In earlier work (Marin and Verdier (2003, 2006)) we investigate the second link by focusing on how factor endowments on the one hand and international competition on the other are aﬀecting firm size and the mode of organization firms choose. We find that firms that are neither too skill intensive nor too labour intensive will choose firmorganizations in which power is delegated to the divisional level to keep middle managers’ initiative alife. We also find that larger more profitable firms will delegate decision control to empower their middle managers. In this paper we are reversing the question by asking how firms’ organizational choices determine heterogeneity across firms in size and productivity in the same industry. We develop a model in which firms’ choice of corporate organization is aﬀecting firm performance and the nature of competition in international markets. We introduce organizational choices in a Krugman cum Melitz and Ottaviano model of internationaltrade. Our model simultaneously determines firms’ organizational choices and hetero- geneity across firms in size and productivity. More precisely, we combine within industry heterogeneity of Melitz (2003) and Melitz and Ottaviano (2003) with power in the firm of Marin and Verdier (2006 and 2007). This allows us to study the impact of corporate organization on firm productivity and on the nature of competition in international markets. Moreoever, it al- lows us to analyse the impact of internationaltrade on aggregate productivity in an industry.
Proposition 1 implies that resources are reallocated to exporting industries due to trade liberalization. In addition, Proposition 2 means that trade liber- alization makes more industries open to internationaltrade. These predictions are consistent with many empirical results. For instance, Bernard, Jensen, and Schott ( 2003 ) find that low-productivity plants in U.S. manufacturing indus- tries with falling trade costs are more likely to die. In a comprehensive survey of empirical studies, Tybout ( 2003 ) concludes that the general consensus of this literature is that foreign competition both reduces the domestic market share of import-competing firms and reallocates domestic market share from inefficient to efficient firms. More recently, Baldwin and Harrigan ( 2007 ) show that trade does not take place in many industries and the incidence of what they call “export zeros” is strongly correlated with distance, which is measured by the transport cost in the present model.
Next, consider the optimal pricing decision of a firm selling a brand of quality λ in its home market. Because each brand is associated with a unique quality level, in what follows we label products based on their quality levels. The aggregate quantity demanded is given by equation (2), which implies that that expenditure per variety, p(λ)q(λ), is independent of the brand’s quality level. Because the elasticity of demand for each variety is unity, a typical firm has an incentive to charge an infinite price and produce an infinitesimally small quantity independently of the product’s quality level. To prevent this from happening and to create an endogenous distribution of markups, we follow the spirit of Schumpeterian growth theory and assume that once a product is introduced in a market (domestic or foreign), a generic, lower-quality version of the product can be produced instantaneously by a competitive fringe of firms. The production of each generic product exhibits constant returns to scale with one unit of labor producing one unit of output. We suppose that the generic version of a product cannot be produced in a country unless the original product is sold there. In other words, the technology to produce generics diffuses internationally through imports. 9 We normalize the quality level of each generic good to one independently
While existing contributions to the literature on heterogeneous firms and trade typ- ically abstract from involuntary unemployment, some look – as we do – at the effect of trade liberalisation on wage inequality. The focus in these papers is on the differential effect that globalisation has on workers that belong to different skill groups. 7 The model in the present paper complements the analysis of inter-group relative wage effects by fo- cussing on the impact that trade has on the wage distribution of ex ante identical workers. There is well documented evidence across many countries that within-group wage inequal- ity is important and has increased (see Katz and Autor, 1999; Barth and Lucifora, 2006). Although the observed increase in within-group wage inequality has been parallel to the recent surge in intermediate goods trade (usually referred to by the term international outsourcing), theoretical explanations have so far predominately focussed on two other sources: technological progress and/or organisational change (see Galor and Moav, 2000; Aghion, Howitt and Violante, 2002; and Egger and Grossmann, 2005). In this literature the role of empirically unobservable individual characteristics (like learning abilities, or analytical and social skills) has been in the centre of interest. By modelling the interaction of firmheterogeneity and rent-sharing motives, our analysis identifies a new factor which may explain the intertemporal pattern of within-group wage inequality: changes in the
Much attention has been devoted recently to the study of internationaltrade when …rms di¤er in terms of productivity. A key contribution is Melitz (2003), which develops a model with …rm- level heterogeneity, product di¤erentiation, increasing returns, monopolistic competition, and …xed as well as variable costs of trade. 1 Although this has become one of the workhorse models in internationaltrade, little is known about the e¤ects of trade policy in such a setting. In part, this stems from the complexity of the model: trade policy a¤ects welfare through its impact on entry, variety, distortions associated with mark-ups, terms of trade, and home-market e¤ects. In this paper we make headway by restricting attention to a “small economy” that takes as given the unit costs of importers and the demand schedules for its exporters. We …nd sharp results for the policies that allow the economy to reach its …rst best allocation and characterize the e¤ects of export subsidies and import tari¤s on productivity and welfare.
