Working papers published by the United Nations University - Maastricht Economic and social Research and training centre on Innovation and Technology http://www.merit.unu.edu/publications/wp.php UNU-MERIT 2012 by F. Cesaroni, M. Giarratana & E. Martínez−Ros - This work explores which factors increase firms' propensity to enter into international markets. The study draws on the resource−based view and assesses the effect played by firms' technological capabilities and cost structures on entry. While many research papers consider those two factors to be independent one from the other, this study focuses on their interactive effect. Empirical analysis covers the whole population of Spanish pharmaceutical firms over the period 1995−2004. By using data on trademarks filed at the United States Patent and Trademark Office (USPTO), the study identifies those firms that have entered the US market with branded products. Then, the study uses a hazard model to empirically estimate which firms' resources and capabilities affect the probability of entry. Results show that firms can maximize the likelihood of entry in foreign markets by pursuing hybrid competitive strategies that combine together scope economies and cost efficiency. Keywords: Innovation and R&D; Patents; Trademarks; Competitive Advantage; Firm−Specific Advantages; Foreign Market Entry. JEL Classification: F2, M16, O30 http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-049 by T. Azomahou & M. Diene - This paper examines the degree of polarization of GDP per capita of African economies between 1966 and 2008. Based on a nonparametric analysis, we find that countries tend to cluster in two classes of per capita GDP. Relying on the Wolfson's bipolarization measure, the results reveal that bipolarization has been accelerating during the two first decades and is still growing. We relate the evolution of polarization during the period to the business sectors. We find that countries specialization is the driving force of this evolution, namely, agriculture and industry sectors. We also study the innovation−development polarization relation in a VAR framework using patents and trademarks as measures of innovation. JEL classifcation: C32, O34, O47, O55 Keywords: Polarization of GDP, patents, trademarks, VAR model http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-048 by T. Azomahou, B. Diene, M. Diene & L. Soete - We use a general equilibrium framework to study optimal health investment in a dynamic model where agents derive utility from consumption and health. The steady state and the dynamics of the model are studied under separable and non−separable preferences. A shock undermining health which increases health expenditure and weakens the income base, not only affects savings but also compromises the consumption capacity. The magnitude of the effects strongly depends on the preferences. The dynamics of the model includes the equilibrium dynamics and bifurcations. Simulation experiments lend additional supports to our findings in favor of the non−separable preferences. JEL classifcation: C61; C62; I15; E21 Keywords: Consumption; health investment; preferences; dynamics; saving http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-047 by T. Azomahou, B. Diene & M. Diene - We use country panel data spanning over 1998−2008 for both developed and developing countries to study the productivity growth when countries are close to the technology frontier. Relying on a semi−parametric generalized additive model, we estimate both reduced and structural forms for total factor productivity growth. We consider three measurements of frontier: the economy with the highest level of productivity growth, the world productivity growth and the productivity growth of the USA. We obtain a U−shape relation between productivity growth and the proximity to the world productivity growth. The relation between productivity growth and human capital displays an inverted U−shape form (res. U−shape) when the proximity to the highest productivity growth is used (res. the proximity to productivity growth of USA). Total staff in R&D has an inverted W−shape effect on productivity growth. The share of R&D expenditure funded by government and from abroad impact positively the growth of productivity. However, the increase in government spending on R&D has a greater impact on productivity growth when the former is weak, and a smaller impact when R&D spending is already high. International trade has a positive effect on productivity growth. Specification tests show that our semi−parametric models provide a better approximation of the data compared to the parametric analogue, revealing a high degree of nonlinearity governing productivity growth. JEL Classification: C14, I23, O3, O4 Keywords: R&D, TFP, panel data, nonparametric estimation, reduced vs. structural form http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-046 by I. Dyrnes - This paper argues that the concept of socio−economic development needs to be redefined for the purpose of effective democracy promotion. By including aspects from human development theory, advocates of revised modernisation theory state that mass values in a society shift towards a preferance for democracy as higher levels socio−economic development provide existential security. This implies that a democratic culture shapes its institutions and not the other way around. If donor countries are willing to make long−term investments in human resources rather than focus on short−term improvements of state institutions, effective democracy may stand a better chance of developing. JEL classification: O15, F59 Keywords: democracy, democratisation, human development theory, modernisation, socio−economic development, foreign development aid, USAID, Egypt, the Middle East, the Arab world, foreign policy, international relations, good governance, civil society, institutional development, economic policy, judicial reform, civic education http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-045 by J. Baum, R. Cowan & N. Jonard - Although intuitively appealing (and common), drawing network strategy implications from empirical evidence of network performance effects in pooled cross−section is not necessarily warranted. This is because network positions can influence both the mean and variance of firm performance. Strategic prescriptions are warranted if empirically observed network effects reflect increases in mean firm performance. If network effects reflect increases in firm performance variance, however, such prescriptions are warranted only if the increase in the odds of achieving high performance is sufficient to compensate for the concomitant increase in the odds of realizing poor performance. Our simulation study, designed to examine network performance effects in both pooled cross−section and within−firm over time across a wide range of conditions, counsels caution in drawing implications for network strategies. We discuss the implications of our findings for research on network effects, and more broadly for drawing strategic inferences from studies of firm performance in pooled cross−section. JEL codes: L14 L2 D85 O3 Keywords: Network formation; strategic alliances; innovation; network strategy; interfirm networks http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-044 by P. García−Gómez, J. Labeaga Azcona & J. Oliva - The therapeutic advances that have taken place since the mid 1990s have profoundly affected the situation of people living with HIV/AIDS, not only in terms of life expectancy and quality of life but also socio−economically. This has numerous effects on different aspects of the patients' life and, especially, on their working life. We analyse in this paper labour force participation and wages of people living with HIV/AIDS in Spain. We select a control group from the general population. We find that the