The three central primitives of international trade theory are consumer preferences, factor endowments, and the production technologies that allow firms to transform factors of production into consumer goods. A limitation of traditional trade theory, however, is that the specification of technology treats the mapping between factors of production and final goods as a black box. In practice, the decisions of agents in organizations determine this mapping. Recently, international trade economists have incorporated insights from the field of Organizational Economics into their theories, thereby shedding new light on the mapping between factors of production and consumer goods. This research agenda is important for at least three reasons. First, it provides an explanation for phenomena that standard trade theory is unable to explain (such as the boundaries and hierarchical structure of multinational firms, or the determinants of intrafirm trade). Second, this literature illustrates how considering the endogenous response of organizations to changes in the economic environment (such as falling trade costs, declining communication costs, or improvements in contract enforcement) can dramatically affect or even overturn some predictions of standard models. Third, this line of models leads to a revision of key aspects of the design of efficient international trade agreements.
What follows is a brief account of some of my own contributions to the literature on international trade and organizations. In my joint survey article with Esteban Rossi-Hansberg,1 we have attempted to provide a more balanced overview of this literature.
We survey an emerging literature at the intersection of organizational economics and international trade. We argue that a proper modeling of the organizational aspects of production provides valuable insights on the aggregate workings of the world economy. In reviewing the literature, we describe certain predictions of standard models that are affected or even overturned when organizational decisions are brought into the analysis. We also suggest potentially fruitful areas for future research.
This paper examines how costly ﬁnancial contracting and weak investor protection inﬂuence the cross-border operational, ﬁnancing, and investment decisions of ﬁrms. We develop a model in which product developers can play a useful role in monitoring the deployment of their technology abroad. The analysis demonstrates that when ﬁrms want to exploit technologies abroad, multinational ﬁrm (MNC) activity and foreign direct investment (FDI) ﬂows arise endogenously when monitoring is nonveriﬁable and ﬁnancial frictions exist. The mechanism generating MNC activity is not the risk of technological expropriation by local partners but the demands of external funders who require MNC participation to ensure value maximization by local entrepreneurs. The model demonstrates that weak investor protections limit the scale of MNC activity, increase the reliance on FDI ﬂows, and alter the decision to deploy technology through FDI as opposed to arm’s length technology transfers. Several distinctive predictions for the impact of weak investor protection on MNC activity and FDI ﬂows are tested and conﬁrmed using ﬁrm-level data.
The classical Heckscher-Ohlin-Mundell paradigm states that trade and capital mobility are substitutes in the sense that trade integration reduces the incentives for capital to ﬂow to capital-scarce countries. In this paper we show that in a world with heterogeneous ﬁnancial development, a very different conclusion emerges. In particular, in less ﬁnancially developed economies (South), trade and capital mobility are complements in the sense that trade integration increases the return to capital and thus the incentives for capital to ﬂow to South. This interaction implies that deepening trade integration in South raises net capital inﬂows (or reduces net capital outﬂows). It also implies that, at the global level, protectionism may backﬁre if the goal is to rebalance capital ﬂows.
Why do firms decide to offshore certain parts of their production process? What qualities certain countries as particularly attractive locations to offshore? In this paper we address these questions with a theory of international production hierarchies in which organizations arise endogenously to make efficient use of agents' knowledge. Our theory highlights the role of host-country management skills (middle management) in bringing about the emergence of international offshoring. By shielding top management in the source country from routine problems faced by host country workers, the presence of middle managers improves the efficiency of the transmission of knowledge across countries. The model further delivers the prediction that the positive effect of middle skills on offshoring is weaker, the more advanced are communication technologies in the host country. We provide evidence consistent with this prediction.
We generalize the Antràs and Helpman (2004) model of the international organization of production in order to accommodate varying degrees of contractual frictions. In particular, we allow the degree of contractibility to vary across inputs and countries. A continuum of firms with heterogeneous productivities decide whether to integrate or outsource the production of intermediate inputs, and from which country to source them. Final-good producers and their suppliers make relationship-specific investments which are only partially contractible, both in an integrated firm and in an arm's-length relationship. We describe equilibria in which firms with different productivity levels choose different ownership structures and supplier locations, and then study the effects of changes in the quality of contractual institutions on the relative prevalence of these organizational forms. Better contracting institutions in the South raise the prevalence of offshoring, but may reduce the relative prevalence of FDI or foreign outsourcing. The impact on the composition of offshoring depends on whether the institutional improvement affects disproportionately the contractibility of a particular input. A key message of the paper is that improvements in the contractibility of inputs controlled by final-good producers have different effects than improvements in the contractibility of inputs controlled by suppliers.
We develop a tractable framework for the analysis of the relationship between contractual incompleteness, technological complementarities, and technology adoption. In our model, a ﬁrm chooses its technology and investment levels in contractible activities by suppliers of intermediate inputs. Suppliers then choose investments in noncontractible activities, anticipating payoffs from an ex post bargaining game. We show that greater contractual incompleteness leads to the adoption of less advanced technologies, and that the impact of contractual incompleteness is more pronounced when there is greater complementary among the intermediate inputs. We study a number of applications of the main framework and show that the mechanism proposed in the paper can generate sizable productivity differences across countries with different contracting institutions, and that differences in contracting institutions lead to endogenous comparative advantage differences.