So why have firms outsourced more services over time? The answer is likely to be related to two intertwined changes. The first comes from the service supply side and consists in the rise of an external market for PBS. Over time more and more firms have specialized in services, and slowly best practices have been established. As argued by Deblaere and Osborne (2010), services have been broken into their components and optimized by eliminating redundancies, automating and standardizing wherever possible. Essentially the production of services has been industrialized, creating a proper market for them, and economies of scale have allowed external providers to beat internal production. This explanation is formalized by Garicano and Rossi-Hansberg (2012a) in a model of growth where organizations develop to exploit existing technologies. They model the process through the emergence of markets for specialized services that are slowly created to satisfy the demand of agents that, facing some exceptional problems, do not have the incentive to acquire the specialized expertise to solve them. The creation of these referral markets takes time because experts have to learn the problems and invest in the knowledge to solve them. The high share of lawyers employed in the PBS industry over the entire period is suggestive in this regard. Law firms have a long history in the U.S. and were already well established in 1950; as a result most lawyers were employed within PBS at the beginning of the period. This shows how the decision of outsourcing services is very much related to the existence of external providers, that is, a market that can provide the services at a given price.
models of Romer (1990), Grossman and Helpman (1991) and Aghion and Howitt (1992), innovation is firm-specific and it is motivated by the appropriation of revenues associated with a successful R&D investment. In Romer (1990) growth is driven by two elements. The first one is the invention of new inputs which make the production of the final good sector more efficient. In this sense and from the point of view of the final good firm it can be seen as process innovation. The second one is knowledge spillovers from past R&D: the higher the stock of knowledge, the easier the invention of new varieties. In this paper there is a similar spillover, which is the imperfect imitation of incumbent firms by entrants. Grossman and Helpman (1991) introduce growth through quality improving innovation of existing products. However, in their model, different qualities are perceived as perfect substitutes and hence the representative consumer buys only the cheapest variety (adjusted by quality). Instead, in my model each variety is perceived as different by the consumer and higher quality varieties give higher utility. In Aghion and Howitt (1992) growth is based on the idea of Schumpeterian creative destruction in which new innovations replace the previous ones driving the incumbent monopolist out of the industry. The creative destruction mechanism is not far from the idea of firm selection. Successful firms grow and drive out of the market unsuccessful ones. Based on these general features my work adds firmheterogeneity, permanent idiosyncratic shocks that hit both production efficiency and product quality, and endogenous investment choices made by incumbent firms. These new elements endogenously link aggregate growth with firm-specific growth and hence with the mechanism of resource reallocation from non- innovators to innovators and from exiting to active firms. The resulting distribution of firm size is consistent with the data.
