Capital Account Liberalization and Aggregate Productivity: The Role of Firm Capital Allocation

We study the effects of capital account liberalization on firm capital allocation and aggregate productivity in 10 Eastern European countries. First, we use aggregate data and show that opening the capital account is associated with higher aggregate total factor productivity. Second, we use a large cross-country firm-level dataset and show that capital account liberalization decreased the variance of the marginal revenue product of capital, particularly in sectors more dependent on external finance. Finally, we use a model of misallocation and find that capital account liberalization increased manufacturing productivity through a more efficient firm capital allocation by 8% to 13%.