employment probability decreases by 16.4 percentage points among asymptomatic HIV patients, by 22.5 percentage points among symptomatic HIV patients, and as much as by 41.3 percentage points if the person is in the AIDS phase. In addition, wages of HIV patients are from 9 to 34 per cent (if infected by Intravenous Drug Use) lower. Gender, educational attainment, unearned income, HIV clinical indicators and number of household members are the main determinants of the employment probability of HIV patients. On the other hand, wages do not play a significant role in employment decisions of these individuals. Keywords: HIV/AIDS; labour supply; wages; unearned income JEL Class.: I1, J20 http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-043 by B. Bedasso - The post−independence history of Kenya is characterized by an unusual mix of stability with ever−lingering fragility. The high level of elite persistence in Kenya could be seen both as a cause and a result of this peculiar nature of the political economy of the country. This paper has the objective of studying the effects of historical elite competition and consolidation on political−economic stability and institutional transition in post−independence Kenya. The logic of the natural state is applied to organize the narrative and analyze the key features (North, Wallis and Weingast (2009), Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History: Cambridge University Press). Most of the existing institutional structures in Kenya are built on elite configurations inherited from the colonial times. The robust growth performance of the first decade after independence was generated by smallholder agriculture, while most of the rent was transferred to the elite via state patronage. The political instability of the later years had a lot to do with dwindling patronage resources and elite fragmentation. For most part of the political economy history of the country, patron−client networks and tribalism have played key role in regulating intra−elite bargains. Land has always been the leverage used by the elite to manipulate the aforementioned structures. Although the Kenyan elite have maintained keen interest in winning via constitutional means, they have kept reverting to extralegal avenues whenever intra−elite negotiations seemed to have failed to be enforced. JEL codes: P16, D72, O55 Keywords: elites, dominant coalition, economic growth, institutional change, Kenya http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-042 by W. Naudé & A. Szirmai - The structural transformation of a traditional economy dominated by primary activities into a modern economy where high−productivity activities in manufacturing assume an important role remains a defining feature of economic development. The challenges to attain such structural transformation may be more daunting than in the past. Based on a recent UNU−WIDER/UNU−MERIT project on industrialization this paper discusses the past and present roles of the manufacturing sector in structural change and analyses new challenges facing industrial policy. New challenges discussed in the paper include: (i) integration into global value chains, (ii) the shrinking of policy space in the present international order, (iii) the rise of the Asian driver economies, (iv) new opportunities provided by resource−based industrialization, (v) the accelerating pace of technological change in manufacturing, (vi) how to deal with jobless growth in manufacturing, (vii) creating adequate systems of financial intermediation, and (viii) how to respond to the threats of global warming and climate change. We argue that structural transformation of developing countries requires a type of manufacturing sector development that can deliver high−quality employment, that is aligned with the international division of labour, and that would not lead to autarky, or a reversal of global gains in establishing openness in trade. Industrial policy can make valuable contributions in this regard if the lessons of the past and the challenges of the future are sufficiently taken into consideration. Keywords: manufacturing, industrialization, growth, development, structural change, industrial policy JEL classification: L60, O25, O40 http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-041 by R. Bluhm, D. de Crombrugghe & A. Szirmai - This paper analyzes periods of economic stagnation in a panel of countries. We test if stagnation episodes are predicted by institutional factors and external/internal shocks, as is implied by recent theoretical contributions, and compare the impacts of these variables with those of traditional macroeconomic variables. We examine the determinants of stagnation episodes using multivariate dynamic linear models, fixed−effects logit models, and dynamic random effects probit models. In addition, we analyze whether the included variables have different impacts on the onset of a stagnation episode than on its continuation. We find that inflation, negative regime changes, real exchange rate undervaluation, financial openness, and trade openness explain the incidence of stagnation spells. Only in the case of trade openness, there is robust evidence of a differential impact; it reduces the probability of falling into a stagnation spell, but has a weaker effect within a spell. All models account for unobserved heterogeneity and exhibit a moderate degree of positive state−dependence. Keywords: growth episodes, stagnation, institutions, dynamic panel data JEL Classification: O11, O43, C25 http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-040 by K. Farla - This study distinguishes between industrial policy that stimulates incumbent industry development, `pro−business policy', and industrial policy that promotes the development of free markets, `pro−market policy'. We find that there is a positive relation between the level of countries' implementation of these policies. However, we find opposite effects of pro−business and pro−market policies when estimating the policy effect on growth and income level. Pro−business policy has a positive effect on economic development, and pro−market policy has a negative effect on economic development. Keywords: Industrial Policy, Growth JEL Classification: L50, O11, O25, O43 O43 http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-039 by K. Farla - It is well−known that the extent of credit lent to private agents differs widely between countries. The `financial deepening' of the economy offers opportunities as well as financial risks. This study investigates the extent to which institutional characteristics are re− lated to countries' level of credit depth. The findings suggest that the formalization of property rights, contracting, and competition institutions is positively related to an increase in the level of credit to the private sector. This result remains robust when controlling for the effect of financial policy. The effect of institutional characteristics on banks' lending capacity and investment is mixed. However, overall, institutional formalization has a positive impact on credit deepening and investment. Keywords: Institutions, Financial Development, Property Rights, Contract, Competition JEL Classification: E44, G18, O11, O43 http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-038 by L. Cingolani & D. de Crombrugghe - The Institutional Profiles Database (IPD) produced by the Agence Francaise de Developpement (AFD) has been carried out in 2001, 2006 and 2009, and a new wave is planned for 2012. Although the structure of the surveys varies greatly between 2006 and 2009, the similarity of a substantial proportion of the questions allows for exploring and exploiting the panel components of the database. This paper presents some general patterns of short−term institutional change, aided by a conceptual classification of the institutional variables. It