This is not the first paper that explores the effects of trade between similar countries on the skill premium. For example, Dinopolous et al. (2001) present a monopolistic com- petition model that highlights the role of intra-industry trade on wage inequality. Their model assumes quasi-homothetic preferences, non-homothetic production, and endogenous factor supplies for skilled and unskilled labor. Moving from autarky to free inter-industry trade causes an expansion of firm size, and hence, an increase in the skill premium. In our model, preferences and production are homothetic and we have two sectors as opposed to one. The key ingredient in our model is that firms are heterogenous and the skill inten- sive sector is relatively more productive than the labor intensive sector. Exposure to trade asymmetrically affects demand for each factor. Neary (2002), on the other hand, presents an oligopolistic model in which a reduction in import barriers induces incumbent firms to invest more strategically. This strategic investment increases the demand for skilled labor, and hence, the skill premium. In our model, however, there are no strategic interactions, and firms compete monopolistically. Finally, Matsuyama (2007) argues that internationaltrade inherently requires a more intensive use of skilled labor; as a result, exposure to trade increases the demand for skilled labor, and hence, the skill premium. In our model, how- ever, production technologies of goods are the same regardless of whether the goods are produced for domestic or foreign markets. 3 The exception in this literature is Epifani and
Among the recent literature modelling open economy with heterogeneous firms, our closest neighbors are Demidova (2008) and Okubo (2009). Demidova (2008) extends Melitz’s (2003) model to a setting with two countries of the same size but are asymmetric in the distribution of the productivity draws of firms. She assumes that there is only one diﬀerentiated-good sector, in which both countries produce and trade with each other in equilibrium. In contrast, we assume that the two countries are of diﬀerent sizes, there is a continuum of sectors, and in equilibrium there are sectors in which only one country produces (with one-way trade) as well as ones in which both countries do (with two-way trade). She assumes a general distribution function for firm productivity whereas we assume the distribution to be Pareto. In both her model and ours, there exists a homogeneous good sector in which both countries produce and trade cost is zero in that sector. Like her, we find that the laggard country may lose from falling trade cost. However, we show that this can only happen in the large country. Okubo (2009) also introduces multiple sectors into the Melitz model, thus making it a hybrid of the multiple-sector Ricardian model and the Melitz model. In the two-sector case he analyzes the general equilibrium eﬀects, allowing the endogenous determination of the relative wage. But the focus of his paper is quite diﬀerent from ours, though there are some similarities. He mainly focuses on changes in population and the eﬀects on the number of varieties. We mainly focus on how the strength of comparative advantage of a sector aﬀects firm selection in diﬀerent sectors under trade integration and trade liberalization. We analyze and obtain closed form solution of the international pattern of specialization and trade as a function of trade barriers, relative country size and Ricardian comparative advantage. We decompose the total eﬀect of trade liberalization into the IRA eﬀect and Melitz eﬀect and explain the condition under which one eﬀect can dominate the other. Most importantly, we identify the conditions under which there is a counter-Melitz eﬀect and a loss from trade liberalization.
In recent decades, as tariﬀ barriers have been generally and steadily falling worldwide, non-tariﬀ barriers (NTBs) have become a crucial concern for internationalorganizations due to their poten- tially harmful eﬀects on trade and development. NTBs consist of all barriers to trade that are not tariﬀs and include all interferences with internationaltrade that distort the free flow of goods and services. As such they include, for example, import quotas and voluntary export restraints (VERs) but also export subsidies. To NTBs belong ‘behind-the-border’ trade barriers (BTBs) stemming from domestic regulations that cover government procurement, product standards, inward foreign investment, competition law, labor standards, and environmental norms. These barriers are the main concern within free trade areas such as NAFTA and the EU. Indeed, mixed feelings about the success of the Single Market Program (SMP) are largely motivated by the persistence of BTBs that seem to disproportionately hamper the internationalization of firms, especially small and medium- sized enterprises.
My final tests return to the set of responses to the trade-policy position question as illustrated in Figure 3. Table 5 presents these in two ways, reporting average marginal effects (AMEs). 64 Model 8 is an ordered logit, where ‘no impact’ stances have been added as an intermediate level to the original trade-stance variable, creating a three-outcome set of responses. The results here largely mirror those from the previous models. As expected, firm size is negatively associated with anti-trade stances and positively linked to pro- trade stances, although significance is reduced. RCA is significant and its coefficient is negatively signed for both anti-trade and ‘no impact’ stances, while positively signed for pro-trade stances. This corresponds with theoretical predictions on both counts: pro-trade stances are more likely among large and productive firms and in comparative-advantage industries. The sign on RCA for ‘no impact’ stances seems to indicate the divide over trade policy is more readily apparent in comparative-advantage industries, where reallocations in response to liberalization are relatively large. Among internationalization options, effects are largely comparable to those of previous models. Unsurprisingly, direct importers are more likely to favor liberalization than other firms. Indirect exporters are more likely to favor liberalization than take protectionist or neutral stances; this is likely either driven by their sensitivity to demand fluctuations among exporting buyers or the potential opportunity to export directly in the event of reduced trade barriers. One difference that emerges is that firms engaging in FDI are much more likely to take pro-trade stances than anti-trade stances, pointing to the importance of international supply chains.
