the revenue benefit exceeds the cost. Trade policy provides a source of exogenous price variation to assess the validity of this prediction: higher tariffs should lead to higher prices and therefore to more integration. We construct firm level indices of vertical integration for a large set of countries and industries and exploit cross-section and time-series variation in import tariffs to examine their impact on firm boundaries. Our empirical results provide strong support for the view that output prices are a key determinant of vertical integration.

    Keywords: Trade; Policy; Ownership; Business and Government Relations; Vertical Integration; Boundaries;

    Citation:

    Alfaro, Laura, Paola Conconi, Harald Fadinger, and Andrew F. Newman. "Do Prices Determine Vertical Integration?*." Working Paper, February 2014. (Revised November 2013. Previous version available as NBER Working Paper 16118 and CEPR Discussion Paper 7899.) View Details
  4. Debt Redemption, Reserve Accumulation, and Exchange-Rate Regimes

    Foreign participation in local-currency-bond markets in emerging countries has increased dramatically over the past decade. In light of this trend, we revisit the question of the optimal exchange-rate regime when developing countries can borrow internationally with local-currency-denominated debt. We find that, as local-currency-bond markets develop, a "pseudo-flexible regime," whereby a country accumulates reserves in conjunction with debt, is the policy that most effectively stabilizes fluctuations under real external shocks.

    Keywords: foreign reserves; local-currency bonds; carry trade; exchange-rate regimes; International Finance; Currency Exchange Rate; Financial Markets; Developing Countries and Economies;

    Citation:

    Alfaro, Laura, and Fabio Kanczuk. "Debt Redemption, Reserve Accumulation, and Exchange-Rate Regimes." Harvard Business School Working Paper, No. 13-074, February 2013. (Revised July 2014. NBER Working Paper Series, No. 19098, June 2013) View Details
  5. Market Reallocation and Knowledge Spillover: The Gains from Multinational Production

    Quantifying the gains from multinational production has been a vital topic of economic research. Positive productivity gains are often attributed to knowledge spillover from multinational to domestic firms. An alternative, less emphasized explanation is market reallocation, whereby competition from multinationals leads to factor reallocation and the survival of only the most productive domestic firms. We develop a model that incorporates both aspects and quantify their relative importance in the gains from multinational production by exploring their distinct predictions for domestic distributions of productivity and revenue. We show that knowledge spillover shifts both distributions rightward while market reallocation raises the left truncation of the distributions and shifts revenue leftward. Using a rich firm-level panel dataset that spans 60 countries, we find that both market reallocation and knowledge spillover are significant sources of productivity gain. Ignoring the role of market reallocation can lead to significant bias in understanding the nature of gains from multinational production.

    Keywords: Gains from Multinational Production; Market Reallocation; Knowledge Spillover; Multinational Firms and Management; Production; Performance Productivity; Competition; Mathematical Methods;

    Citation:

    Alfaro, Laura, and Maggie X. Chen. "Market Reallocation and Knowledge Spillover: The Gains from Multinational Production." Harvard Business School Working Paper, No. 12-111, June 2012. (Revised June 2013.) View Details
  6. The Global Agglomeration of Multinational Firms

    The explosion of multinational activities in recent decades is rapidly transforming the global landscape of industrial production. But are the emerging clusters of multinational production the rule or the exception? What drives the offshore agglomeration of multinational firms in comparison to the agglomeration of domestic firms? Using a unique worldwide plant-level dataset that reports detailed location, ownership, and operation information for plants in over 100 countries, we construct a spatially continuous index of pairwise-industry agglomeration and investigate the patterns and determinants underlying the global economic geography of multinational firms. Our analysis presents new stylized facts that suggest the emerging offshore clusters of multinationals are not a simple reflection of domestic industrial clusters. Agglomeration economies including capital-good market externality and technology diffusion play a more important role in the offshore agglomeration of multinationals than the agglomeration of domestic firms. These findings remain robust when we address potential reverse causality by exploring the regional pattern and process of agglomeration.

    Keywords: Geographic Location; Multinational Firms and Management; Globalized Markets and Industries; Market Entry and Exit; Industry Clusters;

    Citation:

    Alfaro, Laura, and Maggie Chen. "The Global Agglomeration of Multinational Firms." Harvard Business School Working Paper, No. 10-043, December 2009. (Revised April 2014. NBER Working Paper Series, No. 15576, December 2009) View Details
  7. International Financial Integration and Entrepreneurial Firm Activity

    We explore the relation between international financial integration and the level of entrepreneurial activity in a country. We use a unique firm-level data set in a broad sample of developed and developing countries, which enables us to present both cross-country and industry-level evidence. We find a positive robust correlation between de jure and de facto measures of international financial integration and proxies for entrepreneurial activity such as entry, size, and skewness of the firm-size distribution. We then explore potential channels through which foreign capital may encourage entrepreneurship. We find that entrepreneurial activity is higher in industries which have a large share of foreign firms in vertically linked industries. Second, we find that entrepreneurial activity in industries which are more reliant on external finance is disproportionately affected by international financial integration.

    Keywords: Country; Capital; Integration; Entrepreneurship; Developing Countries and Economies;

    Citation:

    Alfaro, Laura, and Andrew Charlton. "International Financial Integration and Entrepreneurial Firm Activity." Harvard Business School Working Paper, No. 07-012, August 2006. (Also NBER Working Paper No. 13118.) View Details

Casebook

  1. Global Capital and National Institutions: Crisis and Choice in the International Financial Architecture

    All managers face a business environment in which international and macroeconomic phenomena matter. International capital flows can significantly affect countries' development efforts and provide clear investment opportunities for businesses. During the 1990s and early 2000s, the world witnessed an explosion in capital flows at the global level. Gross foreign assets and liabilities stood at two or three times GDP for many countries, as compared to just two decades ago. This explosive growth, especially in emerging markets, has been fueled both by changes in world politics (e.g., the end of the Cold War, collapse of the Soviet Union, shifting political climate in China, and political changes in Latin America and Asia) and advances in technology. Private capital flows—debt finance, equity capital, and foreign direct investment (FDI)—became larger than current and past official capital flows. This new era of foreign capital mobility has also been characterized by low interest rates in industrial countries, growing external imbalances in the U.S. economy, and the rise of China, all of which posed new challenges to policy management. In 2009, the global economy remained mired in a deep crisis following the subprime meltdown in the U.S. The situation was also a true testimony of how intertwined individual economies had become over the years. The effect of policies to deal with the ongoing global crisis and new policy choices remain to be seen. Understanding these phenomena—the determinants of capital flows, the effects of foreign capital on host countries, the impact of exchange-rate movements, and the genesis of financial and currency crises—is a crucial aspect to making informed managerial decisions. The cases in this book have been designed to give students an appreciation of the critical role of institutions and policies in affecting patterns of international capital flows and the abilities of government to manage them effectively. The case studies are tied together by two broad themes: (1) the determinants and effects of international capital, and (2) policy-makers' management of these flows. The cases approach these themes by exploring institutional detail in deep local context. The cases expose students to recent key events that have shaped the way economists think about these subjects. The events covered have a clear global perspective as the cases are set in Africa, Asia, Europe and Latin America, as well as the United States. The cases also cover events that occurred during the last three decades as not only do they affect the business environment that managers face today but they also hold important lessons. An important feature the cases reveal is the cyclical nature of international capital flows. Global Capital and National Institutions: Crisis and Choice in the International Financial Architecture is composed of three intellectual segments: (1) Determinants and Effects of International Capital Flows, (2) Policies and Strategies for Harnessing the Benefits of Financial Globalization, (3) Challenges and Policies of Large Economies. Chapter I presents a detailed overview of the cases and readings in the module and relates the cases included to the main patterns of international capital flows in the last thirty years. Finally, the chapter also presents the key insights from the field of international economics covered in the cases as well as the current state of debate among policy-makers.