We develop a dynamic bargaining model in which a leading country endogenously decides whether to sequentially negotiate free trade agreements with subsets of countries or engage in simultaneous multilateral bargaining with all countries at once. We show how the structure of coalition externalities shapes the choice between sequential and multilateral bargaining, and we identify circumstances in which the grand coalition is the equilibrium outcome, leading to worldwide free trade. A model of international trade is then used to illustrate equilibrium outcomes and how they depend on the structure of trade and protection. Global free trade is not achieved when the political-economy motive for protection is sufficiently large. Furthermore, the model generates both “building bloc” and “stumbling bloc” effects of preferential trade agreements. In particular, we describe an equilibrium in which global free trade is attained only when preferential trade agreements are permitted to form (a building bloc effect), and an equilibrium in which global free trade is attained only when preferential trade agreements are forbidden (a stumbling bloc effect). The analysis identifies conditions under which each of these outcomes emerges.
How does the formation of cross-country teams affect the organization of work and the structure of wages? To study this question, we propose a theory of the assignment of heterogeneous agents into hierarchical teams, where less skilled agents specialize in production and more skilled agents specialize in problem solving. We ﬁrst analyze the properties of the competitive equilibrium of the model in a closed economy, and show that the model has a unique and efﬁcient solution. We then study the equilibrium of a two-country model (North and South), where countries differ in their distributions of ability, and in which agents in different countries can join together in teams. We refer to this type of integration as globalization. Globalization leads to better matches for all southern workers but only for the best northern workers. As a result, we show that globalization increases wage inequality among nonmanagers in the South, but not necessarily in the North. We also study how globalization affects the size distribution of ﬁrms and the patterns of consumption and trade in the global economy.
The incomplete nature of contracts governing international transactions limits the extent to which the production process can be fragmented across borders. In a dynamic, general-equilibrium Ricardian model of North-South trade, the incompleteness of international contracts is shown to lead to the emergence of product cycles. Because of contractual frictions, goods are initially manufactured in the North, where product development takes place. As the good matures and becomes more standardized, the manufacturing stage of production is shifted to the South to beneﬁt from lower wages. Following the property-rights approach to the theory of the ﬁrm, the same force that creates product cycles, i.e., incomplete contracts, opens the door to a parallel analysis of the determinants of the mode of organization. The model gives rise to a new version of the product cycle in which manufacturing is shifted to the South ﬁrst within ﬁrm boundaries, and only at a later stage to independent ﬁrms in the South. Relative to a world with only arm’s length transacting, allowing for intraﬁrm production transfer by multinational ﬁrms is shown to accelerate the shift of production towards the South, while having an ambiguous effect on relative wages. The model delivers macroeconomic implications that complement the work of Krugman (1979), as well as microeconomic implications consistent with the ﬁndings of the empirical literature on the product cycle.
I present new estimates of the elasticity of substitution between capital and labor using data from the private sector of the U.S. economy for the period 1948-1998. I first adopt Berndt's (1976) specification, which assumes that technological change is Hicks neutral. Consistently with his results, I estimate elasticities of substitution that are not significantly different from one. I next show, however, that restricting the analysis to Hicks-neutral technological change necessarily biases the estimates of the elasticity towards one. When I modify the econometric specification to allow for biased technical change, I obtain significantly lower estimates of the elasticity of substitution. I conclude that the U.S. economy is not well described by a Cobb-Douglas aggregate production function. I present estimates based on both classical regression analysis and time series analysis. In the process, I deal with issues related to the nonsphericality of the disturbances, the endogeneity of the regressors, and the nonstationarity of the series involved in the estimation.
We present a North-South model of international trade in which differentiated products are developed in the North. Sectors are populated by ﬁnal-good producers who differ in productivity levels. On the basis of productivity and sectoral characteristics, ﬁrms decide whether to integrate into the production of intermediate inputs or outsource them. In either case they have to decide from which country to source the inputs. Final-good producers and their suppliers must make relationship-speciﬁc investments, both in an integrated ﬁrm and in an arm’s-length relationship. We describe an equilibrium in which ﬁrms with different productivity levels choose different ownership structures and supplier locations. We then study the effects of within-sectoral heterogeneity and variations in industry characteristics on the relative prevalence of these organizational forms.
This paper presents new estimates of total factor productivity growth in Britain for the period 1770–1860. We use the dual technique and argue that the estimates we derive from factor
prices are of similar quality to quantity-based calculations. Our results provide further evidence, calculated on the basis of an independent set of sources, that productivity growth during the British Industrial Revolution was relatively slow. The Crafts–Harley view of the Industrial Revolution is thus reinforced. Our preferred estimates suggest a modest acceleration after 1800.
Roughly one-third of world trade is intraﬁrm trade. This paper starts by unveiling two systematic patterns in the volume of intraﬁrm trade. In a panel of industries, the share of intraﬁrm imports in total U.S. imports is signiﬁcantly higher, the higher the capital intensity of the exporting industry. In a cross-section of countries, the share of intraﬁrm imports in total U.S. imports is signiﬁcantly higher, the higher the capital-labor ratio of the exporting country. I then show that these patterns can be rationalized in a theoretical framework that combines a Grossman-Hart-Moore view of the ﬁrm with a Helpman-Krugman view of international trade. In particular, I develop an incomplete-contracting, property-rights model of the boundaries of the ﬁrm, which I then incorporate into a standard trade model with imperfect competition and product diﬀerentiation. The model pins down the boundaries of multinational ﬁrms as well as the international location of production, and it is shown to predict the patterns of intraﬁrm trade identiﬁed above. Econometric evidence reveals that the model is consistent with other qualitative and quantitative features of the data.