International Trade, Industrial Organization, Development Economics, Macroeconomics
Intra-firm Trade in the Presence of Uncertainty
Abstract: This paper investigates the role of uncertainty in the choice of organizational structure adopted by a firm. Specifically, the decision of the firm to either vertically integrate or outsource production of intermediate inputs. We propose a model of incomplete contracting and unequal bargaining á la Antras and Helpman (2004), where we incorporate demand uncertainty by assuming that firms do not know the industry demand they face before making production decisions. Uncertainty is resolved after firms make a relationship-specific investment in the production of intermediate inputs. We find that, in the presence of demand uncertainty, firms engage more in vertical integration compared to when they know the industry demand with certainty. This is because by vertically integrating with an intermediate input supplier, the firm is able to adjust better to fluctuations in the demand of its final output. We also find in the theoretical model that, under uncertainty, vertical integration tendency is less strong in more capital intensive industries. This is because firms located in capital intensive industries find it more profitable to concentrate on producing the capital intensive input while they outsource the production of the intermediate input. We empirically test the predictions of the model by using industry-level data from the manufacturing sector in the US and find results consistent with the implications of the model. In particular, our point estimates suggest that a one standard deviation increase in demand uncertainty increases the share of intra-firm trade by approximately 6.4%. We interpret these results as evidence that the interaction between strategic behaviour and uncertainty influences the choice of organizational structure.
Outsourcing, Productivity and Exports: Theory and Evidence from Firm Level Data for Emerging Economies
Abstract: A significant amount of the international trade literature is concentrated on developed countries. In this paper, we explore the relationship between outsourcing and the export status of firms using data from over 30 emerging and developing countries in Europe for the period 2001-2009. We first develop a simple theoretical model that links outsourcing to the decision by firms to export final output. Participating in outsourcing leads to an increase in total efficiency level of firms which is important for export market participation. My empirical analyses reveal that firms that engage in outsourcing are more likely to export their final output. We also find that these firms export a higher proportion of their final output compared to firms that do not engage in outsourcing. We implement instrumental variable strategy to address endogeneity concerns of the decision to outsource and provide a causal link between outsourcing and exports. We show that the direct link between outsourcing and the export status of the firm varies in relation to whether the firm is located in an EU member country or not and also the degree to which the country in which the firm is located is open to international trade.
Offshoring and Reshoring: The Roles of Incomplete Contracts and Relative Bargaining Power (with N, V. Long)
Abstract:Re-shoring, the practice of bringing manufacturing and services back to the U.S. from overseas, has become a noticeable phenomenon of some US firms especially in the past decade. What is the reason for this observed pattern in the US? To answer this question, we develop a simple theoretical model that incorporates several elements of incomplete contracts and unequal bargaining power between upstream and downstream firms. We show in this paper that an increase in bargaining power of Northern firms relative to that of their Southern contractors can trigger re-shoring if the North-South wage differential is moderate, but increases offshoring if the wage differential is very high. We also explore the idea that changes in wage differential affect offshoring dynamics. We find that, given the productivity level of downstream firms in the North, a decrease in the wage differential will lead some downstream firms in the South to re-shore production if this decrease in wage differential is not accompanied by an increase in downstream firm productivity. The paper suggests that there appears to be a shift in bargaining power from the North to the South accompanied by a reduction in the wage differential, thus leading to the observed pattern of re-shoring.
Work in Progress
Trading Goods and Trading Tasks: A Simple Model of Firm Heterogeneity with Innovation (with Chan Ying Tung)
Abstract:This paper provides a link between trade in goods and trade in tasks through the change in innovation spending. By incorporating the trade-in-task model in Grossman and Rossi-Hansberg (2008) into the model in Melitz (2003), we first show that there are two opposite effects that determine the movement of R&D spending and the number of tasks offshored, namely, the concentration effect and the volume effect. If the first one dominates, there is a co-movement between R&D spending and the degree of offshoring, and vice versa. After trade liberalization, export firms tend to reduce their spending on R&D, and this reduction is less severe when there is a decrease in iceberg cost. While the impact of trade liberalization on the number of tasks offshored is still determined by the concentration effect and volume effect. In the dynamic setting of the model, we introduce uncertainty to innovation and find that in the presence of uncertainty there is less expenditure on R&D.