The importance of technology in the determination of trade patterns has long being a concern of classical trade models of perfect competition and of more re- cent models featuring increasing returns and imperfect competition. 1 Technology transfers in a Ricardian framework have important implications for trade patterns and welfare as Jones and Ruffin (2006) argue. They show that countries may benefit by transferring even their best technology provided there is an increase in relative wages. In the increasing-returns framework, Venables (1999) analyzes the interaction between Ricardian technologies and agglomeration forces showing that trade patterns may have different outcomes from those predicted by compar- ative advantage. Kikuchi et al. (2006) explored the role of cross-country technical heterogeneity in a multisectoral two-country model, showing that the inclusion of Ricardian technical differences brings about the agglomeration of the manufactur- ing sector in one country and makes intraindustry trade unlikely unless there is technical equalization in some industries.
To explore this topic, we opt for a model with technology adoption, which nests in the class of models that have followed the seminal work of Montagna (2001) and Melitz (2003). There are several advantages associated with this approach. First, technology adoption is an important source of industry productivity growth (Griffith et al., 2004). This suggests that innovation policies aiming at promoting technology adoption are relevant from a policy perspective. Second, this approach allows us to study the consequences of these policies while keeping analytical tractability. Finally, this approach is equally well able to encompass the evidence presented in Bustos (2011), featuring a scenario with exporting non-innovators, and the evidence from Castellani and Zanfei (2007), featuring a scenario with innovating non-exporters. The first scenario occurs in quite open countries, where trade is relatively free, so firms can engage in international markets without being innovators. The second scenario is common to relatively closed countries, where trade barriers are relatively high, and it therefore pays to innovate just for the domestic market. For intermediate levels of trade openness, innovation and export activities become complementary, as described in Lileeva and Trefler (2010). These scenarios correspond in our model to three distinct equilibria sustained by different parameter configurations.
One of the most striking features of the microdata is that rm participation in internationaltrade is exceedingly rare. Researchers nd that exporters and importers represent just a tiny fraction of producers across many developed and developing economies. This participation is far from random. Indeed, the same studies nd that exporters and importers are larger, more productive, more skill- and capital-intensive, and pay higher wages prior to their entry into international markets than non-trading rms. These facts suggest self-selection: exporters are more productive, not necessarily as a result of exporting, but because only the most productive rms are able to overcome the costs of entering export markets. The most successful model of such selection is the seminal Melitz (2003) model, which has dominated recent research in the eld. The key insight of that model is that micro-heterogeneity inuences aggregate outcomes. When trade policy barriers or transportation costs fall, high-productivity exporting rms survive and expand while lower-productivity non-exporting rms shrink or exit. This reallocation of economic activity across rms raises aggregate productivity, an eect of globalization that was largely neglected in previous theories of internationaltrade based on comparative advantage and consumer love of variety.
In this paper, we examine the impacts of internationaltrade in goods as well as the impact of international capital movement (i.e., capital account liberalization) on the economy when two countries with different qualities of financial institutions exchange goods and capital. We are especially interested in the impacts at an industry level and in economic interaction between trade in goods and capital movement. More specifically, we examine how finan- cial imperfection affects firmheterogeneity within an industry and how internationaltrade and capital movement affect the industry in individual countries with different qualities of financial institutions. We also allow countries to differ from each other in their wealth dis- tributions (which can be considered as capital endowments for now) in order to distinguish the effects caused by the difference in countries’ financial development from those caused by a traditional difference in factor endowments. We find that international flows of goods and capital when countries are different in their financial development are quite different from those when they are different in their wealth distributions. More importantly, relationships between trade and capital movement are quite different between these two cases: trade and capital movement are substitute when countries are different in their factor endowments (Mundell 1957 and Krugman 1979) while they are complements when countries are different in their financial development. We also investigate foreign direct investment (FDI) flows be- tween two countries with different financial development, and find that reciprocal FDI may arise in such situations. On one hand, FDI from a (relatively) financially-developed country (which we call North) to a financially-less-developed country (which we call South) arises since Northern firms, which locally finance part of their FDI projects, attempt to exploit interest rate differential. On the other hand, there also exists FDI from South to North aiming to overcome financial constraints.
