I analyze differences in the innovativeness of domestic firms and subsidiaries of foreign firms operating in the same country. I argue that domestic firms suffer a liability of localness in innovation, or a competitive disadvantage in product innovation relative to subsidiaries of foreign firms. I propose that this liability of localness is driven by the relatively lower levels of multiculturalism in employees of domestic firms in comparison with subsidiaries, which limit the identification, transfer, and integration of a large diversity of knowledge that supports product innovation. I also propose that managers of domestic firms can compensate for this liability of localness in two ways: by investing in the training of their employees and by exporting. Training modifies the mindsets and abilities of employees and enables them to become more cognitively multicultural, which facilitates product innovation. Exporting changes employees’ mindsets as they become exposed to new ideas available abroad, which also facilitates product innovation. I test these arguments on a sample of manufacturing firms and find that, although domestic firms introduce fewer new products than subsidiaries of foreign firms, they introduce more new products than subsidiaries at the same level of investment in language training and of exports.

Affirmative action policies have come increasingly under attack in recent years. Both in the courts and in public discourse questions have been raised about the legitimacy of government efforts on behalf of blacks and other racial minorities.' The criticism seems to have two central themes. First, it is argued that those policies which have been tried have not had a noticeable effect on the economic standing of minority group members. (See James Smith and Finis Welch.) They thus constitute yet another example of costly but ineffective government regulation, according to this view. The second theme strikes more deeply at the foundation of these policies. Its adherents argue that even if effective programs could be designed, they ought not be implemented. There have been philosophical and empirical arguments advanced to support this conclusion. Essentially, the philosophical argument states that it is wrong for government to intervene on behalf of certain groups (and thus, necessarily, at the expense of others); this amounts to reverse discrimination-a visiting of the fathers' sins upon the sons.2 The empirical argument concludes that, moral issues aside, such intervention is unwarranted because the consequences of historical discrimination have been (or will soon be) largely eliminated. (See B. Wattenberg and W. Wilson.) In this essay I would like to offer a defense of affirmative action policies against the second of these thematic criticisms. That is, I shall hold in abeyance questions concerning the efficacy of particular programmatic efforts, and concentrate instead on whether government should in principle be taking actions to facilitate economic progress for minority group members. This would seem to be the logical first step in constructing an intellectual basis for affirmative action policies. Of course, philosophers and legal scholars interested in theories of distributive justice have devoted considerable attention to this question in the past ten years. (See R. Dworkin and T. Nagel.) The approach adopted here differs from these earlier efforts in two ways. First, I shall endeavor to meet the empirical argument directly, by pointing to evidence which suggests that significant racial economic disparity persists. Secondly, I will treat the philosophical argument in a manner in keeping with the economist's traditional approach to the question of the desirability of laissez-faire. This approach is based upon the concept of failure. Intervention is favored over laissez-faire when, because of some externality, the outcome is inefficient. Below I argue that an analogous market failure contributes to the maintenance of economic inequality between racial groups in our society. As such, intervention which redresses this inequality is warranted.

The standard method for establishing the comparative statics of risk changes in optimization problems has been confined to comparing unique interior solutions, relying on strong assumptions about payoff functions and decision variables. We propose a simple and intuitive approach that hinges on considerably weaker assumptions. Merging insights from the monotone comparative statics literature with insights from the risk apportionment literature, we show that the ranking of simple lottery pairs is all that is needed for establishing the comparative statics of risk changes. We use this approach to analyze the comparative statics of Nth-degree stochastic dominance shifts in a general setting with one and with multiple decision variables, and we show how these results can be applied to generalize the classical theories of precautionary saving, self-protection, and others. This paper was accepted by James Smith, decision analysis.

In analyzing deterrence of large-scale entry, two classes of entry barriers may be distinguished. An innocent entry barrier is unintentionally erected as a side effect of innocent profit maximization. In contrast, a strategic entry barrier is purposely erected to reduce the possibility of entry. Two types of innocent barriers may also be distinguished. A postentry absolute advantage has the property that, if entry did occur, the established firm would be at a profit advantage over the entrant. Examples are superior technology or product design, patents, and lower input prices. A preentry asymmetry advantage arises from the fundamental preentry asymmetry between established firm and potential entrant. Before the entrant makes his entry decision, the established firm has already committed resources. This prior existence gives first-move advantages. The preentry asymmetry is independent of symmetry or asymmetry in the rules (the equilibrium concept) of the postentry game that might ensue; even if the postentry game will be played according to Nash-Cournot or entrant-as-leader rules, the preentry leadership

In a recent paper, Bennett McCallum (1982) lists what he considers to be prominent empirical regularities or of aggregate economies. In particular, he notes that . . output and employment magnitudes are strongly related to contemporaneous money stock surprises, [but that] ... output and employment magnitudes are not strongly and positively related to contemporaneous price level surprises (p. 4). These facts have prompted McCallum and others to develop models of the economy where prices as well as wages are predetermined. The main feature of such models is their abandonment of aggregate-supply formulations where price level disturbances provide a channel for the real effects of money. The purpose of this paper is to demonstrate the consistency of familiar Gray and Fischer wage-indexing models and their implied aggregate-supply relationship with the stylized facts (see JoAnna Gray, 1976; Stanley Fischer, 1977). In a model where the nominal wage is indexed to the price level, the efficient use of the information conveyed by the price level imposes qualitative restrictions on the covariance matrix of disturbances. First, the correlation between the price level and innovations in the deviation of actual output from the full-information output level will be zero. Second, because the money supply contains information about real disturbances that is not conveyed by the price level, the correlation between money supply innovations and innovations in the deviation of output from the full-information level will be positive. Third, the regression of innovations in actual output on the price level will provide an estimate of the optimal degree of indexation. Evidence that is generally consistent with these properties of wage-indexation models is found in quarterly data for the five largest OECD countries. Consider the familiar aggregate formulation: 1

This article provides direct empirical evidence on the relationship between technology and firms’ global sourcing strategies. Using new data on U.S. firms’ decisions to contract for manufacturing services from domestic or foreign suppliers, I show that a firm’s adoption of communication technology between 2002 and 2007 is associated with a 3.1 point increase in its probability of fragmentation. The effect of firm technology also differs significantly across industries; in 2007, it is 20% higher, relative to the mean, in industries with production specifications that are easier to codify in an electronic format. These patterns suggest that technology lowers coordination costs, though its effect is disproportionately higher for domestic rather than foreign sourcing. The larger impact on domestic fragmentation highlights its importance as an alternative to offshoring, and can be explained by complementarities between technology and worker skill. High technology firms and industries are more likely to source from high human capital countries, and the differential impact of technology across industries is strongly increasing in country human capital.

This paper is motivated by a sense that we as a profession need to understand, much better than we now do, how the world capital market works. We seem to be genuinely schizophrenic in the ways we build models-many of them are closedeconomy models in which the rest of the world does not even appear, yet others of them are models of the small, open economy in which hardly any degree of freedom is left for economic policy to influence events. Lying behind the schizophrenia is, I believe, a genuine ignorance on our collective part of how the world capital market