    Keywords: Financial Crisis; Capital; International Finance; Globalized Economies and Regions; Policy; Government and Politics; Business and Government Relations;

Cases and Teaching Materials

  1. The United Kingdom and the Means to Prosperity

    After struggling through the country’s longest recession since 2008, the U.K. was expected to grow faster than any other G7 nation in 2014. Analysts wondered whether the return to growth was because, or in spite of, Prime Minister David Cameron’s controversial £113 billion austerity plan introduced in 2010. Despite the positive upturn in the economy, U.K. policymakers still faced challenges with rapidly rising income inequality, an economy dominated by the financial sector, a possible housing bubble, and an approaching referendum on Scotland’s independence. Moreover, many claimed the U.K. was at risk of secular stagnation, a slowdown in economic growth caused by a structural deficiency in demand. What could the government do to put the country on a sustained and balanced growth trajectory?

    Keywords: United Kingdom; Keynesian multiplier; macroeconomics; inflation; inflation targeting; government spending; government intervention in the markets; monetary policy; financial crisis; financial crisis management; austerity; inequality; public finance; government finance; Macroeconomics; Economics; Government and Politics; Inflation and Deflation; Financial Crisis; Economic Slowdown and Stagnation; Economic Growth; Business Cycles; Welfare or Wellbeing; United Kingdom;

    Citation:

    Alfaro, Laura, Lakshmi Iyer, and Hilary White. "The United Kingdom and the Means to Prosperity." Harvard Business School Case 715-008, September 2014. View Details
  2. Land Acquisition in India: Public Purpose and Private Property (C)

    Keywords: india; special economic zones; land markets; land politics; industrial development; land reform; developing markets; developing countries; industrialization; Industrial property; Economic Growth; Developing Countries and Economies; Economics; Economy; Macroeconomics; Social Issues; India; Asia; South Asia;

    Citation:

    Alfaro, Laura, Lakshmi Iyer, and Rachna Tahilyani. "Land Acquisition in India: Public Purpose and Private Property (C)." Harvard Business School Supplement 714-023, December 2013. View Details
  3. The U.S. Shale Revolution: Global Rebalancing?

    Beginning less than a decade ago, the U.S. shale revolution began transforming the nation's energy outlook. Technological advances in horizontal drilling and "fracking" facilitated access to substantial new reserves of natural gas and light oil, imbedded in shale formations thousands of feet beneath the earth's surface. With gas reserves up by more than 47%, natural gas prices fell from $12 to $3 per thousand cubic feet. Tight oil production in North Dakota and Texas soared to more than 500,000 barrels daily. Because government policy directly controlled gas exports (as LNG), oil exports, and pipeline imports, public policy became the object of intense disputes among oil and gas producers, manufacturing and petrochemical interests, utilities, and environmentalists. Exporting gas (or oil) could affect higher prices in the United States but yield significant revenues, jobs, and balance-of-payments benefits. Refraining from exporting, however, would help consumers, reduce coal combustion, and attract energy-intensive businesses to the United States. And by reducing imports, America's foreign policy interests in the Middle East could also change. It remained to be seen what U.S policy would ultimately imply for the world economy.

    Keywords: oil and gas; oil and gas production; Natural Gas; economics; macroeconomics; Trade policy; trade; manufacturing; obama; LNG; petroleum; Middle East; energy; Energy Industry; International macroeconomics; United States; Japan; foreign policy; Energy; Trade; Economics; Macroeconomics; Energy Industry; Manufacturing Industry; United States; Middle East;

    Citation:

    Alfaro, Laura, Richard H.K. Vietor, and Hilary White. "The U.S. Shale Revolution: Global Rebalancing?" Harvard Business School Case 714-008, September 2013. (Revised March 2014.) View Details
  4. Brazil's Enigma: Sustaining Long-Term Growth & Currency Wars

    Over the past decade, Brazil's future as a leading world economic power appeared certain. An expanding middle class and commodity boom had fueled economic growth, with GDP growth hitting a peak of 7.5% in 2010. However, the high cost of conducting business in Brazil, known as "Custo Brasil," was hurting domestic manufacturing, while incoming foreign investments threatened to overwhelm Brazilian markets. Under President Dilma Rousseff, economic growth stagnated, and the Rousseff administration struggled to find the best balance between reducing inflation, maintaining a flexible exchange rate, and improving the competitiveness of Brazilian exports.

    Keywords: exchange rate; inflation; inflation targeting; industrialization; infrastructure; currency; capital controls; stimulus; commodity prices; manufacturing costs; globalization; productivity growth; Economics; Economic Slowdown and Stagnation; Inflation and Deflation; Macroeconomics; Public Sector; Brazil; South America; Latin America;

    Citation:

    Alfaro, Laura, and Hilary White. "Brazil's Enigma: Sustaining Long-Term Growth & Currency Wars." Harvard Business School Teaching Note 713-092, June 2013. View Details
  5. Kinyuseisaku: Monetary Policy in Japan (C)

    Assuming office in December 2012, Prime Minister Shinzo Abe was determined to revive Japan's stagnating economy through an ambitious plan known as 'Abenomics.' Under the guidance of the newly appointed governor of the central bank, Haruhiko Kuroda, the Bank of Japan adopted quantitative easing as its new monetary policy, pledging to double the nation's monetary base in two years through the purchase of long-term government bonds. While Kuroda insisted that Japan needed to "use every means available" to combat deflation, critics wondered whether inflation would increase the nation's public-sector debt to unsustainable levels or outpace growth in wages. Furthermore, skeptics debated whether Prime Minister Abe was wise to make the Bank of Japan the key player in moving the nation toward economic growth. Others questioned whether, unlike in the past, the Bank of Japan would take the necessary steps to carry through with the policy.

    Keywords: Japan; inflation targeting; inflation; Abenomics; monetary policy; stimulus; quantitative easing; government bonds; Macroeconomics; Inflation and Deflation; Money; Economic Slowdown and Stagnation; Japan;

    Citation:

    Alfaro, Laura, and Hilary White. "Kinyuseisaku: Monetary Policy in Japan (C)." Harvard Business School Supplement 713-086, May 2013. View Details
  6. Currency Wars

    In February 2013, the G-20 finance ministers met in Moscow, Russia to discuss the rising anxieties over a potential international currency war. It was speculated that certain countries were purposely devaluing their currencies in order to improve their competitiveness in global markets. Emerging markets contended that the expansionary monetary policies of the major central banks, such as the US Federal Reserve, European Central Bank, and the Bank of England, were causing significant and detrimental spillover effects, such as currency appreciation, declining exports, and rising inflation, in less developed economies. Conversely, the major central banks insisted that such policies were necessary for reviving economic growth both domestically and internationally. Would these policies successfully create a resurgence of growth? Can expansionary monetary policies be considered "beggar-thy-neighbor" actions by emerging markets? How should developing nations respond?