tests two hypotheses in a preliminary way: a) that institutions tend to score higher over time, and b) that institutions tend to converge across countries. Additionally, it explores associations between institutions and growth for the period 2001−2009. Keywords: Institutional Profiles Database, Institutional change, Growth, Panel data. JEL codes: O42, O50, C23 http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-037 by B. Verspagen - Stylized facts of governance, institutions and economic development. Exploring the institutional profiles database Bart Verspagen The empirical literature on economic growth agrees that institutions and governance are important determinants of long−run economic growth rates. As a stylized fact, this literature points to a strong correlation between the level of GDP per capita and the general development level of institutions and governance. However, the growth rate of GDP per capita itself, as well as other indicators that are broadly associated with the level of economic development, are generally much less strongly correlated with the level of institutional development. We document these correlations, and argue that there is a need for a broader set of stylized facts about institutions, governance and economic development, covering the broader set of economic indicators, including the growth rate itself. To find such stylized facts, we use canonical correlation analysis. We use a database on institutions and governance that has a very large number of indicators, and our analysis produces a number of aggregated measurements of institutions and governance that broadly correlate with patterns of economic development. The analysis confirms the correlation between the general level of economic development on the one hand, and institutional development on the other hand, which is the core stylized fact identified in the literature. In addition to this, our analysis points to the general attitude towards markets, and the level of financial development as specific dimensions of the institutional and governance characteristics of a country that correlate highly with specific development patterns. In particular, we find that a positive attitude towards markets combined with a low level of financial development goes together with growth rates, based on catching−up. We also find that a tendency towards market steering combined with strong financial development goes together with a high involvement in international trade (openness), combined with a low investment rate. Keywords: institutions, governance, economic development JEL codes: O1, O16, O17 http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-036 by D. de Crombrugghe & K. Farla - Using institutional indicators describing 122 countries, we conduct an exploratory study highlighting which institutional characteristics differ across countries with different levels of income and rates of growth. We describe a country's institutions by the degree of formalization of its regulations, the depersonalization of their implementation, and by the degree of control and intervention of the state. Our findings reveal that the variation in state control and intervention decreases along with countries formalization of regulations. This phenomenon may be explained by institutional convergence, by endogeneity in the data and/or by bias. In addition, we find evidence of a strong relationship between institutions and income levels; however, we find no such evidence on growth rates. We find mixed evidence for a relationship between institutions and growth volatility. Keywords: Institutions, Economic performance, Growth JEL Classification: O11, O43 http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-035 by L. Cingolani & D. de Crombrugghe - This article provides a succinct review of the arguments stressing the mutual relationship between institutions and economic performance, and a scholarly account of some of the most popular econometric strategies used to minimize reversed causality problems in impact estimation. Among the techniques revisited we find the instrumental variables (IV) approach, distributed lags and vector autoregressions (VAR), quasi−experiments, and identification by heteroskedasticity (IH). Ultimately, the review is conceived as a methodological aide to researchers seeking to explore causal relationships through the use of the Institutional Profiles Database (IPD) produced by the Agence Francaise de Developpement (AFD). Keywords: Institutions and growth, endogeneity, instrumental variables, dynamic analysis, identification through heteroskedasticity. JEL codes: O42, C33, C36, P14 http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-034 by R. Bluhm & A. Szirmai - This paper provides an analytic review of selected contributions to the study of institutions and economic growth. We review the contributions to the study of institutional determinants of long−run growth by Engerman and Sokoloff, and Acemoglu, Johnson and Robinson. We discuss the work of Rodrik and others who focus on institutions and institutional reform and take steps towards bridging the gap between the study of long−run and short−run growth performances. In addition, we review two new theoretical frameworks by North, Wallis and Weingast and Khan that relate the structure of institutions to short−run volatility and long−run growth trends. We survey a wide array of supplementary econometric evidence and criticisms relating to each of these key contributions. Special attention is given to identifying the underlying causal relationships, the empirical methods and the kind of data used to test theories and hypotheses found in the literature. Further, we compare the findings in different strands of the literature using a sources−of−growth framework which distinguishes between ultimate, intermediate and proximate causes of growth and development. Keywords: growth, institutions, inequality, development JEL Classification: O43, O30, O11 http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-033 by A. Szirmai - For a better understanding of development, we are interested in why in the long run some countries or societies forge ahead, while others stagnate or fall behind. We are especially interested in the conditions under which growth and catch− up can be realised in developing countries. In section 1 of this paper, we develop a framework of proximate, intermediate and ultimate sources of growth and development which serves to structure the analysis and measurement of economic development. Sections 2 to 6 offer a review of classical and modern theories of development and stagnation, in the context of the framework of proximate and ultimate causality developed in section 1. Special attention is paid to the interactions between institutions and growth in different theoretical traditions. Section 7 presents empirical time series on long−run economic trends in a sample of 31 developing countries representing 80 percent of the population of the developing world. These series focus on proximate causality and on socio−economic outcomes and highlight some of the key issues discussed in the theoretical overview in sections 2−6. JEL: O10, O43, N1O Keywords: Theories of Economic Development, Economic Growth, Proximate Causality, Intermediate Causality, Ultimate Causality http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-032 by R. Cowan & A. Kamath - When agents use informal interaction to exchange knowledge, their production relations may develop as emergent properties of their social relations and may exhibit homophily. The Saliyar community cluster in India is an archetype of this. This cluster's experience is investigated on how its thickly homophilous networks have steered it from dominance to decline, in the market for a product which calls for constant improvement of know−how, under unchanging production technology. A network