Lecture 9 - Heiwai Tang

Transcription

Lecture 9 - Heiwai Tang
Advanced Topics in Trade
Lecture 9 - Multinational Firms and Foreign Direct Investment
Heiwai Tang - SAIS
April 8, 2015
Today’s Agenda
I
Stylized facts about multinational firms (Antras and Yeaple, 2014).
I
Determinants of horizontal FDI by Brainard (1997).
I
A simple conceptual framework, based on Helpman (JEL 2006), to
study different modes for firms to serve foreign markets.
I
A brief introduction of Antras and Helpman (2004) about
incomplete contracts (imperfect contract enforcement) and vertical
foreign direct investment (FDI).
Multinational firms have been largely overlooked in most
trade models
I
So far, in all models we studied in this course, the entire production
process is assumed to be undertaken in the domestic economy.
Thus, trade was always in final goods.
I
However, evidence suggests that firms frequently choose to service
foreign markets through local subsidiaries, thus becoming
multinational firms.
I
The literature refers to this arrangement as horizontal FDI.
I
Multinational corporations account for a significant fraction of world
trade flows, with trade in intermediate inputs between divisions of
the same firms constituting an important portion of these flows.
I
Outsourcing of production tasks to foreign affiliates are referred to
as vertical FDI.
Why should we care about multinational firms?
Answer: Because they are important in the global economy:
I
Value added of all MNEs (including parent firms) was around 8 tr
USD in 1997, which was roughly 25% of world GDP.
I
Excluding parent firms, about 10-12% of world GDP is accounted
for by foreign affiliates (in 2007).
I
Also, 1/3 of the volume of world trade is intra-firm trade
(transactions that happen within firm boundary.
I
In 2004, 36.1% of total U.S. imports were intra-firm.
I
About another third of the volume of world trade is accounted for
by transactions in which MNEs are in one of the two sides of the
exchange (71% of U.S. exports).
I
The 700 largest MNEs account for roughly 50% of world R&D
spending and close to 70% of world business R&D spending.
Distribution of Worldwide Production of Multinational
Motivation
Enterprises (MNEs)
Domestic Production versus Worldwide Sales
•
Less than 50% of Ford’s and Toyota’s production occurs in their countries of origin
Share of Worldwide Production of Ford
Share of Worldwide Production of Toyota
South America
3%
Europe
8%
Asia Pacific
Africa
15%
North America
47%
Asia Pacific
Africa
27%
Europe
29%
South
America
9%
North America
18%
Economics 1535: Lecture 18
I
Japan
44%
2
Source: Antras (2013) CREI talk
Pol Antràs (Harvard)
Horizontal FDI (Part 1)
Spring 2014
3 /
Domestic
Production versus
Worldwide
Distribution
of Worldwide
Production
ofSales
MNEs
 U.S. firms serve foreign markets mostly (75%) via
foreign affiliate sales
How American Firms Serve Foreign Markets, 2009
U.S. Exports
$1.57 trillion
Foreign Affiliate
Sales to 3rd Countries,
$1.47 trillion
Local Sales of
Foreign Affiliates
$2.95 trillion
Economics 1535: Lecture 18
I
3
Source: Antras (2013) CREI talk
Pol Antràs (Harvard)
Horizontal FDI (Part 1)
Spring 2014
4 / 46
Multinationals’ Presence in U.S. Trade
Multinationals in U.S. Trade
I
Source: Antras (2013) CREI talk
Pol Antràs
(Harvard)
Horizontal FDI (Part 1)
Spring
Share of Intrafirm Imports from Top Destinations
Variation in the Share of Intra…rm Trade across Countri
Pol Antràs
I
(Harvard)
Horizontal FD I (Part 1)
Source: Antras (2013) CREI talk
Spring 2014
Variations in the Share of Intrafirm Trade across Industries
Variation in the Share of Intra…rm Trade across Industri
Pol Antràs
I
(Harvard)
Horizontal FDI (Part 1)
Source: Antras (2013) CREI talk
Spring 2014
Six Stylized Facts about Multinational Firms (Antras and Yeaple,
Handbook of International Economics 2014)
Fact 1: MNEs are highly concentrated in developed
countries.