    Keywords: currency; competitiveness; Trade policy; Devaluation; exchange rate; monetary policy; quantitative easing; inflation targeting; capital flows; Central Banking; Currency Exchange Rate; Competitive Strategy; Emerging Markets; Policy; Trade; Conflict and Resolution; Banking Industry; Public Administration Industry; Moscow;

    Citation:

    Alfaro, Laura, and Hilary White. "Currency Wars." Harvard Business School Case 713-074, March 2013. View Details
  7. Australia: Commodities and Competitiveness (TN)

    For the past few decades, Australia has dealt with the benefits and costs of repeated mining booms—inflation, a housing bubble, a current account deficit and growing dependence on China. Between 1996 and 2007, however, Australia had most of these issues under control and grew at impressive rates, becoming one of the richest of developed countries. Yet competitiveness in its non-mining sectors declined. Since the financial crisis, additional challenges associated with climate change, minerals taxes, migration and an overvalued currency have complicated the issues facing Julia Gillard and her Labor Party, with a very thin majority.

    Keywords: competitiveness; inflation; mining; current account; Exchange rates; trade; capital flows; commodities; environment; carbon tax; Goods and Commodities; Australia;

    Citation:

    Alfaro, Laura, Richard H.K. Vietor, and Hilary White. "Australia: Commodities and Competitiveness (TN)." Harvard Business School Teaching Note 713-063, February 2013. View Details
  8. Brazil's Enigma: Sustaining Long-Term Growth

    Over the past decade, Brazil's future as a leading world economic power appeared certain. An expanding middle class and commodity boom had fueled economic growth, with GDP growth hitting a peak of 7.5% in 2010. However, the high cost of conducting business in Brazil, known as "Custo Brasil," was hurting domestic manufacturing, while incoming foreign investments threatened to overwhelm Brazilian markets. Under President Dilma Rousseff, economic growth stagnated, and the Rousseff administration struggled to find the best balance between reducing inflation, maintaining a flexible exchange rate, and improving the competitiveness of Brazilian exports.

    Keywords: capital controls; inflation; Exchange rates; stimulus; competitiveness; productivity growth; foreign investment; infrastructure; Inflation and Deflation; Currency Exchange Rate; Brazil;

    Citation:

    Alfaro, Laura, and Hilary White. "Brazil's Enigma: Sustaining Long-Term Growth." Harvard Business School Case 713-040, October 2012. (Revised September 2013.) View Details
  9. Australia: Commodities and Competitiveness

    For the past few decades, Australia has dealt with the benefits and costs of repeated mining booms—inflation, a housing bubble, a current account deficit and growing dependence on China. Between 1996 and 2007, however, Australia had most of these issues under control and grew at impressive rates, becoming one of the richest of developed countries. Yet competitiveness in its non-mining sectors declined. Since the financial crisis, additional challenges associated with climate change, minerals taxes, migration and an overvalued currency have complicated the issues facing Julia Gillard and her Labor Party, with a very thin majority.

    Keywords: commodities; competitiveness; carbon tax; environment; capital flows; current account; mining; Goods and Commodities; Australia;

    Citation:

    Alfaro, Laura, Richard H.K. Vietor, Bill Russell, and Hilary White. "Australia: Commodities and Competitiveness." Harvard Business School Case 713-015, August 2012. (Revised January 2014.) View Details
  10. Chile's Copper Surplus: The Road Not Taken (A)

    In 2008, Andres Velasco, Chile's Finance Minister, was under mounting criticisms over his fiscal policy. As the world's largest copper producer, Chile was benefiting from the rise in copper prices, which had more than tripled since 2003. Copper revenues translated into greater income for the government as Chile's biggest copper producer, Codelco, was a state-owned enterprise. Velasco had chosen to save the bulk of the copper revenues into two stabilization funds; by the end of August 2008, the collective amount represented more than 20% of Chile's GDP. Several critics wanted the funds to be used to improve the poor public education system, income gap, and other impending social issues. After all, Chile had one of the most unequal distributions of wealth in the world. Productivity was stagnant and economic growth had slowed down significantly since the 1990s. What should Velasco do amid growing public discontent? Was it really in Chile's best interest to keep saving the copper wealth?

    Keywords: Developing Countries and Economies; Economic Growth; Metals and Minerals; Investment Funds; Policy; State Ownership; Wealth; Chile;

    Citation:

    Alfaro, Laura, Dante Roscini, and Renee Kim. "Chile's Copper Surplus: The Road Not Taken (A)." Harvard Business School Case 710-019, March 2010. (Revised May 2013.) View Details
  11. Chile's Copper Surplus: The Road Not Taken (B)

    In 2009, Chile's Finance Minister Andres Velasco's fortunes had been reversed. His fiscal policy that had come under attack just a year ago had been used to finance a $4 billion fiscal stimulus package amid the global economic downturn. Velasco was now Chile's most popular minister. However, the future of Chile's fiscal policy was questionable with the election of a new president, Sebastian Pinera, the first conservative leader to lead Chile in two decades.

    Keywords: Developing Countries and Economies; Financial Crisis; Financial Strategy; Financing and Loans; Policy; Government and Politics; Chile;

    Citation:

    Alfaro, Laura, Dante Roscini, and Renee Kim. "Chile's Copper Surplus: The Road Not Taken (B)." Harvard Business School Supplement 710-020, March 2010. (Revised May 2013.) View Details
  12. Crisis and Reform in Japan's Banking System (A)

    In 1997, amidst Japan's ongoing financial problems, Prime Minister Ryutaro Hashimoto sought to restructure the financial sector to make it more transparent and globally competitive. He hoped that this effort, dubbed the "Big Bang" after the British financial restructuring a decade earlier, would prove as successful. But the financial problems, which seemed to have abated, looked as if they might be worsening. Thus, Hashimoto had to weigh priorities. Should he focus on long-term restructuring, immediate financial rescue, or both? Might an over-emphasis on long-term restructuring increase the chances that major banks could collapse? And what were the best economic and political strategies in these arenas? As a major developed economy, Japan offers an analog to the problems that faced the United States in its 2008–2009 financial crisis.

    Keywords: Financial Crisis; Capital; Banks and Banking; Crisis Management; Business and Government Relations; Banking Industry; Japan;

    Citation:

    Porte, Thierry, Rawi E. Abdelal, Laura Alfaro, and Jonathan Schlefer. "Crisis and Reform in Japan's Banking System (A)." Harvard Business School Case 710-036, November 2009. (Revised June 2012.) View Details
  13. Crisis and Reform in Japan's Banking System (B)

    In 1997, amidst Japan's ongoing financial problems, Prime Minister Ryutaro Hashimoto sought to restructure the financial sector to make it more transparent and globally competitive. He hoped that this effort, dubbed the "Big Bang" after the British financial restructuring of a decade earlier, would prove as successful. But the financial problems, which seemed to have abated, looked as if they might be worsening. Thus, Hashimoto had to weigh priorities. Should he focus on long-term restructuring, immediate financial rescue, or both? Might an over-emphasis on long-term restructuring increase the chances that major banks could collapse? And what were the best economic and political strategies in these arenas? As a major developed economy, Japan offers an analog to the problems that faced the United States in its 2008-09 financial crisis.

    Keywords: History; Adaptation; Policy; Globalized Markets and Industries; Financial Crisis; Business and Government Relations; Macroeconomics; Restructuring; Global Strategy; Banks and Banking; Banking Industry; Japan;

    Citation:

    Porte, Thierry, Rawi E. Abdelal, Laura Alfaro, and Jonathan Schlefer. "Crisis and Reform in Japan's Banking System (B)." Harvard Business School Supplement 710-037, November 2009. (Revised June 2012.) View Details
  14. Australia: The Riches and Challenges of Commodities (TN)

    Teaching Note for 709007.

