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Cheap Labor Meets Costly Capital: The Impact of Devaluations on Commodity Firms

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  • Kristin J. Forbes

Abstract

This paper examines how devaluations affect the relative costs of labor and capital and therefore influence production, profitability, investment, and stock returns for firms in the 'crisis' country as well as competitors in the rest of the world. After developing these ideas in a small, open-economy model, the paper performs a series of empirical tests using information for about 1,100 firms in 10 commodity industries between 1996 and 2000. The empirical tests support the model's main predictions: 1) Immediately after devaluations, commodity firms in the crisis country have output growth rates about 10%-20% higher than competitors in other countries; 2) Immediately after devaluations, commodity firms in the crisis country have operating-profit growth rates about 15%-25% higher than competitors in other countries; 3) The effect of devaluations on fixed capital investment and stock returns (and therefore expected long-run output and profits) is determined by capital/labor ratios and changes in the cost of capital. For example, crisis-country firms have higher rates of capital growth and better stock performance after devaluations if they had lower capital/labor ratios and there was no substantial increase in their interest rates.

Suggested Citation

  • Kristin J. Forbes, 2002. "Cheap Labor Meets Costly Capital: The Impact of Devaluations on Commodity Firms," NBER Working Papers 9053, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:9053
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    Cited by:

    1. Kristin J. Forbes, 2007. "The Microeconomic Evidence on Capital Controls: No Free Lunch," NBER Chapters,in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, pages 171-202 National Bureau of Economic Research, Inc.
    2. Hutchison, Michael M. & Noy, Ilan, 2006. "Sudden stops and the Mexican wave: Currency crises, capital flow reversals and output loss in emerging markets," Journal of Development Economics, Elsevier, vol. 79(1), pages 225-248, February.
    3. Landon, Stuart & Smith, Constance E., 2009. "Investment and the exchange rate: Short run and long run aggregate and sector-level estimates," Journal of International Money and Finance, Elsevier, vol. 28(5), pages 813-835, September.
    4. Ben Tomlin & Loretta Fung, 2015. "Exchange Rate Movements and the Distribution of Productivity," Review of International Economics, Wiley Blackwell, vol. 23(4), pages 782-809, September.
    5. Manuel CANTAVELLA-JORDA & Sheila Amin GUTIERREZ DE PIÑERES, 2012. "A Cross-national Panel Study of Devaluations on Disaggregated Export Sectors: A Case for Sector Specific Policies," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 12(2).
    6. Mihir A. Desai & C. Fritz Foley & Kristin J. Forbes, 2004. "Financial Constraints and Growth: Multinational and Local Firm Responses to Currency Crises," NBER Working Papers 10545, National Bureau of Economic Research, Inc.
    7. Kristin J Forbes, 2002. "How Do Large Depreciations Affect Firm Performance?," IMF Staff Papers, Palgrave Macmillan, vol. 49(Special i), pages 214-238.
    8. Anna Lamin & Miguel A. Ramos, 2016. "R&D investment dynamics in agglomerations under weak appropriability regimes: Evidence from Indian R&D labs," Strategic Management Journal, Wiley Blackwell, vol. 37(3), pages 604-621, March.
    9. Landon, Stuart & Smith, Constance E., 2007. "The exchange rate and machinery and equipment imports: Identifying the impact of import source and export destination country currency valuation changes," The North American Journal of Economics and Finance, Elsevier, vol. 18(1), pages 3-21, February.
    10. repec:clg:wpaper:2007-04 is not listed on IDEAS
    11. Chortareas, Georgios & Cipollini, Andrea & Eissa, Mohamed Abdelaziz, 2012. "Switching to floating exchange rates, devaluations, and stock returns in MENA countries," International Review of Financial Analysis, Elsevier, vol. 21(C), pages 119-127.
    12. Jen Baggs & Eugene Beaulieu & Loretta Fung, 2010. "Are Service Firms Affected By Exchange Rate Movements?," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 56(s1), pages 156-176, June.
    13. Landon, Stuart & Smith, Constance E., 2006. "Exchange rates and investment good prices: A cross-industry comparison," Journal of International Money and Finance, Elsevier, vol. 25(2), pages 237-256, March.
    14. Weiner, Robert, 2006. "Do Crises Tear the Fabric of Oil Trade?," Discussion Papers dp-06-16, Resources For the Future.
    15. Forbes, Kristin J., 2002. "Cheap labor meets costly capital: the impact of devaluations on commodity firms," Journal of Development Economics, Elsevier, vol. 69(2), pages 335-365, December.
    16. Walter, Stefanie, 2008. "A New Approach for Determining Exchange-Rate Level Preferences," International Organization, Cambridge University Press, vol. 62(03), pages 405-438, July.
    17. Dionisius Narjoko & Hal Hill, 2007. "Winners and Losers during a Deep Economic Crisis: Firm-level Evidence from Indonesian Manufacturing ," Asian Economic Journal, East Asian Economic Association, vol. 21(4), pages 343-368, December.
    18. Karen Watkins & Dick van Dijk & Jaap Spronk, 2004. "Macroeconomic Crisis and Individual Firm Performance: The Mexican Experience," Tinbergen Institute Discussion Papers 04-057/2, Tinbergen Institute.
    19. Dionisius A. Narjoko & Raymond Atje, 2007. "The Effects of Agricultural Trade Liberalisation under the Doha Development Agenda with Special Reference to the Asia Pacific Region: A Brief Survey," Working Papers 3207, Asia-Pacific Research and Training Network on Trade (ARTNeT), an initiative of UNESCAP and IDRC, Canada..
    20. Fung, Loretta & Liu, Jin-Tan, 2009. "The impact of real exchange rate movements on firm performance: A case study of Taiwanese manufacturing firms," Japan and the World Economy, Elsevier, vol. 21(1), pages 85-96, January.
    21. Forbes, Kristin J., 2004. "The Asian flu and Russian virus: the international transmission of crises in firm-level data," Journal of International Economics, Elsevier, vol. 63(1), pages 59-92, May.
    22. BAHMANI-OSKOOEE, Mohsen & HALICIOGLU, Ferda & Neumann, Rebecca, 2016. "Domestic Investment Responses to Changes in the Real Exchange Rate: Asymmetries of Appreciation versus Depreciation," MPRA Paper 82941, University Library of Munich, Germany, revised 10 Apr 2016.

    More about this item

    JEL classification:

    • F1 - International Economics - - Trade
    • F2 - International Economics - - International Factor Movements and International Business

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