Stylized Facts About Multinational Activity: #1
Multinational activities are concentrated in developed countries where
they are mostly
two-way.
Developing
countries
are concentrated
more likely to
the
Fact One:
Multinational
activity
is primarily
in be
developed
recipient of
multinational
activities
than
the
source.
countries where it is mostly two-way. Developing countries are more likely to
be the destination of multinational activity than the source
2
2
log (Outward FDI Stock / GDP)
0
‐1
‐2
‐3
‐4
‐5
‐6
‐7
‐8
‐9
LBR
1
0
log (Inward FDI Stock / GDP)
HKG
LUX
IRLCHESGP
BEL
PAN
NLD
LBR
CYP
ISL
GBR
SWE
DNK
FRA
EUU
FIN
AUT NOR
MYS BHR ESPDEU
CAN
ESTPRT
ISR AUSUSA
RUS
ITA
CHL SYC
ZAF LBN
ZMB
QAT
ARE
SVN
HUNMLT
JPN KWT
KOR
GRC
NZL
AZE
KAZ
SRB
TTO
MNE
BRA
ARG
THA
COL
POLCZE
HRV
MEX
UKR
LTU
AGO
IND
BRN
MUS
CHN VEN
GAB
SLB PHL
OMN
SAU
BLZ
LVA SVK
TUR
NER GIN
BGR
KHM
VUT
MAREGY
BWA
SEN
NGA
NIC MNG
PNG
CAF
JAMPER
JOR
YEM
SWZ
PRY
FJIGEO
ALB
MDA
DZA
HND
MKDROM
PAK
BEN
KEN CMR
GTM
ARM
TCD
LKA
MRT
SYR
MLI
TUN URY
ECU
NAM
BIH
MWI
BLR
GNB
CRI
IDN
RWA
WSM
y = − 14.23 + 1.206 x
BFA
(1.004) (0.109)
CIV
BGD
BDI
LSO
GUY BOL
MDG
R2 = 0.467
CPV
SLV
MOZ
HTI
KGZ
GNQ
1
‐1
ZAR
‐2
‐3
HKG
KNA SYC
SGP LUX
VCT
LCA
HND
GRD
COG
MNE
CYPBEL
DMA
MLT
IRLCHE
BHS
BGR
LBN
BRN
BLZJAM
EST
TTO ISLNLD
STP SLB
PAN
GUY
JOR
MNG
HUN
NIC
FJIGEO
TUN PLW
CPV
CZE SWE
BHR
VUT
CHLHRV
GMB
VNM
MRT
MOZ
SVK
KAZ
SRB
KHM
ZMB
LSO
MAC
MDG
GNQ
MDA
MKD
TCD
PRTNZL
GBR
NAM
MAR
LVA
ARM
AUS
DNK NOR
ESP
ROM
EUU
BIHZAF
MYS
NER GIN TZA
UKRMDV
AUT
POL
TKM
THA
FRA
TMP
SAU
CRIURY
LTU
ALB
SLV
ISR
CAN
FIN
BOL
UGA
EGY
TON
SVN
MEX
SDN
NGA
AGO
TGO
LAO
CIV
DOM
PER MUS
SLE GNB GHA CMR
ARE
QAT
SWZ COL
ARGRUS OMNDEUUSA
BRA TUR
ERI CAF
KGZ
MWI
IDN
PRY ECUAZE BLR
ITA
TJKPNG
GTM
ETH
YEM
MLI BENSENKIR
PHL SYR
PAK
DZA
IND
UZB
GRC
GAB
COM
BTN
BFA
LKA
AFG
HTI
BWA
IRQWSM CHN VEN
RWA KEN
BGD
KWT
BDI
JPN
‐4
NPL
KOR
‐5
‐6
y = − 2.985 + 0.219 x
(0.483) (0.054)
‐7
R2 = 0.087
‐8
‐9
5.5
6.5
7.5
8.5
9.5
10.5
11.5
5.5
6.5
log (Real GDP Per Capita)
Sources: UNCTAD and World Bank
7.5
8.5
9.5
log (Real GDP Per Capita)
Sources: UNCTAD and World Bank
Figure: Aggregate FDI Stocks and Development
10.5
11.5
Fact 1: MNEs are highly concentrated in developed
countries.