analysis of the Saliyars community cluster − in comparison with the networks of the communities in a cluster of a similar population at Payattuvila, which has surged ahead of the Saliyar Cluster in performance in handloom weaving − provides evidence that it is not simply social embeddedness alone, but the homophily in socially embedded links that are detrimental to clusters dependent upon informal knowledge exchanges. Hence, we provide evidence that social embeddedness is not as detrimental unless combined with homophily. The conceptual ambit of embeddedness has to broaden out to recognize that social relations come in various 'homophilies'. This has many policy implications too as it involves studying embeddedness and homophily in rural traditional technology clusters intensively involving community social capital; such clusters being ubiquitous in India and whose experiences have not been scrutinized in this perspective. Keywords: Clusters, Handloom, Networks, Social Embeddedness, Homophily, Kerala JEL codes: O33, Z13 http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-031 by E. Sfakianakis & M. van de Laar - Public−private partnerships (PPPs) can impose important future cost on the government, which in turn create obligations similar to public debt obligations for financing infrastructure investment. Apart from that, government guarantees, typical in PPP contracts, constitute explicit contingent liabilities. The risk that arises from such guarantees must be transparently valued to assess a country's fiscal profile. In this study, we aim to show that the notion of a PPP as a (set of) contingent claim(s) can also be used to value the PPP public risk. Valuing contingent claims in this manner is important, as it allows us to compare more carefully different set−ups of a PPP. We introduce and analyse the different scenarios that were at the Chilean government's disposal for executing a transport infrastructure project. Our findings reveal that, for the first years of a PPP programme, the burden on the surplus or deficit will be less in the case of the PPP compared to typical public investment. Secondly, the net contingent PPP flows constitute the real effect on the deficit and correspondingly on the public debt and weaken the government's fiscal stance. Finally, we attribute a specific price to the PPP public risk introducing CDS valuation with and without counterparty (government) default. Keywords: PPP, Guarantees, Public Finance, CDS valuation JEL classification: H40 http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-030 by P. Arqué−Castells & P. Mohnen - We study whether there is scope for using subsidies to smooth out barriers to R&D performance and expand the share of R&D firms in Spain. We consider a dynamic model with sunk entry costs in which firms' optimal participation strategy is defined in terms of two subsidy thresholds that characterize entry and continuation. We compute the subsidy thresholds from the estimates of a dynamic panel data type−2 tobit model for an unbalanced panel of about 2,000 Spanish manufacturing firms. The results suggest that "extensive" subsidies are a feasible and efficient tool for expanding the share of R&D firms. Keywords: R&D, Persistence, Subsidies, Dynamic models JEL Codes: H2, O2, C1, D2 http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-029 by E. Schuering & F. Gassmann - There has been an ongoing debate among researchers, policy−makers and development partners in low−income countries on whether and to what degree non−contributory social transfers should be targeted to the poor or paid out universally to every citizen or to all citizens in a particular category. This paper critically discusses the assumptions behind the political economy arguments of targeting and tests whether a universal mechanism is bound to politically excel in a low−income country context. A number of authors have argued that going universal is a win−win situation, both for the poor, the middle class as well as those who are in power. We would therefore expect broad−based support behind a universal scheme, in particular in countries where poverty is widespread and targeting also proves administratively challenging. On the basis of attitudinal surveys with the urban, rural and student population in Zambia, we actually detect more support for targeting the poor than the political economy models would predict. These findings are corroborated by experimental evidence from rural Zambia. We discuss the assumptions of the political economy models in the light of these findings and contemplate on potentially decisive parameters that the models currently do not incorporate. Key words: political economy, targeting, universalism JEL codes: H53, I38, O15 http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-028 by W. Naudé - This paper provides an overview of the state of the art of the intersection of development and entrepreneurship. Given the neglect of entrepreneurship by development scholars it deals with (i) recent theoretical insights from the intersection of entrepreneurship and development studies; (ii) the empirical evidence on that relationship between entrepreneurship and development; and (iii) fresh insights for entrepreneurship policy for development that emerges from recent advanced in this area, including female entrepreneurship in developing countries. Key words: Entrepreneurship, development, small business, private sector development JEL Classification numbers: M13, O10, O17, O40 http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-027 by W. Naudé & H. Bezuidenhout - How responsive are remittances to various disasters, both natural and human−made? And would remittances be affected by systemic financial crises (such as the 2008/09 financial crisis)? Using panel data on 23 Sub−Saharan African (SSA) countries over the period 1980 to 2007, we find that remittances are slow to respond to natural disasters, unresponsive to outbreaks of conflict, and will decline, albeit slowly, after a global financial crisis only to the extent that the crisis affects incomes, migration stocks, exchange rates, and the banking system. The relative persistence of remittances suggests that it is a good bulwark against natural disasters and global financial crises in SSA. Keywords: remittances, migration, disasters, global financial crisis, Africa JEL classification: F24, F22, O55 http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-026 by J. Hagedoorn & A. Ridder - Our exploratory empirical study, based on a series of in−depth interviews and a survey of firms, searches for answers on a number of questions that deal with the role of formal contracts and intellectual property rights in the context of open innovation. We find that firms active in open innovation have a strong preference for the governance of their open innovation relationships through formal contracts. These contracts are relevant from both a control and a process monitoring perspective. Also, despite the open nature of open innovation, firms still see intellectual property rights as highly relevant to the protection of their innovative capabilities. In a first attempt to explain this preference for intellectual property rights by open innovation firms, we find the degree of openness of firms, their legalistic attitude, and the competitive dynamics of their product market environment to be related to this preference. JEL codes: K11, K12, L24 Keywords: open innovation, contracts, intellectual property rights http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-025 by A. Waheed - The analysis of the impact of innovation on employment growth is an important topic for policy makers, because (un)employment is an important social topic, and the effects of innovation on employment are often poorly understood. Despite the significant importance of this relationship, very few studies on