Does capital misallocation from financial frictions cause substantial aggregate productivity losses? To explore this question, I propose a highly tractable theory featuring entrepreneurs who are subject to borrowing constraints and idiosyncratic productivity shocks. Productive entrepreneurs cannot raise capital in the market; however, they may self-finance investment in the sense of paying it out of their own savings. Such selffinancing can undo capital misallocation if productivity shocks are sufficiently autocorrelated. If so, financial frictions have no effect on aggregate productivity. Conversely, productivity losses may be large if autocorrelation is low. My model economy is further isomorphic to an aggregate growth model with the difference that productivity is endogenous and depends on the quality of credit markets. This implies that financial frictions have no direct effect on aggregate output and savings; only an indirect one through aggregate productivity. In an application of the model, I estimate its critical parameters using plant-level panel data from two emerging market economies, show that it can match the allocation of capital within these economies, and calculate that financial frictions can explain aggregate productivity losses of up to twenty-five percent relative to the US.

Chinese economic growth has been spectacular in the last 30 years. We investigate the role of International Joint Ventures with Technology Transfer agreements, an understudied area. Technology transfer is the traditional mechanism for developing countries to “catch up ” and has been a key component of Chinese economic policy. We collect original survey data on Chinese firms and their joint ventures and match this to administrative data on firm performance. To identify the causal effect of joint ventures we use time-varying and province-specific policies at the time when a firm was born. International joint ventures have large effects on productivity especially when combined with a technology transfer component. We estimate that without International joint ventures China’s growth would have been about one percentage point lower per annum over the last three decades.