Share of U.S. Intrafirm Imports and Capital Abundance of the Exporting
Countries
Stylized Facts About Multinational Activity: #1
Share of Intrafirm Imports , Average 2000‐05
1
y = − 0.485 + 0.075 x
(0.117) (0.011)
0.9
R2 = 0.214
IRL
IRQ
0.8
0.7
SVK
MEX HUN
GAB
CRI
MYS
SUR
STP
JPN
SGP
LUX
KWT
FINAUT
GBRNLD
LBY
DNK CHE
KOR
NOR
DOM
BHS
CAN
SLVVCT
ISL
FRA
YEM
BEL
COG SLB
JAM
NGA
NZL
BIHMAR
CIV
MDV VEN
GMB
CZE
PRT
SVN
LCA
THA
BOL
BRA
AUS
LBR
ESP ITA
POL
TTO
MRT
TON BLZ
MLI
ISR
GNB ZMB
RUS
IDN
ESTTWN
ZAF
CHN
TUN
DJI
DZA
DMA
CHL
MWI
COL
ARG
SLE
WSM
BHR
GRC
SYR
ECU HRV
NIC
SEN
BRB
ALB
NAM
OMN
UGA
LKA
TCDSDN
HKG
ARE
FJI
EGY GTM
IND
KEN
QAT
SYC
TUR
GUY
TZA
BGR
PAN
VNM
COM
CMR
ZWE
BFA HTI BEN
SOM
GNQ
URY
AGO
BRN
IRN
JOR
BTN
GHA
GRD
CPVPER
ETHMDG
LBN
GIN TGO
ZAR
BWA CYP
RWA
PAK
MNG
NPL
CAF
SWZ
VUT
NER
MKDMUS
MAC
PNG
MOZ
KHM BGD
LAO
LSO UZB PRY
CUB
AFG
0.6
MLT
SAU
SWE
HND
PHL
0.5
0.4
0.3
0.2
0.1
BDI
0
6.5
7.5
8.5
9.5
10.5
11.5
12.5
Log Capital/Labor Ratio, Average 2000‐05 Sources: U.S. Census Related‐Party Trade Database and Penn World Tables (using perpetual inventory method of Caselli, 2005)
Figure: Share of U.S. Intra…rm Imports and Physical Capital Abundanc
Fact 2: Intrafirm trade is more prevalent in capital and
Stylized Facts
About Multinational Activity: #2
R&D intensive
sectors.
1
y = − 0.142 + 0.108 x
(0.122) (0.025)
0.9
3361
R2 = 0.182
0.8
3254
0.7
0.6
0.5
0.4
0.3
0.2
3159
0.1
3162
0
3
3.5
4
4.5
5
5.5
6
6.5
7
Share of Intrafirm Imports by NAICS 4, Average 2000‐05
Share of Intrafirm Imports by NAICS 4, Average 2000‐05
Fact Two: The relative importance of multinationals in economic activity is
higher in capital intensive and R&D intensive goods, and a signi…cant share
of two-way FDI ‡ows is intraindustry in nature
1
R2 = 0.345
0.8
3254
0.7
0.6
0.5
0.4
0.3
0.2
3159
0.1
3162
0
Log U.S. Capital/Employment by NAICS 4, Average 2000‐05 Sources: U.S. Census Related‐Party Trade Database and NBER‐CES Manufacturing Industry Database
y = 0.940 + 0.142 x
(0.091) (0.022)
3361
0.9
‐5
‐4.5
‐4
‐3.5
‐3
‐2.5
‐2
‐1.5
Log (R&D Expenditure/Sales + 0.01) by NAICS 4, Average 2000‐05 Sources: U.S. Census Related‐Party Trade Database and Nunn and Trefler (2008)
Figure: The Share of Intra…rm Imports, Capital Intensity and R&D Intensity
Pol Antràs (Harvard)
Horizontal FDI (Part 1)
Spring 2014
19 / 4
Fact 3: MNEs’ activities are decreasing in distance.