    Keywords: Futures and Commodity Futures; Financial Crisis; Demand and Consumers; Trade; Natural Environment; Business and Government Relations; Policy; Growth and Development Strategy; Australia;

    Citation:

    Alfaro, Laura, and Renee Kim. "Australia: The Riches and Challenges of Commodities (TN)." Harvard Business School Teaching Note 710-066, June 2010. View Details
  15. Australia: The Riches and Challenges of Commodities

    Australia's Prime Minister Kevin Rudd faced a daunting task that he never imagined he would have to face when he was elected two years ago. Australia at that time was poised to enter its 17th year of uninterrupted growth. Commodity exports were booming, largely driven by China's insatiable appetite for raw materials. Then the global financial crisis erupted in 2008, brewing challenges for the world's biggest exporter of coal and iron ore. Prime Minister Rudd pushed for massive stimulus packages to revive domestic consumption and demand. Yet as an economy heavily dependent on trade, tumbling commodity prices brewed difficult times for Australia's trade deficit and its persistent large current account deficit. What was in hold for Australia's deficit, which had been in the red all but four years since 1950? In addition, how should policymakers address the intense concerns regarding China's growing interest in Australia's prized natural resources sector?

    Keywords: Financial Crisis; Trade; Foreign Direct Investment; Policy; Crisis Management; China; Australia;

    Citation:

    Alfaro, Laura, and Renee Kim. "Australia: The Riches and Challenges of Commodities." Harvard Business School Case 709-007, June 2009. (Revised May 2013.) View Details
  16. Special Economic Zones in India: Public Purpose and Private Property (A)

    In 2005, the government of India enacted the Special Economic Zones (SEZ) Act in order to attract investment, generate export revenues, and create manufacturing jobs. However, several planned projects faced difficulties in acquiring land for setting up the SEZ. In December 2007, the government introduced a new piece of legislation, which proposed to extend the power of eminent domain to allow the government to acquire land for SEZs. Was this the right response to the land acquisition problems of private firms? Was the SEZ strategy the right one for India's economic growth?

    Keywords: Acquisition; Development Economics; Economic Growth; Policy; Government Legislation; Property; Business and Community Relations; Business and Government Relations; India;

    Citation:

    Alfaro, Laura, and Lakshmi Iyer. "Special Economic Zones in India: Public Purpose and Private Property (A)." Harvard Business School Case 709-027, December 2008. (Revised October 2012.) View Details
  17. Tata Motors in Singur: Public Purpose and Private Property (B)

    In October 2008, Tata Motors canceled their car manufacturing plant in West Bengal state, in the face of widespread farmer protests over land acquisition issues. This meant abandoning a project in which the company had invested $300 million and delaying the launch of the Nano, the world's cheapest car. What strategy could Tata have pursued to avoid this outcome? Would similar problems arise in Gujarat state, where the project had been relocated?

    Keywords: Business Exit or Shutdown; Rights; Emerging Markets; Property; Business and Government Relations; Conflict and Resolution; Auto Industry; Manufacturing Industry; West Bengal;

    Citation:

    Alfaro, Laura, Lakshmi Iyer, and Namrata Arora. "Tata Motors in Singur: Public Purpose and Private Property (B)." Harvard Business School Case 709-029, February 2009. (Revised October 2012.) View Details
  18. The First Global Financial Crisis of the 21st Century

    The global economy was expected to suffer from negative growth for the full year in 2009, a phenomenon not seen since World War II. While the U.S. subprime mortgage disaster was blamed as the original instigator, it was noted that the "global imbalances" of the U.S. current account deficit funded for many years by other nations such as China were also a chief culprit of the crisis. Policymakers around the world recognized that the scope and scale of the financial crisis required a coordinated global response. Yet there were conflicting views on what kind of action was needed to address the first global financial crisis of the 21st century.

    Keywords: Financial Crisis; Mortgages; Globalized Economies and Regions; Policy; International Relations; Business and Government Relations; Conflict and Resolution;

    Citation:

    Alfaro, Laura, and Renee Kim. "The First Global Financial Crisis of the 21st Century." Harvard Business School Case 709-057, April 2009. View Details
  19. U.S. Subprime Mortgage Crisis: Policy Reactions (A)

    By March 2008, the U.S. Government and the U.S. Federal Reserve Board had taken various policy measures over the last few months to tackle the subprime mortgage crisis that threatened to drag the economy into a recession. The Bush administration approved a fiscal stimulus package exceeding $150 billion. Interest rates had been repeatedly cut at the fastest pace in decades, to 2.25% as of March 2008. The Fed, in an unprecedented move, helped JPMorgan Chase to take over Bear Stearns, which was on the brink of collapse. Yet as the global economy faced slower growth stemming from the U.S. mortgage crisis, policy makers were caught in an intense debate over what the 'right' solution would be, and the implication of these policies on global imbalances.

    Keywords: Financial Crisis; Inflation and Deflation; Central Banking; Mortgages; Policy; Business and Government Relations; United States;

    Citation:

    Alfaro, Laura, and Renee Kim. "U.S. Subprime Mortgage Crisis: Policy Reactions (A)." Harvard Business School Case 708-036, March 2008. (Revised July 2009.) View Details
  20. U.S. Subprime Mortgage Crisis: Policy Reactions (B)

    In March 2009, the U.S. economy was in a severe recession not seen since the Great Depression after the subprime mortgage crisis had spiraled out of control. The situation had dramatically changed in one year since the Federal Reserve Board had helped to bailout investment bank Bear Stearns. Deflation, not inflation, had become a top concern. Interest rates were near zero percent. Five million jobs had been lost. The new Barack Obama administration had pushed forward with a $787 billion stimulus package, coupled with various programs to address the frozen credit markets and depressed investors' confidence. Yet the burning question in every policymaker's mind was-how effective would the various plans work to revive the U.S. economy?

    Keywords: Financial Crisis; Central Banking; Mortgages; Globalized Economies and Regions; Policy; United States;

    Citation:

    Alfaro, Laura, and Renee Kim. "U.S. Subprime Mortgage Crisis: Policy Reactions (B)." Harvard Business School Case 709-045, April 2009. (Revised June 2010.) View Details
  21. U.S. Subprime Mortgage Crisis: Policy Reactions (TN) (A) and (B)

    Teaching Note for [708036] and [709045].

    Keywords: Mortgages; Crisis Management; Government and Politics; Financial Services Industry; United States;

    Citation:

    Alfaro, Laura, and Renee Kim. "U.S. Subprime Mortgage Crisis: Policy Reactions (TN) (A) and (B)." Harvard Business School Teaching Note 710-003, August 2009. View Details
  22. Sovereign Wealth Funds: For Profits or Politics?

    On March 21, 2008, the U.S. government secured an agreement from two leading sovereign wealth funds (SWFs) to adopt a new set of investment principles to govern the Funds' activities. SWFs, broadly defined as an investment fund owned by a national or a government, were gaining prominence across the globe, especially with their recent investments in troubled U.S. financial firms that had suffered significant losses from the subprime mortgage crisis. Yet SWFs were viewed with suspicions amid concerns that they could have potential political interests behind their investments. Many SWFs also lacked disclosure or transparency regarding their activities or investment goals. Countries such as the United States felt that some kind of international regulation had to be imposed, but would it be possible?

