Start-up Entry Strategies: Employer vs. Nonemployer firms

From 1997 to 2001 we observe in the Usa a faster growth in the number of Nonemployer firms (NF) vis à vis Employer firms (EF). The diverse speed of net entry may be due to particular internal organisation of the two types of firms and the effect that this has on the reactions to market uncertainty. However, the set of internal organizations of firms is larger than that made up simply by EFs and NFs, in particular among newborn firms, since we observe corporate start-ups with employees, firms owned and managed by their founders who are simultaneously the employees and, finally, non corporate enterprises. The second class of firms mostly belongs to the category of NFs, according to US nomenclature, while non corporate firms may belong to either category. Our curiosity is attracted by different entry patterns of NFs and EFs and our aim is to interpret them. According to recent literature, firms carry out an irreversible investment, such as entry, only if market prices are strictly larger than average total costs (Marshallian point). However, the trigger price that makes firms become active is affected by institutional rules, the existence of profit sharing, efficiency wages, exit options - i.e. partial reversibility -, financial constraints. Then, the internal organization of a newborn firm may make the difference. In a continuous time stochastic environment, where firms bear a sunk cost, we model entry as a growth option. On the trace of distinct objective functions we show that NFs and EFs have specific entry patterns in terms of output price and/or size. Why? Simply because they react in diverse fashions to market price volatility. In this sense we are able to show that, in most cases, the NF is locally less risky. This makes the NF better suited to enter under conditions of higher volatility. This exactly corresponds to what happened during the years between 1997-2001.Entry strategies, Uncertainty, Nonemployer, Employer firms

Are Workers. Enterprises Entry Policies Conventional

One of the main reasons why workers’ enterprises (WE) still represent a relevant chunk of the economy may lie in some affinities with conventional profit maximizing firms. To prove this, we compare the entry policies of WEs and conventional firms when they can decide size at entry while having to stick to it afterwards. Even though short run differences remain, a long run coincidence appears besides that under certainty. Endogenizing size and time of entry in an uncertain dynamic environment we see that WEs enter at the same trigger and size of conventional firms. Both of them wait less and choose a dimension larger than the minimum efficient scale. This may be another way to explain why WE are still an important share of the economy (Hesse and Cihàk, 2007) despite the ongoing mantra of their imminent demise.Workers’ Enterprises, Entry, Uncertainty, Rigidity

Vertical Integration and Operational Flexibility

The main aim of the paper is to highlight the relation between flexibility and vertical integration. To this purpose, we go through the selection of the optimal degree of vertical disintegration of a flexible firm which operates in a dynamic uncertain environment. The enterprise we model enjoys flexibility since it can switch from a certain amount of disintegration to vertical integration and viceversa. This means that the firm never loses vertical control, i.e., the ability to produce all inputs even when it buys them in the market. This sort of flexibility makes for results which are somehow contrary to the Industrial Organization recent literature and closer to the Operations Research results. In this sense we provide a bridge between the two approaches and rescue Industrial Organization from counterintuitive conclusions.Vertical Integration, Outsourcing, Entry, Flexibility

Partnerships vs. Firms Entry Strategies

From 1997 to 2001 we observe a faster growth in the number of Nonemployer businesses (mostly Partnerships) vis-à-vis Firms in the USA, a country with the mildest asymmetries between the two types of enterprise with respect to taxation, administrative entry barriers and other institutional aspects. The different speed of net entry may be due to the internal organisation of the two types of enterprise and its relation to some market features. In a continuous time stochastic environment, with sunk costs, we model entry as a growth option. Partnerships and Firms display speci…c entry patterns in terms of output price and size since they react in diverse fashions to market uncertainty. In most cases, the Partnership is less risky and better suited to enter under conditions of high volatility, as during the years between 1997 and 2001.Entry Strategies, Uncertainty, Partnership, Firm

Current Account Composition and Sustainability of External Debt

If an economy runs a current account (CA) deficit and finances it via a corresponding net inflow of equity capital the external debt (ED) does not change, i.e.: the CA deficit does not add to ED. This is no paradox. It simply comes from the definition of CA deficit and ED and points to different degrees of sustainability of CA deficits according to the way they are financed and to the composition of the CA itself. By the evaluation of the determinants of interest rates spreads vis à vis US lending rates we assess the sustainability of CA deficits. We find that FDI net inflows (proxy of equity capital) allow emerging economies to sustain larger CA imbalances with respect to CA deficits financed by inflows of more liquid assets. Equity capital is a way to finance the CA. It does not contribute to the ED and it affects the solvency assessment of a country.Equity capital, FDI, CA deficit, external debt

Input Production Joint Venture

In many industries it is quite common to observe firms delegating the production of essential inputs to independent ventures jointly established with competing rivals. The diffusion of this arrangement and the favourable stance of competition authorities call for the assessment of the social and private desirability of Input Production Joint Ventures (IPJV), which represent a form of input production cooperation, not investigated so far. IPJV can be seen as an intermediate organizational setting lying between the two extremes of vertical integration and vertical separation. Our investigation is based on an oligopoly model with horizontally differentiated goods. We characterize the conditions under which IPJV is privately optimal finding that firms’ incentives may be welfare detrimental. We also provide a rationale for the empirical relevance of IPJV both in terms of its ability to survive and in terms of disengagement incentives.Input Production Joint Venture, Horizontal Differentiation, Oligopoly

Vertical integration in a stochastic framework and a nonsymmetric bargaining equilibrium

We go through the decision to vertically integrate or outsource in an uncertain framework. We consider two di¤erent market strategies, price setting and quantity setting and two di¤erent vertical relationships: a Stackelberg one and a bargaining one. In the …rst scenario, with certainty, price and quantity settings are alike, while with uncertainty the ranking changes. If the bargaining framework is adopted instead, quantity setting under uncertainty leads to an asymmetric distribution of realized gains along the vertical chain

Pitfalls in private and social incentives of vertical crossborder outsourcing

Vertical production processes take increasingly place in a crossborder fashion with two distinct patterns. Either a multinational firm (MNF) controls the whole vertical chain spreading production over many countries or vertically separeted firms, belonging to different countries, operate independently in distinct stages. Which arrangement emerges is a matter of incentives. On the private side, the decrease of transport costs may expand crossborder outsourcing, due to the incentives to disintegrate that emerge alternatively for the Upstream and the Downstream sections of production. Even though there remains a social superiority of vertical integration (V I) this becomes questionable since the benefits are spread over more than one country, and some country may rather like a vertically disintegrated (VD) arrangement, which is often more trade oriented. Finally, we consider an international duopoly with a vertical restraint, coming either from a competition or a trade policy. Additional private incentives to go VD; due to some fresh drawbacks of V I; arise and countries may show distinct patterns of V I according to their relative size

Private incentives to vertical disintegration among firms with heterogeneous objectives

A vertically integrated monopoly is compared to a decentralized market arrangement where production is segmented. A Labor Managed firm produces an input used by a profit maximizer manufacturerof a final good. Unlike what usually occurs between homogenoeus firms we find circumstances in which the decentralised vertical arrangement is privately superior to the integrated one