this topic for developing countries are yet available compared with developed ones. This paper contributes to this scanty literature by investigating the employment effect of innovation for two South Asian developing countries: Bangladesh and Pakistan. We further analyze whether this relationship shows country−specific and industry−specific differences. Finally, we investigate whether complementarity between process and product innovation exists or which effect (displacement or compensation) of one particular innovation type dominates the other, in order to influence employment. One of the striking findings of our analysis is that both product and process innovation spur employment in this region as a whole, regardless of low−tech and high−tech industries, even after controlling for a number of firm−specific characteristics. Moreover, although both innovation types also have significantly positive impacts on employment growth of all Bangladeshi and of all Pakistani firms separately, they are important factors for employment growth of only high−tech Bangladeshi firms and of only low−tech Pakistani firms. Moreover, we observe a strong complementarity between both innovation types in order to stimulate employment. Contrary to the most previous studies, we witness an insignificantly negative effect of labour cost on employment change, perhaps owing to the availability of labour force to hire at cheaper rates compared with developed countries. We notice that some of the innovation determinants exert different influences across industries and across both countries. The same is the case for the determinants of employment growth. JEL classification: J23; O31; O33 Keywords: Bangladesh; Employment growth, Pakistan; Product innovation; Process innovation http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-024 by B. Letty, Z. Shezi & M. Mudhara - The core of this paper consists of two case studies of 'grassroots' innovation led by innovative smallholder farmers in a village in South Africa − one about developing an alternative production practice for growing potatoes, and the other about introducing a new cash crop (cherry peppers) and the establishment of a new marketing relationship. One of the purposes of the study was to explore questions about the development of innovation indicators that might support policy and management concerned with this kind of innovation. The case studies are therefore located in the context of a review of existing science, technology and innovation indicators and their limitations with respect to this area of agricultural innovation. Another purpose was to identify and clarify the position of 'grassroots' innovation within other perspectives on different kinds of innovation system (or mode of innovation) in agriculture in developing countries. The case studies are also therefore set in the context of a review of literature about these other system perspectives, focusing in particular in 'formal' and 'informal' systems, and on 'grassroots' and 'participatory' modes of innovation involving interactions between formal and informal systems. The combination of case studies and broader reviews leads to two main conclusions: (1) grassroots and other participatory modes of agricultural innovation merit much greater policy attention than they have received; but (2) the base of available analysis and indicators about these approaches to innovation and their effectiveness is still inadequate to inform and support policy and management in this area. The paper therefore concludes with a discussion of steps that might be taken to improve the available information, understanding and indicators about these modes of innovation. JEL Codes: O13, O17, O33. Key words: Agriculture, innovation, grassroots innovation, informal economy http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-023 by G. Crespi & P. Zuniga - This study examines the impact of innovation strategies on employment growth in four Latin American countries (Argentina, Chile, Costa Rica, and Uruguay) using micro−data for manufacturing firms from innovation surveys. Building on the model proposed by Harrison et al. (2008), we relate employment to three innovation strategies: make only (R&D), buy only (external R&D, licensing of patents and know−how, technical assistance, and other external innovation activities) and make and buy (mixed strategy). Firms that conduct in−house innovation activities ("make only") have the greatest impact on employment; the "make and buy" strategy comes in second. Similar results are found for small firms. These results highlight the importance of fostering in−house technological efforts not only for innovation per se, but also to promote growth in firm employment. The impact of "make only" strategies is greater in high−tech industries, whereas "make only" and "make and buy" have a similar impact on employment in low−tech industries. Finally, the study provides evidence of the mechanisms through which innovation strategies affect employment. The findings show that innovation strategies enhance technological innovation, but their impact differs between product and process innovation. Product innovation is mainly motivated by in−house technology investments, followed by mixed strategies, whereas process innovation is basically driven by "buy" strategies. JEL: O12, O14, O31, O33, O40, J21 Keywords: innovation, employment, external R&D, Latin America, innovation surveys http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-022 by W. Naudé & Z. Ács - Unlike in the past where industrial policy was either focused on creation and growth of state−owned firms or alternatively consisted merely of broadly functional policies without consideration for firm or entrepreneurial specifics, the requirement now is that future industrial policy ought to be a nuanced partnership between entrepreneurs and the state. In this paper we outline some considerations for such an industrial policy where the entrepreneur−state nexus is paramount. Moreover, we argue that such an industrial policy will need to take into consideration that the entrepreneur−state nexus is evolving, and that it depends on the stage of development of a particular country. Keywords: entrepreneurship, industrialization, structural change, industrial policy, innovation, development JEL codes: O32, L52, L53, M13 http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-021 by W. Naudé & J. Brach - In this paper we investigate the extent of international entrepreneurship in Algeria, Egypt, Morocco, Oman and Syria using a dataset covering 3,281 firms. We find that weak technological capabilities constrain internationalization. Firms with ISO accreditation, an own website, and those who have introduced new technology have a higher probability of entering export markets than otherwise. Firms in high−tech sectors are more likely to export early. However with foreign shareholding this advantage of high−tech firms disappears. The results suggest that early international entrepreneurs may need to pay more in informal payments if they want to increase the share of their exports once they have entered into export markets. We derive implications for policy and further research. JEL classification codes: L26, L25, M16, O55, F23 Key words: International entrepreneurship, exports, entrepreneurial capabilities, innovation, Middle East, North Africa, MENA http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-020 by S. Fransen, K. Kuschminder & M. Siegel - The past decades have seen a rise of survey research in migration studies, which is often cross−national due to the very nature of migration. Conducting cross−country surveys presents challenges for researchers in terms of survey design, implementation, and data collection. A thematic focus on migration brings additional challenges due to the complexity of migration, issues of definitions, sampling