    Keywords: Foreign Direct Investment; Investment Funds; Sovereign Finance; Corporate Disclosure; Governing Rules, Regulations, and Reforms; International Relations; State Ownership; United States;

    Citation:

    Alfaro, Laura, and Renee Kim. "Sovereign Wealth Funds: For Profits or Politics?" Harvard Business School Case 708-053, May 2008. (Revised July 2009.) View Details
  23. Kinyuseisaku: Monetary Policy in Japan (A)

    Toshihiko Fukui, Governor of the Bank of Japan, faced a complex situation in the fall of 2007. An economic recovery had allowed the central bank to abandon its zero interest rate policy, which had been in place for years, and raise rates to 0.5%. The Bank of Japan was eager to increase them to more “normal” levels to exert effective monetary policy. Yet the appropriate timing and approach was a controversial issue, especially as the government did not want a rate hike that could potentially hinder economic growth and increase its already large fiscal debt burden.

    Keywords: Inflation and Deflation; Money; Central Banking; Interest Rates; Policy; Japan;

    Citation:

    Alfaro, Laura, and Akiko Kanno. "Kinyuseisaku: Monetary Policy in Japan (A)." Harvard Business School Case 708-017, January 2008. (Revised April 2009.) View Details
  24. Kinyuseisaku: Monetary Policy in Japan (B)

    Toshihiko Fukui, Governor of the Bank of Japan, faced a complex situation in the fall of 2007. An economic recovery had allowed the central bank to abandon its zero interest rate policy, which had been in place for years, and raise rates to 0.5%. The Bank of Japan was eager to increase them to more "normal" levels to exert effective monetary policy. Yet the appropriate timing and approach was a controversial issue, especially as the government did not want a rate hike that could potentially hinder economic growth and increase its already large fiscal debt burden.

    Keywords: Inflation and Deflation; Money; Central Banking; Interest Rates; Policy; Japan;

    Citation:

    Alfaro, Laura, and Akiko Kanno. "Kinyuseisaku: Monetary Policy in Japan (B)." Harvard Business School Supplement 709-056, March 2009. (Revised May 2013.) View Details
  25. Chronology of the Asian Financial Crisis

    In July 1997, Thailand became the first Asian "tiger" economy to abandon its fixed exchange rate system in response to speculative attacks on its currency. Investors started to flee Asia, and the crisis rapidly spread to other countries. Central banks spent billions of dollars to try and defend their currencies, only to seek emergency bailouts from the International Monetary Fund. This case presents a chronology of events that unraveled during the Asian financial crisis from 1997 to the end of 1998.

    Keywords: Financial Crisis; Currency Exchange Rate; Central Banking; Policy; Crisis Management; Asia; Thailand;

    Citation:

    Alfaro, Laura, Rafael Di Tella, and Renee Kim. "Chronology of the Asian Financial Crisis." Harvard Business School Case 708-001, February 2008. (Revised April 2009.) View Details
  26. Transforming Korea Inc: Financial Crisis and Institutional Reform

    South Korea, as one of the Asian "tiger" economies, transformed itself into the world's 11th largest economy and major exporter by 1996, emerging from being one of the lowest income countries in the region back in the 1960s. Yet one year later in 1997, Korea was swept up in the Asian financial crisis and sought a record $58 billion bailout from the International Monetary Fund. The crisis exposed fundamental weaknesses in the Korean economy, from bad loans to reckless growth policies pursued by large conglomerates. Sweeping reforms took place and the Korean economy rebounded quickly. Yet as Korea approached the 10-year anniversary of the crisis, the nation found itself pondering whether it had implemented enough institutional and structural reforms, or whether more had to be done, such as searching for a new economic development model to ensure its future.

    Keywords: Development Economics; Financial Crisis; Governing Rules, Regulations, and Reforms; Business and Government Relations; South Korea;

    Citation:

    Alfaro, Laura, and Renee Kim. "Transforming Korea Inc: Financial Crisis and Institutional Reform." Harvard Business School Case 708-007, October 2007. (Revised May 2008.) View Details
  27. Transforming Korea Inc: Financial Crisis and Institutional Reform (TN)

    Teaching Note for 708007.

    Keywords: Financial Crisis; Governing Rules, Regulations, and Reforms; Transformation; Policy; Development Economics; Investment Funds; International Finance; Financing and Loans; South Korea;

    Citation:

    Alfaro, Laura, and Renee Kim. "Transforming Korea Inc: Financial Crisis and Institutional Reform (TN)." Harvard Business School Teaching Note 708-027, October 2007. View Details
  28. Korea: After the 1997 Financial Crisis

    Examines what happened to Korea after the 1997 financial crisis and the implementation of the IMF-mandated reforms imposed on Korea as conditionalities to the country's emergency loan package.

    Keywords: Financial Crisis; Macroeconomics; Financing and Loans; Governing Rules, Regulations, and Reforms; Crisis Management; South Korea;

    Citation:

    Alfaro, Laura, Rafael M. Di Tella, and Renee Kim. "Korea: After the 1997 Financial Crisis." Harvard Business School Case 707-042, March 2007. (Revised January 2008.) View Details
  29. Creditor Activism in Sovereign Debt: "Vulture" Tactics or Market Backbone

    The role of distressed debt funds, also known as "vulture funds," in sovereign debt restructuring was a hotly debated topic, especially after the success of Elliot Associates in converting an $11 million investment in Peruvian bonds worth $21 million into a $58 million cash payout from the country, representing the full face value of the bonds plus past-due interest. Highlights the problems associated with debt restructuring coordination. On the one hand, many observers derided firms such as Elliot and Dart as "vultures" or "rouge creditors" who sought to profit on sovereign debt restructurings at the expense of countries suffering economic hardship and of the majority of bondholders whose cooperation allowed the restructurings to take place. Critics believed that these holdout creditors created "collective action problems" and presented a major obstacle to successful sovereign debt restructurings. On the other hand, other observers argued that activist investors actually improved the market overall by demonstrating the enforceability of contracts. In fact, they argued that creditors faced too many hurdles in collecting against countries after receiving favorable judgments in support of claims.

    Keywords: Borrowing and Debt; Bonds; Investment Activism; Investment Funds; Sovereign Finance; Government and Politics; Contracts; Business and Government Relations; Peru;

    Citation:

    Alfaro, Laura, and Ingrid Vogel. Creditor Activism in Sovereign Debt: "Vulture" Tactics or Market Backbone. Harvard Business School Case 706-057, June 2006. (Revised December 2007.) View Details
  30. Creditor Activism in Sovereign Debt: "Vulture" Tactics or Market Backbone (TN)

    Teaching Note to 706057.

    Keywords: Borrowing and Debt; Financing and Loans; Bonds; Contracts; Investment Activism;

    Citation:

    Alfaro, Laura, and Ingrid Vogel. Creditor Activism in Sovereign Debt: "Vulture" Tactics or Market Backbone (TN). Harvard Business School Teaching Note 708-010, August 2007. View Details
  31. International Capital Markets and Sovereign Debt: Crisis Avoidance and Resolution

    Successive economic crises of the 1990s and early 2000s intensified focus on reform of the "international financial architecture." Because many of these crises involved defaults on sovereign bonds, an important component of the discussion revolved around the composition of international capital flows and sovereign debt restructuring. With the official sector, private creditors, and sovereign debtors focused on different issues, proposals surrounding the topic varied widely. Describes some of the proposals and summarizes scholarship on their advantages and disadvantages.