Stylized Facts About Multinational Activity: #3
The production of the foreign affiliates of multinationals is decreasing in
distance (from
the host
country),
butofatthea foreign
slower a¢
rate
than
Fact Three:
The
production
liates
of aggregate
multinationals falls
trade (both
andbut
exports)
o¤ imports
in distance,
at a slower rate than either aggregate exports or parent
exports of inputs to their a¢ liates
‐26
y = − 2.877 + 0.318 x
(0.636) (0.078)
3
R2 = 0.144
log(Affiliate Salesds/Exportsds) log (Affiliate Salesds / GDPdGDPs)
4
y = − 28.16 − 0.573 x
(0.658) (0.080)
‐28
‐30
‐32
‐34
‐36
R2 = 0.052
2
1
0
‐1
‐2
‐3
‐38
‐4
‐40
‐5
5
6
Sources: Ramondo (2012) and World Development Indicators
7
8
log (Distance between s and d)
9
10
5
6
7
8
log (Distance between s and d)
9
10
Sources: Ramondo (2012), Feenstra's trade data and World Development Indicators
Figure: Gravity, FDI Sales and Trade Flows
Pol Antràs (Harvard)
Horizontal FDI (Part 1)
Spring 2014
22 / 4
Fact 4: MNEs’ headquarters tend to be associated with
better performance.
Fact Four: Both the parents and the a¢ liates of multinational …rms te
be larger, more productive, more R&D intensive and more export orient
than non-multinational …rms
Table 3. U.S. Parent Firms Percent Shares of US Activities
Enterprises
Value Added
Employment
R&D Expenditure
Exports
Manufacturing
All Industries
0.4
62.3
58.2
72.1
44.4
0.04
17.6
16.9
69.2
54.7
Source: Barefoot and Mataloni (2011), U.S. Census
Fact 4: MNEs’ headquarters tend to be associated with
Stylized
Facts About Multinational Activity: #4
better
performance.
Table 4. A¢ liates Relative to Local Firms
Enterprises
Employment
Sales
R&D Expenditure
Exports
Finland
France
Ireland
Holland
Poland
Sweden
1.6
17.2
16.2
13.1
17.5
2.0
26.2
31.8
27.4
39.5
13.4
48.0
81.1
77.3
92.3
3.4
25.1
41.1
35.8
60.0
16.0
28.1
45.2
20.9
69.1
2.8
32.4
39.9
52.0
45.8
Source: OECD (2007).
Stylized
Facts headquarters
About Multinational
Activity:
#5 high
Fact 5: MNEs’
focus on R&D
and other
value-added activities.
Within multinational enterprises, parents are relatively specialized in
Factwhile
Five:affiliates
Withinaremultinational
enterprises,
relatively spec
R&D
primarily engaged
in selling parents
goods inare
foreign
in
R&D
while
a¢
liates
are
primarily
engaged
in
selling
goods
in foreign
markets (both the host market and third markets).
markets, particularly in their host market.
Table 5. Share of US Multinational Activity Due to Parent Firms
1999
Sales
Value Added
Employment
R&D Expenditure
Source: BEA
74
78
75
87
2009
65
68
68
84
Fact 6: MNEs’ headquarters focus on on R&D and other
high value-added
Stylized Factsactivities.
