You might not normally think that books with the titles, The Economy Of Puerto Rico (2006) or Multinational Firms in the World Economy (Princeton University Press: 2006), would be mandatory reading for advocates of more accountable economic development programs in the United States. But they are. The Island nature of Puerto Rico and its ties to the United States make it a fascinating business climate “laboratory.” The latter study of multinationals includes data on transnational investments in both developed and developing countries, as well a comprehensive review of the foreign location literature.
The Puerto Rico book is focused on restoring growth and is a Brookings Institution publication. Edited by Susan Collins, Barry Bosworth, and Miguel Soto-Class, this tome boasts ten beefy and at times, rather technical articles, authored by the likes of Richard Freeman, Helen Ladd, Alan Krueger, Gary Burtless, and many other luminaries of the economics field.
After a good record of growth from 1950 to 1970, when the Island was closing the gap between it and the US, regarding per capita income, it has been stagnating since, with large scale unemployment, falling labor productivity, and growing income disparities.
What went wrong? Plenty of blame is tossed all around – too high of a minimum wage, overly generous disability, unemployment insurance and other transfer payments, big tax credits for capital intensive private investments, a under-sized indigenous small business sector, high school dropout rates, a rather large public sector for its level of development, dysfunctional and slow business permitting processes, and a mismatch between available jobs and skill levels. Two chapters zero in on the harm that tax subsidies have done to the Island economy. In short, Puerto Rico is a fascinating example of place to explore business climate issues in ways that both challenge and reinforce the typical views of progressive incentive reformers in the U.S. (For more info, contact www.brookings.edu)
The work on multinational firms is a virtual small encyclopedia on the topic. Edited by Giorgio Navaretti and Anthony Venables, this book covers the waterfront, from labor standards to off-shoring, from foreign direct investment (FDI) impacts on the host country to employment losses back home, from firm strategy to tax competition, from mergers and acquisitions to complimentary host economic development activities. It also includes a helpful chapter on Ireland, today’s poster child for the importance of business subsidies and attraction.
Rather technical at times, Multinational Firms in the World Economy, fortunately, has lots of good conclusions and short summary sections. Although cognizant of the pain caused by capital mobility, the book takes a mainly positive view on foreign direct investment, regarding both home and host countries. However, it marshals a fair amount of argument against business subsidies. (The study contends that incentives should only be provided if they are structured to address real market failures. If they are a function of politics, reject them.)
The research is also pretty nuanced and scholarly. So, a close slow read of the text and footnotes are necessary to get to the subtleties. Multinational Firms concludes with a good policy chapter, which tackles three big questions:
- Does the existence of FDI and transnational corporations affect the effectiveness and the optimal design of general policies such as tax or trade policy?
- Should countries design special policies to influence FDI flows?
- Is there a need for international policy coordination or cooperation to avoid harmful policy competition?
Lastly, after reading this book, you will have a much better grasp of the determining factors in corporate decisions to move overseas.