and the geographical areas of interest. This paper gives insight into the practicalities of implementing a migration household survey in a developing country, conflict−affected setting. By focusing on these settings this paper is one of the few to target survey methodology in a non−developed country context. We highlight specific areas for attention within survey implementation stages: (1) scoping, (2) survey design, (3) training, (4) pilot, and (5) data collection. We specifically use the examples of the IS Academy project in Ethiopia and Burundi, hereby highlighting the differences between the two countries. The aim of this paper is to give practical guidelines for researchers and practitioners working in the area of migration research. Keywords: cross−country survey research; migration research; conflict−affected settings; Burundi; Ethiopia JEL codes: Y, Z http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-019 by M. Siegel & S. Fransen - Mobile remittances have a high development potential as they hold the promise of providing quick, easy and cheap money transfers. In Africa mobile phone usage has increased sharply and mobile banking providers are extending their services, enabling greater opportunities for mobile remittances. The rise of mobile banking in Africa, however, differs substantially across countries, mainly due to a lack of financial infrastructure. Consequently, the opportunities that mobile banking offers for mobile remittances vary geographically. The services provided do not always meet the needs of remittance senders and the African remittances market is generally under−acknowledged as an important market by providers. Restrictive financial regulations play a key role as well. Mobile remittances have the potential to become an important and revolutionary tool for remittances sending in Africa. Effective policies should therefore address the limitations in the regulatory and financial infrastructure for mobile banking to become the foundation for mobile remittances. Keywords: Remittances, mobile remittances, Africa, innovation, technology, development JEL codes: Y, Z http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-018 by M. Siegel & K. Kuschminder - Using the specific case of the International Organization for Migration's (IOM) Temporary Return of Qualified Nationals (TRQN) project, this paper illustrates the effect the short−term return of highly qualified migrants abroad can have on capacity building in the origin country through knowledge transfer, innovation and technological change. The paper specifically examines the needs, expectations and delivery of knowledge through the TRQN project in Afghanistan. Key words: migration, return migration, innovation, technological change, migration and development, Afghanistan JEL codes: Y, Z http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-017 by R. Bauchmüller - Early Childhood Education (ECE) programmes are presumed to have positive effects in particular for children who are at risk of failing during their school careers. However, there is disagreement on whether such programmes should be more teacher and curriculum based or rather centred on the individual child. In this paper I study child−centred ECE programmes that are used at preschools in the Dutch province of Limburg, which is in fact mainly a study of 'Speelplezier', a new child−centred programme which has recently been certified as being 'in theory' effective in raising children's school readiness, but which has not yet been evaluated. I use a rich dataset covering the first three grades at elementary schools in the Southern part of Limburg for the year 2008/09 to evaluate the impact of child−centred ECE versus alternative preschool options. I estimate ordinary least squares effects of attending a preschool applying child−centred ECE onto test scores from the beginning of elementary schooling, under the control of alternative childcare experiences and various child and family related characteristics and re−weighing observations of the studied sample to represent population averages. I argue that access to a preschool kindergarten applying child−centred ECE is to some degree exogenously determined. In a further effort to identify causal effects, I also use propensity score matching and instrumental variable estimation techniques. I find no evidence of the expected short−term effects on language or on cognitive development who attended a child−centred ECE preschool as compared to preschools applying other or no early education programmes. In order to reach measurable benefits, the child−centred methods and their applications need to be intensified and extended to all disadvantaged groups of children. Yet I find some evidence that children of low educated parents who have been placed in a child−centred ECE preschool tend to have higher language and cognitive outcomes. Keywords: early childhood education (ECE), child−centred programme, cognitive and language development, school readiness, distance to preschool JEL: I21, J13, J24 http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-016 by T. Gries, S. Jungblut & W. Naudé - We propose that the rate of creation and failure of new firm start−ups can be modelled as a search and matching process, as in labor market matching models. Deriving a novel Entrepreneurship−Beveridge curve, we show that a successful start−up depends on the efficiency with which entrepreneurial ability is matched with business opportunity, and outline a number of possible applications of this matching approach to formalize the economics of entrepreneurship. JEL classifications: L26, M13,O10, O14 Keywords: Entrepreneurship, start−ups, labor market matching http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-015 by D. Opolot - This paper studies the impact of interaction topologies on individual and aggregate behavior in environments with social interactions. We study social interaction games of an infnitely large population with local and global externalities. Local externalities are limited within agents' ego−networks while the global externality is derived from aggregate distribution in a feedback manner. We consider two forms of heterogeneity, that due to individual intrinsic tastes and that due to ego−networks. The agents know the potential number of other agents they will interact with but do not posses complete information about their neighbors' types and strategies so they base their decisions on expectations and beliefs. We characterize the existence, uniqueness and multiplicity of equilibrium distribution of strategies. By considering arbitrary interaction topologies, we show that the interaction structure greatly determines the uniqueness and multiplicity of equilibrium outcomes, as well as the equilibrium aggregate distribution of strategies as measured by the mean strategy. Keywords: Complex networks, Partial information, Local externality, Global externality, Adoption. JEL codes: C72, D82, D84, 033 http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-014 by W. Naudé, J. Amorós & O. Cristi - We know that entrepreneurs − at least those driven by opportunities − can contribute to economic growth, productivity improvements and competitiveness in national economies.. But do they contribute to happiness on the country level? In other words, does the happiness of nations depend on its entrepreneurs? And what about happy nations − are they better places for entrepreneurs to start−up new businesses? In this paper we survey the literature on entrepreneurship and happiness, and use various data sources, including from the Global Entrepreneurship Monitor, to find tentative evidence of an inverse U−shape relationship between (opportunity) entrepreneurship and national happiness. We find little evidence that a nation's happiness drives early−stage entrepreneurial activity but we do find evidence