    Keywords: Capital; Markets; Sovereign Finance; Conflict and Resolution; Financial Crisis;

    Citation:

    Alfaro, Laura, and Ingrid Vogel. "International Capital Markets and Sovereign Debt: Crisis Avoidance and Resolution." Harvard Business School Background Note 707-018, November 2006. (Revised May 2007.) View Details
  32. Aid, Debt Relief, and Trade: An Agenda for Fighting World Poverty (A)

    At the 2005 Group of Eight summit, world leaders agreed to relieve the world's poorest countries' debt burdens and double aid to Africa by 2010. The announcement raised questions whether debt relief would really help the poor. By examining past aid trends and policies of multilateral institutions, such as the International Monetary Fund and the World Bank, this case also questions whether aid can allow poor countries to break the vicious cycle of poverty, and/or how aid can be used effectively.

    Keywords: Developing Countries and Economies; Borrowing and Debt; Capital; International Relations; Nonprofit Organizations; Poverty; Welfare or Wellbeing; Africa;

    Citation:

    Alfaro, Laura, Eric D. Werker, and Renee Kim. "Aid, Debt Relief, and Trade: An Agenda for Fighting World Poverty (A)." Harvard Business School Case 707-029, April 2007. (Revised July 2007.) View Details
  33. Aid, Debt Relief, and Trade: An Agenda for Fighting World Poverty (TN) (A) and (B)

    Keywords: Money; Borrowing and Debt; Trade; Poverty;

    Citation:

    Alfaro, Laura, Eric D. Werker, and Renee Kim. "Aid, Debt Relief, and Trade: An Agenda for Fighting World Poverty (TN) (A) and (B)." Harvard Business School Teaching Note 707-049, June 2007. (Revised February 2008.) View Details
  34. Rovna Dan: The Flat Tax in Slovakia

    Explores the tax policy choices made by Slovakia and the impact of reforms. Set in 2006, looks at the decision facing new Prime Minister Robert Fico as he faces the public's "reform fatigue." Traces the development of tax and fiscal policies since Slovakia's independence in 1993, focusing on the 2004 implementation of the rovna dan, or "equal tax," a drastic simplification of the tax system. A major theme is the impact of labor market and welfare reform, as well as the effective tax rates of both investors and workers. Another important theme relates to Slovakia's desire to join the EU and adopt the Euro.

    Keywords: Investment; Governing Rules, Regulations, and Reforms; Policy; Taxation; Labor; Welfare or Wellbeing; Slovakia;

    Citation:

    Alfaro, Laura, Rafael M. Di Tella, Ane Damgaard Jensen, and Vincent Marie Dessain. "Rovna Dan: The Flat Tax in Slovakia." Harvard Business School Case 707-043, March 2007. (Revised March 2010.) View Details
  35. Foreign Direct Investment and Ireland's Tiger Economy (A)

    Describes Ireland's transformation from one of Europe's poorest countries to one of its richest in just 10 years, earning it the title Celtic Tiger. The spectacular story of growth and recovery is attributed, in large part, to foreign direct investment (FDI), particularly from the United Sates. The government of Ireland has continually nurtured the climate for investment and through its investment promotion arm, Ireland Development Authority (IDA), has aggressively sought investment projects. Despite the apparent miracle, some question the FDI-focused policy and special incentives given. Their skepticism stems largely from the fact that Ireland's indigenous industry has remained on the periphery of this transformation, with limited linkages to the foreign sector. Offers an opportunity to examine the debate surrounding FDI. Was FDI the key ingredient in Ireland's success? What does it take for a country to attract FDI? Did government agencies, specifically IDA, play a role in the Irish success story? Also, analyzes other causes of growth--namely, Ireland's entry into the European Union and subsequent larger market access, as well as a sound macroeconomic policy.

    Keywords: Developing Countries and Economies; Economic Growth; Macroeconomics; Foreign Direct Investment; Policy; Business and Government Relations; Republic of Ireland;

    Citation:

    Alfaro, Laura, Vinati Dev, and Stephen McIntyre. "Foreign Direct Investment and Ireland's Tiger Economy (A)." Harvard Business School Case 706-007, July 2005. (Revised March 2010.) View Details
  36. The U.S. Current Account Deficit

    Investors and policymakers throughout the world were confronted with the risk of painful economic consequences arising from the large U.S. current account deficit. In 2007, the U.S. current account deficit was $731 billion, equivalent to 5.3% of GDP. The implications of the deficit were debated with intensity. At one extreme, it was argued that large deficits would eventually resolve themselves smoothly, even if they persisted for many more years. Former Federal Reserve Chairman Alan Greenspan was among those expecting a "benign resolution to the U.S. current account imbalance." Other analysts, such as economists at the World Bank, believed the large deficits raised the risk of a sharp and disorderly fall of the dollar and that necessary macroeconomic adjustment could be painful, for the United States as well as for the rest of the world. The Financial Times asked: "How long will foreigners be prepared to make such generous 'gifts' to the US?" In this environment, Berkshire Hathaway, run by legendary investor Warren Buffett, postulated that current account imbalances would lead to "some chaotic markets in which currency adjustments play a part" and announced to shareholders a plan to increase investment in overseas companies to protect against this risk. It remained to be seen what the short- and long-term implications of the current account deficit would ultimately yield.

    Keywords: Macroeconomics; Borrowing and Debt; Currency; Foreign Direct Investment; Business and Government Relations; United States;

    Citation:

    Alfaro, Laura, Rafael M. Di Tella, Ingrid Vogel, Renee Kim, and Matthew Johnson. "The U.S. Current Account Deficit." Harvard Business School Case 706-002, July 2005. (Revised August 2014.) View Details
  37. China: To Float or Not To Float? (A)

    On July 21, 2005 China revalued its decade-long quasi-fixed exchange rate of approximately 8.28 yuan per U.S. dollar by 2.1% to 8.11 and, at the same time, introduced a more market-based exchange rate system. Many analysts and economists were disappointed with what they considered too small a change and called for more flexibility in the U.S. dollar/yuan exchange rate. Modification to China's exchange rate regime had been eagerly anticipated and much debated in the preceding months as China's trade surplus against the United States reached record highs and as friction intensified with Europe and Japan. Also, analysts argued that the tightly managed exchange rate put a strain on China's own economy. Not only was the exchange rate expensive to sustain, but it contributed to--as well as limited China's flexibility in responding to--a potentially overheating economy. Although China's extensive controls on the movement of capital into the country helped to counteract some inflationary pressure, controls were becoming more porous as China increasingly integrated with the world economy. It remained to be seen what China would ultimately choose to do with its exchange rate regime.

    Keywords: Macroeconomics; Trade; Currency Exchange Rate; Governance Controls; Policy; Growth and Development Strategy; China;

    Citation:

    Alfaro, Laura, Rafael M. Di Tella, and Ingrid Vogel. "China: To Float or Not To Float? (A)." Harvard Business School Case 706-021, March 2006. (Revised April 2010.) View Details
  38. China: To Float or Not To Float? (B) - Timeline of Changes Relevant to the Chinese Renminbi

    On July 21, 2005 China revalued its decade-long quasi-fixed exchange rate of approximately 8.28 yuan per U.S. dollar by 2.1% to 8.11% and, at the same time, introduced a more market-based exchange rate system. Many analysts and economists were disappointed with what they considered too small a change and called for more flexibility in the U.S. dollar-yuan exchange rate. Provides a timeline of further changes relevant to the Chinese renminbi.

