Essays on International Economics

This dissertation consists of three independent essays on international economics. First, I examine how the geographic distribution of innovation determines aggregate productivity. Second, I study how culture matters for production networks and its aggregate implications. Lastly, I focus on how the complementarity of suppliers for production matters for the amplification of negative shocks through production networks. The first chapter of this dissertation studies the role of spatial knowledge spillovers in R&D for innovation, and therefore on aggregate productivity. I causally estimate spatial knowledge spillovers in Research and Development (R&D) and quantify their importance for R&D policies. Using a new administrative panel on German inventors, I estimate these spillovers by isolating quasi-exogenous variation from the arrival of East German inventors across West Germany after the Reunification of Germany in 1990. I then embed the estimated spillovers into a spatial model of innovation, and use it to quantify the productivity gains from implementing policies that promote R&D activities. The model predicts that reducing migration costs for inventors and R&D subsidies lead to substantial productivity gains. Finally, these productivity gains increase with the degree of spatial knowledge spillovers in R&D. The second chapter, co-authored with Gaurav Khanna and Hiroshi Toma, examines how cultural proximity shapes production networks, and how it affects welfare. We combine a new dataset of firm-to-firm trade for a large Indian state with information on cultural proximity between firms derived from India's caste and religious classifications. We find that larger cultural proximity between a pair of firms reduces prices and fosters trade at both intensive and extensive margins. We argue that these results are driven by increasing trust between firms due to their cultural proximity, which in turn solves contracting frictions. Guided by these stylized facts, we propose a firm-level production network model, where cultural proximity influences trade and matching costs. Our counterfactual exercises indicate that social inclusion policies raise welfare, and reducing contracting frictions increases welfare via the channel of trade becoming less reliant on cultural proximity. The third chapter, co-authored with Devaki Ghose and Gaurav Khanna, studies the aggregate implications of firm-level elasticities of substitution across suppliers. We continue using this firm-to-firm trade for a large Indian state, and leverage geographic and temporal variation from the Covid-19 lockdowns in India to estimate these firm-level elasticities of substitution across suppliers of the same product, and quantify the fall in trade. If suppliers are complements rather than substitutes in production, this shock can amplify by further transmitting downstream and upstream through the supply chain. We find that even at this very granular supplier level, suppliers are highly complementary. We use our elasticities and simulate the impact of the Covid-19 lockdowns to find that under our estimated elasticities, the overall fall in output is substantial and widespread, and to show the importance of targeted policies during economic downturns according to firm size and connectedness.PhDEconomicsUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/176631/1/bcfujiy_1.pd