that opportunity−motivated entrepreneurs in happier nations may be less concerned with high firm growth. Thus we conclude that opportunity−motivated entrepreneurship may contribute to a nation's happiness, but only up to a point. Not everybody should become entrepreneurs, and the happiness of a nation cannot be indefinitely increased by boosting the numbers of opportunity entrepreneurs. Key words: Happiness, entrepreneurship, self−employment, life and job satisfaction, development, subjective wellbeing, Global Entrepreneurship Monitor. JEL classification: I31, M13, O50 http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-013 by R. Cowan, N. Jonard & R. Weehuizen - In this paper we model interactions between organizational structures, job stress, emotional contagion and organization performance. An organization is modelled as solving problems or performing tasks. Tasks enter the organization and can be addressed by a subset of its members. Organization structure determines which agents can address which problems. Members address the task by applying energy to it. An agent's available energy is determined by his stress level, which is in turn determined by his workload. However agents' stress levels are moderated by social interactions that take place in parallel to the work environment. Organizations can be structured as a group of specialized individuals or as hierarchies of varying depths. We explore the effects of organizational structure and social interactions on performance. keywords: stress, emotional contagion, social networks, organization structure, productivity JEL codes: L2, M1, M5, D23 http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-012 by Y. Getachew - Contrary to a popular belief, the most popular Ak growth models display transitional dynamics once the representative agent and complete markets as− sumptions are overturned. The class of models is identi.ed with diminishing− returns at individual but constant−returns at aggregate due to externality e¤ects. Under incomplete markets, the former implies that dynasties with a lower levels of initial capital grow faster. This is picked up by the aggregate economy that passes through a long transitional period before it converges to its balanced growth path. During the transition period, aggregate con− sumption and output grow at the same rate but higher than that of capital. Key words: Transitional dynamics, Ak model, inequality dynamics, heterogeneous households, incomplete capital market JEL Classi.cation: D3, E, O4 http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-011 by M. Rehm, W. Gijselaers & M. Segers - Organizational learning has been identified as a pivotal aspect in contributing to the competitive advantage of organizations (e.g. Argote & Ingram, 2000). However, despite ambiguous results on their effectiveness, traditional programs continue to dominate organizational learning initiatives. In this context, Communities of Learning (CoL) are an innovative methodological tool to stimulate knowledge creation and diffusion among members of an organization’s workforce. Previous research has shown that such (online) collaborative learning processes are significantly influenced by the hierarchical positions of individual participants within these communities (e.g. Romme, 1996). However, little is known about how exactly participants’ hierarchical positions influence individual levels of activity and performance levels within CoLs. The present study provides empirical evidence on 27 CoLs of a global training program, analyzing user statistics from asynchronous discussion forums for 235 staff members. The results of our study not only indicate that participants’ hierarchical position has a significant impact on their general level of activity, as well as their final grade. We are also able to reveal a group of “Stars” that lead their CoLs irrespective of their hierarchal position. Similarly, our findings suggest a certain duality among participants holding the lowest hierarchical positions. While the majority exhibits a “follower” mentality, a smaller subgroup appears to take on roles and behaviours usually assigned to team leaders. By considering these insights, managers of training programs can better anticipate participants’ behaviour and device collaborative learning activities that foster a vibrant learning environment, contributing to higher levels of cognitive discourse and social interaction among participants. Keywords: community of learning; online learning; organizational learning; hierarchy; diversity JEL classification codes: D83, I21, I23 http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-010 by A. Konté & M. Ndong - This paper investigates the informal information and communication technology (ICT) sector in Senegal with a view to developing indicators that could be used to improve the understanding of the innovation process. Three approaches are used to gather the information needed for the analysis: a review of literature; a questionnaire to collect data; and, a life story to provide context to the research. The analysis provides examples of innovation in the informal ICT sector and examines the relationship of social factors to these examples. As the informal sector dominates the Senegalese economy, the paper contributes to the understanding of innovation driven economic growth in that sector, and to the factors linked to transition of economic activity from one sector to another. JEL Code: O31, O33 Key words: Informal economy, innovation indicators, information and communication technologies, ICT, social http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-009 by F. Vandeninden - The aim of this paper is to evaluate the impact in terms of poverty and cost of the introduction of social (or non−contributory) pensions in Europe. We use data from the household survey EU−SILC and focus on 17 countries. We simulate − in a static framework − the introduction of two social pension schemes: universal and means tested social pensions. We see that the old−age poverty would substantially decrease (average poverty rate goes from 19.7 to 2.5 per cent with the universal scheme) but not totally, even though the level of the universal pension is set up to the poverty line. The impact on poverty with the means tested social pension is quite similar (though always smaller) than the one with the universal pension, since most elderly have few other income sources than pensions. On the opposite, it costs less. In fact, the means test reduces substantially the number of entitled elderly while the universal pension leads to a 'leakage' to non−poor elderly. Key words: Old age poverty, pension systems, social pensions. JEL Codes: D310, D190, H55, I380 http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-008 by F. Vandeninden - The term 'transaction cost' has been widely mentioned in the recent literature on aid effectiveness. In fact, the shift into the aid delivery system (see e.g. the Paris Declaration on aid effectiveness) has been justified among others by the high transaction costs generated by the previous aid modalities. In this paper, we first want to understand what the notion of transaction costs means in the context of aid delivery and give a typology of the possible costs. We also develop an analytical framework to evaluate them. This framework appears to be a relevant tool to compare the effectiveness of aid modalities. We finally apply this analytical framework in Mali: we look at the evolution of the foreign aid transaction costs in two sectors (health and education) with the introduction of sector−wide programmes. Key words: aid modalities, aid effectiveness, transaction costs JEL Codes: O20, O22, D23 http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-007 by D. Sologon & C. O'Donoghue - Using a fully harmonized panel dataset across 14 European countries between the