    Keywords: currency; exchange rate; China; Macroeconomics; Trade; Currency Exchange Rate; Governance Controls; Policy; China; United States;

    Citation:

    Alfaro, Laura, Rafael M. Di Tella, Ingrid Vogel, Renee Kim, Bill Russell, and Hilary White. "China: To Float or Not To Float? (B) - Timeline of Changes Relevant to the Chinese Renminbi." Harvard Business School Case 706-022, March 2006. (Revised March 2014.) View Details
  39. China: To Float or Not To Float? (C)- Esquel Group and the Chinese Renminbi

    In July 2005, China revalued its currency by 2.1% and adjusted its exchange rate regime toward a more market-based system. Esquel Group, a family-run, privately held textiles firm specializing in high-quality cotton shirts with its most significant manufacturing base located in China, was among those companies confronted with the challenge of addressing the revaluation of the yuan and the possibility of future appreciation. Provides a brief overview of China's textile industry and background on Esquel Group.

    Keywords: Family Business; Currency Exchange Rate; Private Ownership; Problems and Challenges; Value Creation; China;

    Citation:

    Alfaro, Laura, Rafael M. Di Tella, and Ingrid Vogel. "China: To Float or Not To Float? (C)- Esquel Group and the Chinese Renminbi." Harvard Business School Case 706-023, March 2006. (Revised November 2006.) View Details
  40. China: To Float or Not To Float? (D)- Bank of America's Strategic Investment in China Construction Bank

    With its $3 billion investment in Chinese state bank China Construction Bank, Bank of America--the second U.S. bank behind Citigroup in terms of assets and market capitalization--was one of several foreign banks directly participating in China's banking sector reform. Banking sector reform was considered by some analysts to be an important complement to capital account liberalization and further changes to China's exchange rate regime.

    Keywords: Currency Exchange Rate; Banks and Banking; Foreign Direct Investment; International Relations; Banking Industry; China; United States;

    Citation:

    Alfaro, Laura, Rafael M. Di Tella, and Ingrid Vogel. "China: To Float or Not To Float? (D)- Bank of America's Strategic Investment in China Construction Bank." Harvard Business School Case 706-031, March 2006. (Revised November 2006.) View Details
  41. China: To Float or Not To Float? (E)- ABB Investment in China

    In July 2005, China revalued its currency by 2.1% and adjusted its exchange rate regime toward a more market-based system. ABB, a global power and automation technologies company based out of Switzerland with operations in China, was among those companies confronted with the challenge of addressing the revaluation of the yuan and the possibility of future appreciation. Provides background on ABB's activities in China as well as incentives provided by Chinese officials for multinational corporations to move inland.

    Keywords: Currency Exchange Rate; Investment; Multinational Firms and Management; International Relations; Problems and Challenges; Value Creation; China; Switzerland;

    Citation:

    Alfaro, Laura, Rafael M. Di Tella, and Ingrid Vogel. "China: To Float or Not To Float? (E)- ABB Investment in China." Harvard Business School Case 706-035, March 2006. (Revised November 2006.) View Details
  42. China: To Float or Not To Float? (F)- Alcatel and Strong Chinese Competition

    The Chinese operations of Alcatel, a global communications solution provider based in France, were faced with strong local competition and a difficult market. It remained unclear how Alcatel would be able to recover growth in the Chinese market. Initiatives were underway to increase focus on services over equipment, to increase Chinese research and development presence, and to merge with U.S. competitor Lucent.

    Keywords: Currency Exchange Rate; International Relations; Growth and Development Strategy; Research and Development; Competitive Strategy; Horizontal Integration; Communications Industry; China; France; United States;

    Citation:

    Alfaro, Laura, Rafael M. Di Tella, and Ingrid Vogel. "China: To Float or Not To Float? (F)- Alcatel and Strong Chinese Competition." Harvard Business School Case 706-036, May 2006. (Revised November 2006.) View Details
  43. Capital Controls in Chile in the 1990s (A)

    In 1991, Chile adopted a framework of capital controls focused on reducing the massive flows of foreign investment coming into the country as international interest rates remained low. Capital inflows threatened the Central Bank's ability to manage the exchange rate within a crawling band, which aimed eventually to lower Chile's rate of inflation to international levels. Until the Asian financial crisis of 1997 and the Russian debt crisis of August 1998, the Chilean economy performed spectacularly under, or perhaps in spite of, these controls. In the aftermath of the Asian and Russian crises, Chile's economy began to suffer through both trade and financial channels. Chile's current account deteriorated not only because Chile relied on Asia as a market for one-third of its exports, but also as the price of cooper, Chile's largest export product, plummeted in the face of dwindling Asian demand. Financial flows to Chile, like to emerging markets in general, fell dramatically as investors panicked. By the end of 1999, Chile had experienced Latin America's most severe "sudden stop" of external capital flows. In this new economic environment, Chile was forced to reevaluate its system of capital controls. Many observers in the private sector blamed the controls for unnecessarily adding to the strain and demanded the controls be dismantled completely. Meanwhile, Chile's Central Bank continued to defend the controls and argued that they had helped insulate the country for worse contagion.

    Keywords: Developing Countries and Economies; Economic Growth; Financial Crisis; Capital; Governance Controls; Business and Government Relations; Chile;

    Citation:

    Alfaro, Laura, Rafael M. Di Tella, and Ingrid Vogel. "Capital Controls in Chile in the 1990s (A)." Harvard Business School Case 705-031, March 2005. (Revised July 2007.) View Details
  44. Capital Controls in Chile in the 1990s (B)

    Supplements the (A) case.

    Keywords: Governance Controls; Financial Crisis; Foreign Direct Investment; Currency Exchange Rate; Inflation and Deflation; Demand and Consumers; Interest Rates; Capital; System; Central Banking; Chile;

    Citation:

    Alfaro, Laura, Rafael M. Di Tella, and Ingrid Vogel. "Capital Controls in Chile in the 1990s (B)." Harvard Business School Case 705-032, March 2005. (Revised June 2005.) View Details
  45. Brazil 2003: Inflation Targeting and Debt Dynamics

    In October 2002, Brazilians elected a left-wing president, Luis Inacio Lula da Silva, for the first time in that country's history. As markets faltered in response, Lula sought to reaffirm his commitment to fiscal discipline, a floating exchange rate, and inflation targeting. By August 2003, however, his attempt to change market sentiment was threatened as the country faced a looming recession. Skeptics began to worry that the new PT (Worker's Party) government would be forced to resort to printing money to meet its campaign promises. Furthermore, after Argentina's massive default on its public debt at the end of 2001, observers were questioning the sustainability of Brazil's debt situation. Lula was under intense pressure to deliver results immediately and implement measures that would help spur the economy.

    Keywords: Economy; Inflation and Deflation; Money; Borrowing and Debt; Policy; Emerging Markets; Brazil;

    Citation:

    Alfaro, Laura, Rafael M. Di Tella, and Ingrid Vogel. "Brazil 2003: Inflation Targeting and Debt Dynamics." Harvard Business School Case 704-028, February 2004. (Revised March 2010.) View Details
  46. Brazil 2003: Inflation Targeting and Debt Dynamics (Abridged)

    In October 2002, Brazilians elected a left-wing president, Luis Inacio Lula da Silva, for the first time in that country's history. As markets faltered in response, Lula sought to reaffirm his commitment to fiscal discipline, a floating exchange rate, and inflation targeting. By August 2003, however, his attempt to change market sentiment was threatened as the country faced a looming recession. Skeptics began to worry that the new PT (Worker's Party) government would be forced to resort to printing money to meet its campaign promises. Furthermore, after Argentina's massive default on its public debt at the end of 2001, observers were questioning the sustainability of Brazil's debt situation. Lula was under intense pressure to deliver results immediately and implement measures that would help spur the economy.