About Multinational Activity: #6
Cross-Border Mergers and Acquisitions, compared to green-field
investments,
up a large Mergers
proportion
of FDI and
areupa aparticularly
Factmake
Six: Cross-Border
and Acquisitions
make
large fraction of
importantFDI
mode
of
entry
into
developed
countries.
and are a particularly important mode of entry into developed countries.
Table 7. The Value of Mergers and Acquisitions Relative to FDI Flows
World
Developed
Developing
Source: UNCTAD
2005
2006
2007
2008
2009
2010
0.47
0.65
0.19
0.43
0.54
0.21
0.52
0.68
0.18
0.41
0.60
0.16
0.21
0.34
0.08
0.27
0.42
0.14
Determinants of Horizontal FDI
Helpman (06): Trade, FDI, and the Organization of Firms
I
A simplified version of Melitz (2003).
I
A firm’s profit from domestic sales
πD (Θ) = ΘB − cfD ,
where Θ is some function of the firm’s productivity and B captures
the level of industry demand at home, as well as factor prices (e.g.
wages).
I
Profit from exports
πX (Θ) = τ 1−ε ΘB ∗ − cfX ,
where B ∗ captures the level of industry demand in the foreign
country, as well as factor prices (e.g. wages).
I
Profit from horizontal FDI
πI (Θ) = ΘBI∗ − cfI ,
I
Intuitive assumptions of the ranking of fixed costs:
fD < fX < fI
One killer graph that captures firms’ decisions
598
Journal of Economic Literature, Vol. XLIV (September2006)
Figure 3. Multinationals,Exporting, and Nonexporting Firms
technologyH or a traditional
technologyL, as
Argentinianfirms. This raises the operatin
Brainard (AER 1997)
”An Empirical Assessment of the Proximity-Concentration Trade-off Between
Multinational Sales and Trade”
I
A pioneering paper in economics to empirically examine the
determinants of horizontal FDI versus exporting, using sectoral data
I
Proposes an econometric model in which the share ln(Exp/(MNE
affiliate sales + Exp)) is regressed on:
I industry and country-specific measures of trade costs, and
I industry measures of plant-specific and firm-specific economies
of scale.
I controls related to the importing country, such as GDP per
capita, corporate tax rates, openness to trade, openness to
FDI;
I
Specification:
EXmj
ln
FDImj + EXmj
j
= α + β1 Freightm
+ β2 Tariffmj + β3 GDP Diff j
+β4 Tax j + β5 Trade j + β6 FDI j +
+β7 PlantSCm + β8 FirmSCm + jm ,
where m indexes country and j indexes industry.
Empirical Results (Brainard, AER 1997)
I
For each industry, measures plant-level economies of scale by the
number of production employees in the median US plant (in terms
of value added)
I
For each industry, measures firm-level economies of scale by the
number of nonproduction workers in the average US-based firm.
I
Finds that these two variables have opposite effects on the ratio of
exports to total sales abroad.
I
The coefficient on the difference in GDP per capita between the
foreign country and the U.S. is positive and significant
I
Perhaps Brainard is unintentionally testing both horizontal and
vertical FDI at the same time?