early− 1990s and 2001, the European Community Household Panel, we fill a gap in the literature with a cross−national comparative study which explores the trends in persistent inequality and transitory inequality across countries belonging to a common economic area, but with different systems and with different rates of adaptation to the economic reality of the 1990s. The covariance structure of earnings is estimated using minimum distance methods. We find a substantial degree of convergence in the overall inequality among the Mediterranean, the Continental and the Anglo−Saxon countries, which reflects a convergence in both permanent and transitory inequality. Among the Nordic/Flexicurity countries we find a strong divergence in the overall inequality, driven by a divergence in both permanent and transitory inequality. Pooling most countries in Europe, we find evidence of a strong convergence in earnings instability. The Nordic/Flexicurity countries have a lower overall inequality, a lower persistent inequality and a higher earnings mobility. These cross−national differences in persistent inequality and earnings instability across Europe can be partly explained by the labour market policies and institutions linked with the wage−setting mechanism. The stricter the regulation in the labour and product market, the higher the persistent inequality. The higher the unionization, the degree of corporatism, and the tax wedge the lower persistent inequality. Corporatist systems are associated with a lower earnings instability than decentralized ones. Keywords: earnings dynamics; permanent inequality; transitory inequality JEL classification codes: C23; D31; J31 http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-006 by E. de Neubourg & C. de Neubourg - Malnutrition is accepted to have a negative impact on the school performance of children and adolescents. Malnutrition also has a negative impact on cognitive development and a potentially lasting effect on (some) cognitive functions. This paper focuses on the effects of malnutrition and Post−Traumatic Stress Disorder (PTSD) on short−term−working−memory on children. These effects are important since defective working memory capacities limit the learning ability of young children and thus the success of investment in human capital. The study is based on an empirical study among 80 children (boys and girls) aged between 9 and 13 years old in Banda Aceh, Indonesia, conducted in 2010 in cooperation with UNICEF. The study involved testing the children on a number of working memory tests (Digit Span, Coding and Bourbon−Vos) and the Raven SPM intelligence test. Malnutrition was measured as stunting. The population of children living in Banda Aceh had been exposed to severe stress during the tsunami of December 2004 and its aftermath, and during the long−lasting violent conflict in the region. The study measured the degree of Post−Traumatic Stress Disorder (PTSD) using the Child PTSD Symptoms Scale (CPSS). PTSD is proved to have similar effects on brain development as malnutrition and thus the effects of malnutrition on the working memory of children have to be controlled for the potential effects of PTSD. According to the results of the study, malnutrition is associated with a decrease in performance on the working memory tasks. On the contrary, intelligence measured by Raven's SPM was not associated with the decrease in performance on the working memory tasks, while it was found that a high score on the CPSS was indeed associated with a decrease in the performance on the three working memory tests. The study concludes with a discussion of the policy relevance of the results and sets out an agenda for further research. Key words: PTSD, working memory, malnutrition, tsunami JEL: I14, I21, I24 http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-005 by C. Huang - We estimate the value of Chinese invention and utility model patents that were applied for during two periods, 1987−1989 and 1986−1998. We find that patents applied for by foreign entities invariably have higher value than do those applied for by domestic entities, and the gap is significant. The total value of invention and utility model patents in the 1987 cohort together represent about 40 per cent of China's 1987 governmental R&D budget. Keywords: Value; Patent; China; Invention Patent; Utility Model Patent; Patent Renewal JEL code: O32; O34 http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-004 by J. Li & C. O'Donoghue - Alignment is a widely adopted technique in the field of microsimulation for social and economic policy research. However, limited research has been devoted to the understanding of their simulation properties. This paper discusses and evaluates six common alignment algorithms used in the dynamic microsimulation through a set of theoretical and statistical criteria proposed in the earlier literature (e.g. Morrison 2006; O'Donoghue 2010). This paper presents and compares the alignment processes, probability transformations, and the statistical properties of alignment outputs in transparent and controlled setups with both synthetic and real life dataset (LII). The result suggests that there is no single best method for all simulation scenarios. Instead, the choice of alignment method might need to be adapted to the assumptions and requirements in a specific project. Key words: alignment, microsimulation, algorithm evaluation JEL Classification: C1 C5 http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-003 by J. Li & C. O'Donoghue - More than 10 years ago O'Donoghue (2001) surveyed the dynamic microsimulation models that had been developed up to that point. However the 2000's have seen many of the barriers that existed for model development up until that point overcome. This paper surveys the development and practices in dynamic microsimulation over the past decade, and discusses the methodological challenges today. The paper provides an overview of the methodological choices made in more than 60 known dynamic microsimulation models and examines the advantages and disadvantages of different practices. In addition, this paper reviews the main progress made in the field and explores how future microsimulation models could evolve. JEL Classification: C1 C5 Key Words: Dynamic Microsimulation, Survey http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-002 by L. Soete - "Innovation is good for you" appears actually the common feature of most science, technology and innovation studies over the last decades. This appears, however surprising given the fact that innovation failure rather than innovation success appears a much more common feature. Hence the simple, but straightforward question which will be central in this Tans lecture: could it be that innovation is not always good for you? A frequently heard argument is that at a societal level, innovation is renewing society’s dynamics and hence leading to higher levels of economic development and welfare. A process of creative destruction destroying maybe a few incumbents to the benefit though of many newcomers. However, sometimes the exact opposite pattern: a process of destructive innovation, benefiting a few at the expense of many, will occur. In this period of "crises" examples abound of such destructive creation processes. In this Tanslecture some typical examples will be highlighted: our unsustainable fossil−fuel based economic growth at the global level; European monetary integration at the European level; financial innovation at the sectoral level. The Tans Lecture is organized every year to honour dr. J. Tans (1912−1993), the founding father of Maastricht University. JEL Codes: O17, O31, O33, O43, F55, G01 Keywords: Innovation, Creative Destruction, Destructive Creation, Economic Growth, International Relations, Financial Crisis http://www.merit.unu.edu/publications/wp.php?year_id=2012#wp2012-001