430 International Organization internationally linked to varying degrees:financial markets are closely linked, equity markets are less connected,and markets for firm-and sector-specific capital are quite nationally segmented.In other words,among industrialized countries,financial capital flows freely but other assets flow relatively less freely or very little. Inasmuch as capital is specific to location,increased financial integration has only limited effects on policies targeted at particular industries.Whether or not a sector-specific policy is effective depends greatly on how easily firms can enter the sector.Financial markets can affect the ease of entry by extending funds to new firms.The easier it is for new firms to enter the sector,the more quickly the benefits of the policy to preexisting firms will dissipate and thus the less effective the policy will be.This is a general feature of sector-specific policies and holds as long as financial capital is mobile domestically;it would be true even if capital were not mobile internationally. Where cross-border financial flows reduce entry barriers to a favored sector, they contravene sector-specific policy.International capital mobility may have increased the ability of foreign producers to respond to trade protection by locating in the protected market;inasmuch as the purpose of protection was to support locally owned firms,this objective may be frustrated.The proliferation of Japanese-owned automobile factories in the United States in response to automobile import controls may have been made easier by the integration of financial markets and may have reduced some of the benefits of the controls to shareholders and employees of American-owned automobile manufacturers.3 All in all,however,increased financial capital mobility probably has little effect on most sector-specific policies.Supporters of such policies can generally design them to avoid their frustration by financial flows,domestic or interna- tional.Financial capital mobility,within or across borders,is not likely to affect the impact of cash transfers to farmers on their incomes.Nor can financial flows significantly impede government health and safety standards.Financial integration may make it more difficult to design some sector-specific policies to avoid undesirable side effects (namely,benefits accruing to untargeted firms), but it rarely makes them unsustainable. On the other hand,integration of financial markets has significant effects on the effectiveness and the differential distributional impact of national macro- economic policies.To get a handle on the issue,it is useful to start with what 13.Although I am unaware of any studies of this phenomenon,arguments to this effect are frequently heard among American competitors of the Japanese transplants,often in the context of complaints over the Japanese firms'access to low-cost Japanese funds.There are reasons to doubt the accuracy of the argument,however.First,most foreign direct investment is funded in the host country.Second,if Japanese firms have privileged access to Japanese finance,then financial markets are not fully integrated.The result might be due to preferential ties among Japanese financial and nonfinancial firms,which would constitute a "natural"barrier to financial capital mobility.Further study in this regard is required.A related issue is the effect of foreign-owned branch plants on political lineups in the host country.For anecdotal evidence that Japanese investment in the United States has created or reinforced domestic interest groups that favor freer trade,see "Influx of Foreign Capital Mutes Debate on Trade,"The New York Times,8 February 1987,p.113.430 International Organization internationally linked to varying degrees: financial markets are closely linked, equity markets are less connected, and markets for firm- and sector-specific capital are quite nationally segmented. In other words, among industrialized countries, financial capital flows freely but other assets flow relatively less freely or very little. Inasmuch as capital is specific to location, increased financial integration has only limited effects on policies targeted at particular industries. Whether or not a sector-specific policy is effective depends greatly on how easily firms can enter the sector. Financial markets can affect the ease of entry by extending funds to new firms. The easier it is for new firms to enter the sector, the more quickly the benefits of the policy to preexisting firms will dissipate and thus the less effective the policy will be. This is a general feature of sector-specific policies and holds as long as financial capital is mobile domestically; it would be true even if capital were not mobile internationally. Where cross-border financial flows reduce entry barriers to a favored sector, they contravene sector-specific policy. International capital mobility may have increased the ability of foreign producers to respond to trade protection by locating in the protected market; inasmuch as the purpose of protection was to support locally owned firms, this objective may be frustrated. The proliferation of Japanese-owned automobile factories in the United States in response to automobile import controls may have been made easier by the integration of financial markets and may have reduced some of the benefits of the controls to shareholders and employees of American-owned automobile manufacturers.13 All in all, however, increased financial capital mobility probably has little effect on most sector-specific policies. Supporters of such policies can generally design them to avoid their frustration by financial flows, domestic or interna￾tional. Financial capital mobility, within or across borders, is not likely to affect the impact of cash transfers to farmers on their incomes. Nor can financial flows significantly impede government health and safety standards. Financial integration may make it more difficult to design some sector-specific policies to avoid undesirable side effects (namely, benefits accruing to untargeted firms), but it rarely makes them unsustainable. On the other hand, integration of financial markets has significant effects on the effectiveness and the differential distributional impact of national macro￾economic policies. To get a handle on the issue, it is useful to start with what 13. Although I am unaware of any studies of this phenomenon, arguments to this effect are frequently heard among American competitors of the Japanese transplants, often in the context of complaints over the Japanese firms' access to low-cost Japanese funds. There are reasons to doubt the accuracy of the argument, however. First, most foreign direct investment is funded in the host country. Second, if Japanese firms have privileged access to Japanese finance, then financial markets are not fully integrated. The result might be due to preferential ties among Japanese financial and nonfinancial firms, which would constitute a "natural" barrier to financial capital mobility. Further study in this regard is required. A related issue is the effect of foreign-owned branch plants on political lineups in the host country. For anecdotal evidence that Japanese investment in the United States has created or reinforced domestic interest groups that favor freer trade, see "Influx of Foreign Capital Mutes Debate on Trade," The New York Times, 8 February 1987, p. 113