Empirical
ResultsEmpirical
(Brainard,Results
AER 1997)
rainard
(1997):
530
THE AMERICANECONOMICREVIEW
TABLE 1-EXPORT
Independent
variable
FREIGHT
TARIFF
PWGDP
TAX
TRADE
FDI
OLS
(i)
SHARES (DEPENDENT VARIABLE =
Country random
effects
(ii)
Industryrandom
effects
(iii)
-0.2451
(-5.429)
-0.274
(-6.239)
0.330
(4.272)
-1.335
(-4.882)
1.9114
(7.416)
-2.6163
(-9.264)
-0.2009
(-3.996)
-0.2814
(-5.666)
0.3231
(2.371)
-1.3566
(-2.809)
1.9395
(4.149)
-2.6302
(-5.077)
-0.1264
(-2.672)
-0.0872
(-2.038)
0.1922
(2.909)
-0.9853
(-4.258)
2.1306
(9.887)
-2.8126
(-11.944)
3.6903
(2.212)
3.9210
(1.281)
3.5633
(2.554)
1,159
0.118
1,159
0.040
1.8446
0.933
PSCALE
CSCALE
ADJ
LANG
EC
COUP
Constant
Number of
observations
Adjusted R2
X2
P
OLS
(iv)
-0.2717
(-4.578)
-0.3707
(-7.447)
0.2958
(3.747)
-0.5695
(-1.795)
1.6558
(6.305)
-0.8343
(-1.810)
0.1345
(2.735)
-0.2726
(-4.656)
-0.0313
(-0.156)
-0.1767
(-1.803)
-0.8107
(-5.933)
0.6247
(2.624)
-4.7336
(-2.042)
1,159
0.080
23.425
0.001
1,035
0.233
SEPTEMBER1997
EXSH)
Country random
effects
(v)
-0.2852
(-4.813)
-0.3895
(-7.259)
0.3050
(2.677)
-0.5787
(-1.223)
1.5841
(4.035)
-0.8502
(-1.219)
0.1331
(2.728)
-0.2734
(-4.722)
-0.0177
(-0.069)
-0.1459
(-0.998)
-0.7808
(-3.823)
0.6486
(1.805)
-4.4334
(-1.270)
1,035
0.140
4.8503
0.963
Industryrandom
effects
(vi)
-0.1228
(-1.767)
-0.1644
(-3.412)
0.1461
(2.122)
-0.2150
(-0.792)
1.8477
(8.262)
-0.9120
(-2.334)
0.1087
(0.941)
-0.2291
(-1.587)
-0.0367
(-0.188)
-0.2707
(-3.223)
-0.8165
(-7.040)
0.5632
(2.788)
-5.1163
(-2.535)
1,035
0.180
22.154
0.036
Notes: The table reportsestimates of equation (3); t values are reportedin parentheses.All variables are in logs. Samplesize differences reflect missing data.
Pol Antràs (Harvard)
Horizontal FDI (Part 1)
set of independent variables. The coefficients
addition, the country variables again interact
Spring 2014
4
between them. To assess this implication, we added a variable GDP , which is the logarithm of the
absolute value of GDP between the United States and country i. Running this augmented regression
Empirical
Results
(Brainard,
AER
1997)
inard
(1997):
Updated
Results
More
Recent
D
statistically
signi…cant coe¢
cient on GDP suggests
that marketwith
size does matter:
U.S. …rms
are more
on 2009 data, we obtain the coe¢ cient estimates shown in column 3. The positive and (moderately)
likely to export to smaller markets and to engage in foreign direct investment in larger countries.
Table 3: Proximity-Concentration Empirics
Dep. Var.: log
Xji
Xji +Sji
(1)
(2)
(3)
(4)
(5)
(6)
Freight
-0.28**
-0.13**
-0.12**
-0.13**
-0.13*
0.01
[0.05]
[0.04]
[0.04]
[0.04]
[0.06]
[0.25]
Tari¤s
-0.23**
-0.28**
-0.27**
-0.29**
-0.38**
-0.04
[0.06]
[0.05]
[0.05]
[0.06]
[0.10]
[0.04]
GDP/POP
0.10
0.04
0.06
[0.07]
[0.08]
[0.08]
School
0.07
[0.09]
KL
0.08
[0.06]
GDP
PlantSc
0.32
0.39*
[0.17]
[0.17]
0.09*
0.13*
0.13*
0.14*
0.18
[0.04]
[0.05]
[0.05]
[0.05]
[0.15]
-0.18**
-0.32**
-0.31**
-0.32**
-0.35*
[0.03]
[0.04]
[0.04]
[0.04]
[0.14]
Country Fixed E¤ects
No
No
No
No
Yes
Industry Fixed E¤ects
No
No
No
No
No
Yes
Year
1989
2009
2009
2009
2009
2009
Observations
1,762
2,315
2,315
2,315
2,482
2,482
0.15
0.09
0.09
0.09
0.16
0.40
CorpSc
R-square
Yes
Standard errors are in brackets (* signi…cant at 5%; ** at 1%).