When firms are constrained to produce in their home countries, as in Brander and Spencer (1985), both governments use output subsidies in equilibrium to make their national firms more aggressive on the product market (profit-shifting). However, when the firms’ plants are mobile, tax competition drives the countries’ output subsidies down to zero. Key to this result is the assumption of nondiscrimination between domestic and foreign firms. Therefore, starting from the Brander and Spencer equilibrium, each government has an incentive to cut its output subsidy under plant mobility, thereby driving its own firm abroad where it will be subsidized by foreign taxpayers. In contrast to our model, the incentives created by Janeba’s set-up mean that (in the presence of output subsidies) governments do not wish to attract inward FDI, a characteristic which seems diﬃcult to reconcile with experience. Another important diﬀerence is that Janeba’s “third market” assumption means that the impact of national market-size asymmetries cannot be assessed.
The paper has investigated the role of international cooperations for firms’ export decisions. The theoretical framework (section 2) has put forward an extension of the class of models of firmheterogeneity and internationaltrade. The main idea we have introduced within the standard heterogeneity model is that an enterprise, once it realizes that its productivity is above a minimum cutoff level that is required to enter the export market, must not only pay the sunk export costs as previously pointed out in the literature, but it must also engage in a cooperation agreement with a foreign partner in order to favour its market access and distribution activities overseas. Specifically, our model argues that a prospective exporter can adopt two alternative international cooperation strategies: cooperation for the commercialization of existing products only, or also for the further development and commercialization of innovative (new) products. Such a cooperation strategy is one key factor affecting the export propensity of firms (in addition to the other factors previously pointed out in the literature such as productivity, firm size and sunk export costs).
man, 2004, Grossman and Helpman, 2003 & 2005). A central question in this literature is how trade liberalization changes the incentives to oﬀshore parts of the production process through foreign direct investments or through outsourcing inputs from independent foreign suppliers. Another stream in this literature studies how the possibility of oﬀshoring some "tasks" in the production process amends the conclusions of the Hecksher-Olhin model (Grossman and Rossi- Hansberg, 2006, Baldwin and Robert-Nicoud, 2007). Here, we do not consider diﬀerent modes of organizations. This simplifying assumption, however, allows us to easily deal with factor re- allocations among ﬁrms due to trade liberalization, and gives the possibility of studying trade patterns in a general equilibrium analysis. This in turn enables us to single out the consequences of the interaction between oﬀshoring and ﬁrm heterogeneity.
oligopolistic competition is recognized in standard textbooks on industrial organization; for example Pindyck and Rubinfeld [2005, p. 441] write “oligopoly is a prevalent form of market structure. Examples of oligopolistic industries include automobiles, steel, aluminum, petrochemicals, electrical equipment, and computers.” The relevance of oligopolistic competition to internationaltrade is even greater as firms engaging in internationaltrade on average are larger than firms that do not engage in trade [Bleaney and Wakelin, 2002, p. 3]. Thus, firms engaging in internationaltrade are likely to have market power and engage in oligopolistic competition.
Finding a lower elasticity means that the demand-side is more heterogeneous in the ﬁrm heterogeneity model for motor vehicles and parts than we thought it was based on the Armington elasticity. Since consumer preferences are more heterogeneous there is more room for new exporters in the MVH market to invest in diﬀerentiat- ing their varieties. Therefore, marginal ﬁrms can markup their prices against large infra-marginal ﬁrms in the market. It should be noted that there is also signiﬁcant supply-side heterogeneity in the MVH market. Spearots shape estimate is 1.79 for MVH is one of the lowest shape parameter values within the aggregate manufacturing industry (Spearot, 2015). This implies that infra-marginal ﬁrms have a dispropor- tionate share of the overall activity in this market and marginal ﬁrms are much less productive compared to the incumbents. As noted in previous discussions, having a low productivity is less of a disadvantage when preferences are more heterogeneous (low elasticity). Even though marginal ﬁrms charge slightly higher prices than the incumbents, consumers are willing to pay a premium for new varieties. However, with a higher elasticity, marginal ﬁrms would have lost their market power and would be subsumed by the large and productive infra-marginal ﬁrms. So moving from the higher substitution elasticities used previously in GTAP-based studies of ﬁrm heterogeneity to the lower values suggested by this study represents an important change.