    Keywords: Brazil; inflation; Brazil;

    Citation:

    Alfaro, Laura, and Rafael Di Tella. "Brazil 2003: Inflation Targeting and Debt Dynamics (Abridged) ." Harvard Business School Case 713-041, October 2012. View Details
  47. Brazil 2003: Inflation Targeting and Debt Dynamics (TN)

    Teaching Note to (9-704-028).

    Keywords: Inflation and Deflation; Borrowing and Debt; Brazil;

    Citation:

    Alfaro, Laura, Rafael M. Di Tella, and Ingrid Vogel. "Brazil 2003: Inflation Targeting and Debt Dynamics (TN)." Harvard Business School Teaching Note 704-039, May 2004. (Revised July 2008.) View Details
  48. Malaysia: Capital and Control

    On September 1, 1998, the government of Malaysia imposed currency and capital controls in response to the financial crisis that had swept Asia. The controls sparked an enormous controversy in the world of international finance. Some celebrated the controls for insulating the Malaysian economy from the unstable international financial system. Others criticized the controls for trapping investors and allowing the government to protect the interests of "cronies." This debate also raised the central question about the future of the international financial architecture: What is the appropriate balance between financial market freedom and government discretion in the management of the global economy?

    Keywords: Business and Government Relations; International Finance; Policy; Crisis Management; Balance and Stability; Globalized Economies and Regions; Malaysia;

    Citation:

    Abdelal, Rawi E., and Laura Alfaro. "Malaysia: Capital and Control." Harvard Business School Case 702-040, April 2002. (Revised April 2003.) View Details
  49. Capital Controls

    Only in the waning years of the 20th century did international financial markets begin to enjoy the freedom from government regulation that they had experienced before the first world war. By 2002, international capital markets had grown to be enormous--$1.2 trillion flowed around the globe per day. The massive size of the market presented policy makers with a serious challenge as they were forced to grapple with the costs and benefits of such mobile capital. This note briefly relates the modern history of capital controls and summarizes scholarship on the advantages and disadvantages of international financial market regulation.

    Keywords: History; Policy; Business and Government Relations; Change Management; Cost vs Benefits; Governance Controls; Governance Compliance; Emerging Markets; Financial Markets; Network Effects; Banking Industry; Financial Services Industry;

    Citation:

    Abdelal, Rawi E., and Laura Alfaro. "Capital Controls." Harvard Business School Background Note 702-082, April 2002. (Revised September 2002.) View Details
  50. Botswana: A Diamond in the Rough

    In the years since independence, tiny, landlocked Botswana has gone from being one of the world's poorest nations to becoming a stable, prosperous state, blessed with the highest sustained growth rate in the world. This case highlights the role that foreign direct investment (FDI) has played in this success, as well as how strong local institutions have helped to harness the benefits that the foreign investor--here, the giant De Beers company--has brought. Also, examines how Botswana was able to avoid the natural resource curse that has haunted so many other resource-abundant countries.

    Keywords: Foreign Direct Investment; Growth and Development Strategy; Economic Growth; Natural Environment; Developing Countries and Economies; Botswana;

    Citation:

    Alfaro, Laura, Debora L. Spar, Faheen Allibhoy, and Vinati Dev. "Botswana: A Diamond in the Rough." Harvard Business School Case 703-027, March 2003. (Revised November 2005.) View Details
  51. Foreign Direct Investment

    Briefly reviews motivations and trends behind foreign direct investment and multinational corporations as well as the policy debate that surrounds them.

    Keywords: International Finance; Foreign Direct Investment; Multinational Firms and Management; Policy; Business and Government Relations;

    Citation:

    Alfaro, Laura, and Esteban Clavell. "Foreign Direct Investment." Harvard Business School Background Note 703-018, October 2002. (Revised March 2009.) View Details
  52. New Partnership for Africa's Development, The

    In a world context of international institutions such as the World Trade Organization and the International Monetary Fund and their interaction with developing countries, this case looks at an African development initiative to address its own problems: The New Economic Partnership for Africa's Development (NEPAD). With an emphasis on democracy and governance, NEPAD's primary objective is to eradicate poverty in Africa and bring long-term and sustainable political, economic, and social change to the region. Examines in depth this initiative "by Africans for Africans" and how it is likely to evolve.

    Keywords: Development Economics; Developing Countries and Economies; International Finance; Investment; Poverty; Africa;

    Citation:

    Alfaro, Laura, Debora L. Spar, and Cate Reavis. "New Partnership for Africa's Development, The." Harvard Business School Case 704-006, September 2003. (Revised May 2004.) View Details
  53. Bombardier: Canada versus Brazil at the WTO

    In less than a decade, Bombardier had grown from a medium-size Canadian company to a highly profitable global player largely on the strength of the introduction of a new generation of regional jet and successfully marketing its product to airlines around the world. Events taking place on the other side of the globe, however, threatened Bombardier's hard-earned success. A nasty trade dispute with Brazilian rival Embraer was dragging on into its fifth year with no end in sight. Recent developments in the dispute at the WTO were forcing CEO Robert Brown and his team to decide on a strategy for what could very well turn out to be the most critical year in the company's history.

    Keywords: Trade; Global Strategy; Five Forces Framework; Marketing Strategy; Product Launch; Business and Government Relations; Situation or Environment; Competition; Air Transportation Industry; Canada; Brazil;

    Citation:

    Abdelal, Rawi E., Laura Alfaro, and Brett Laschinger. "Bombardier: Canada versus Brazil at the WTO." Harvard Business School Case 703-022, February 2003. (Revised May 2003.) View Details
  54. Brazil: Embracing Globalization?

    In 2001, Brazil stands at a crossroads. The country seems to be emerging from decades of economic stagnation. The economic situation remains tenuous, however, Brazil's leaders must now chart a forward course. Most critically, they must decide whether Brazil's future rests with close links to the global economy.

    Keywords: Developing Countries and Economies; Development Economics; Economic Slowdown and Stagnation; Cooperation; Globalized Economies and Regions; Cost vs Benefits; Brazil;

    Citation:

    Alfaro, Laura. "Brazil: Embracing Globalization?" Harvard Business School Case 701-104, April 2001. (Revised May 2002.) View Details
  55. Power to the States: "Fiscal Wars" for FDI in Brazil

    On January 6, 1999, Itamar Franco, the governor of the state of Minas Gerais, the second-largest state in Brazil, declared a 90-day moratorium on its debt payment to the federal government. The announcement triggered a run on the Brazilian currency, the Real, and threatened the macroeconomic stability carefully constructed by President Fernando Henrique Cardoso since 1993. Confidence in the country on the part of foreign investors was badly shaken. This case traces the origin of this crisis.

    Keywords: International Relations; Investment; Financial Crisis; Borrowing and Debt; Brazil;

    Citation:

    Alfaro, Laura, Yasheng Huang, and Marios S. Kalochoritis. Power to the States: "Fiscal Wars" for FDI in Brazil. Harvard Business School Case 701-079, March 2001. (Revised February 2004.) View Details

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