Pol Antràs (Harvard)
Horizontal FDI (Part 1)
Spring 2014
To further explore the role of relative factor endowment di¤erences, we next we replace GDP =P OP
(GDP per worker di¤erences) with absolute di¤erences in years of schooling (School) and capital-labor
The Incomplete Contracts Approach to Study the Determinants of
Vertical FDI
Helpman (JEL 2006)
I
Contracts are incomplete (from Lecture 3).
I
Firms’ optimal responses to contractual frictions:
I
I
Where to produce? (Slicing up the value chain, such as R&D
and product development, parts and components production,
assembly, etc. in different countries)
Extent of control that firms exert over different production
stages:
I
I
Should these production stages be kept within firm
boundaries?
Should they be contracted out to suppliers or assemblers?
Helpman (JEL 2006) Section 3
I
Based on Antras and Helpman (2004).
I
Ideas: Two-stage game. The final-good producer (in the North, e.g.
U.S.) has to decide
I
I
I
whether to produce the intermediate inputs in-house or
outsource it to another firm
If outsourcing turns out to be optimal, the firm decides
whether to outsource it to a firm in the North or the South.
Different organizational modes are associated with
I
I
Different bargaining power for the supplier and the final-good
producer. Bargaining power is higher if the final-good producer
owns and controls the supplier, through vertical integration.
Different fixed costs: production in the South and vertical
integration respectively are associated with higher fixed costs
(e.g. overhead, management costs).
Helpman (JEL 2006) Section 3
I
The idea that control over another firm’s asset can enhance the
bargaining power of the controlling firm is the key of the
Property-rights Theory of the Firm.
I
What kind of final-good producer would prefer to vertically
integrate with the supplier? and produce in the South?
Helpman (JEL 2006) Section 3
I
Cost structures aside, organizational mode of production depends
on the (intrinsic) characteristics of the industry.
I
For example, in R&D intensive sector (e.g., pharmaceutical
companies), the headquarter firm’s pre-production investment
accounts for a big part of the production cost.
I
If the supplier deviates from ex-ante agreements or expectations,
the final-good supplier could suffer a big loss (esp when investments
are sunk and relationship-specific).
I
Antras and Helpman (2004) call this the ”hold-up” problem.
I
The party that has a larger share of ex-ante investment in the joint
production unit is relatively more vulnerable to hold-up, and thus
deserves a higher level of protection by having a larger bargaining
power, through vertical integration.
Helpman (JEL 2006) Section 3
I
Antras and Helpman (2004) embed the two-stage bargaining game
and differentiated sectors in the Melitz (2003) heterogeneous-firm
model.
I
Production function in each sector takes the Cobb-Douglas form,
and differs in headquarter-input intensity (like R&D, capital, skill
intensity).
I
Predictions: Firms with different productivities will optimally sort
themselves into one of the four production modes (conditional on
survival):
I
I
I
I
Outsourcing in the North (Domestic outsourcing)
Outsourcing in the South (Offshoring)
Vertical integration with suppliers in the North (Domestic
M&A)
Vertical integration with suppliers in the South (Vertical FDI)
Antras and Helpman (2004)
Predictions in a Graph
global sourcing
567
Fig. 4.—Equilibrium in the headquarter-intensive sector
depicted in figure 3—as the benchmark case. In this event the freeentry condition (11), together with (6) and (8), imply
Antras and Helpman (2004)
Sorting of Firms based on Productivity
global sourcing
565
Fig. 2.—Organizational forms
high-productivity firms outsource components in the South, low-productivity firms outsource them in the North, and the least productive
firms exit. On the other hand, integration takes place in headquarterintensive sectors (i.e., high h). The most productive firms integrate in
the South and somewhat less productive firms outsource in the South.
Firms with even lower productivity acquire components in the North,