A Multi-Country Approach to Factor Proporations Trade and Trade Costs

Classic trade questions are reconsidered by generalizing a factor-proportions model to multiple countries, multi-stage production, and country-specific trade costs. We derive patterns of production specialization and trade for a matrix of countries that differ in relative endowments (columns) and trade costs (rows). We demonstrate how the ability to fragment production and/or a proportional change in all countries’ trade costs alters these patterns. Production specialization and the volume of trade are higher with fragmentation for most countries but interestingly, for a large block of countries, these variables fall following fragmentation. Countries with moderate trade costs engage in market-oriented assembly, while those with lower trade costs engage in export-platform production. These two cases correspond to the concepts of horizontal and vertical affiliate production in the literature on multinational enterprises. Increases in specialization and the volume of trade accelerate as trade costs go to zero with and without fragmentation. Classification-

Learning on the quick and cheap: Gains from trade through imported expertise

Gains from productivity and knowledge transmission arising from the presence of foreign firms has received a good deal of empirical attention, but micro-foundations for this mechanism are weak . Here we focus on production by foreign experts who may train domestic unskilled workers who work with them. Gains from training can in turn be decomposed into two types: (a) obtaining knowledge and skills at a lower cost than if they are self-taught at home, (b) producing domestic skilled workers earlier in time than if they the domestic economy had to rediscover the relevant knowledge through “reinventing the wheel”. We develop a three-period model in which the economy initially has no skilled workers. Workers can withdraw from the labor force for two periods of self study and then produce as skilled workers in the third period. Alternatively, foreign experts can be hired in period 1 and domestic unskilled labor working with the experts become skilled in the second period. We analyze how production, training, and welfare depend on two important parameters: the cost of foreign experts and the learning (or “absorptive”) capacity of the domestic economy. Classification-

International Trade and Retailing,

Abstract The New Trade Theory predicts that international trade lowers prices for consumers and raises the choices available to them. This study shows that both predictions may no longer hold once adjustments in retailing are taken into account. We present a new model of retailing in general equilibrium and establish a trade-off between the number of products stocked and the number of retail outlets. The results demonstrate that international trade can lead to higher consumer prices if the retail market is relatively less competitive, and that retail assortments do not rise if consumers have a sufficiently low preference for diversity. Keywords: International Trade, Retailing, Diversity, Market Structure, Welfare, Monopolistic Competition. JEL Classification: F12, L11, L81 * I gratefully acknowledge research support from the German Science Foundation (DFG grant number EC 216/5-1). Thanks also to Jim Anderson, Beata Javorcik, James Markusen, J. Peter Neary, Volker Nocke, Michael Pflüger, Horst Raff, and Michael Rauscher for helpful comments and discussions. A previous version of this paper circulated with the subtitle "Diversity versus Accessibility and the Creation of 'Retail Deserts'" and was presented at various conferences and seminars

The Determinants of Intrafirm Trade

Abstract This paper analyzes the determinants of the sourcing mode of imported inputs at the firm level. We exploit a unique French dataset of 1,141,393 import transactions spanning across firm, countries and products in 1999, where we observe whether a transaction is intra-firm or at arms' length. We first study which firm-, country-and product-specific factors affect the 'make or buy' choice at the firm level (extensive margin). We confirm a number of theoretical predictions of property-rights models, and provide a number of empirical facts that can be used to refine theory. We finally compare our results with previous findings on more aggregated data, highlighting the importance of separating the extensive and intensive margins of imports. Keywords: intra-firm trade; outsourcing; firm heterogeneity; incomplete contracts; internationalization strategies; quality of institutions, extensive margin, intensive margin

Regional Integration and Third-Country Inward Investment

The paper focuses on how the Free Trade Area of the Americas (FTAA), which will include both high-income developed and developing countries, will affect the options and investment strategies of multinational firms outside the region. Preliminary sections discuss the strategies open to both insider firms (headquartered with the Americas) and outsider firms, and the characteristics of technologies and countries that determine equilibrium location choices. Then I turn more explicitly to the question at hand, and suggest that a free-trade area of the Americas can be conceptually decomposed into (a) integration among the southern developing countries and (b) integration between the south and NAFTA. The first will give third-country multinationals horizontal investment opportunities to serve the effectively larger southern market with local production to serve the local southern market. The second gives third-country multinationals the opportunity to exploit low labor costs in the south to produce for export to North America (export-platform FDI). While this all sounds attractive for third-country firms, the theory emphasizes that the same advantages of integration are conferred upon U.S. and Canadian firms who have the additional advantage of supplying services and intermediate goods to southern affiliates at lower cost than the third country firms. This competitive effect from insider firms leads the theory to suggest weaker benefits to third-country firms than a simpler approach might predict.

Export-Platform Foreign Direct Investment

An interesting empirical phenomenon is export-platform foreign-direct investment, particularly affiliate production for sale in third countries rather than in the parent or host countries. This is rather poorly understood because our theoretical understanding of multinationals is largely derived from two-country models. Our model shows how affiliate production solely for third countries can occur when a firm in each of two large, high-income countries has a domestic plant to serve its own market, and uses a plant in a small, low-cost country to serve the other highincome country. Third-country export-platform FDI can also occur when the host and third countries are inside a free-trade area and the parent is outside. Our empirical section shows that US affiliates located inside a free-trade area concentrate their exports to other free-trade member countries, consistent with parameterizations of our model in which the outside firm is the chief beneficiary of the free-trade area. Affiliates located outside of free-trade areas such as those in Southeast Asia show a balance between exports to the parent and exports to third countries, consistent with parameterizations that generate “global export-platform” production. Classification-Multinational firms, export platform, foreign direct investment, affiliate exports, free-trade area