A New International Division of Labor in Europe: Offshoring and Outsourcing to Eastern Europe

Europe is reorganizing its international value chain. I document these changes in Europe’s international organization of production with new survey data of Austrian and German firms investing in Eastern Europe. I show estimates of the share of intra-firm trade between Austria and Germany on the one hand and Eastern Europe on the other. Furthermore, I present empirical evidence of the drivers of the new division of labor in Europe. I find among other things that falling trade costs and falling corruption levels as well as improvements in the contracting environment in Eastern Europe are affecting the level of intra-firm imports from Eastern Europe. They are also favoring outsourcing over offshoring. Low organizational costs of hierarchies and large costs of hold-up (when there are no alternative investors in Old Europe or no alternative suppliers in Eastern Europe) are favoring offshoring over outsourcing. Tax holidays granted by host countries in Eastern Europe also mildly affect the organizational choice

The Vanishing Barter Economy in Russia: A Test of the Virtual Economy Hypothesis? Reply to Barry Ickes

This paper is a reply to Barry Ickes' critique of my paper “Trust versus Illusion: What is Driving Demonetization in Russia?” in which I show that the data reject Barry Ickes' Virtual Economy explanation of barter in Russia in favor of an institutional explanation based on the lack of trust

Law in Transition and Development: The Case of Russia

The rise of barter and non-cash payments has become a dominant feature of the Russian transition to a market economy. This paper confronts with empirical evidence two approaches to explain barter in Russia: the ’illusion view’ and the ’trust view’ of barter. The ’illusion view’ suggests that barter allows the parties to pretend that the manufacturing sector in Russia is producing value added by enabling this sector to sell its output at a higher price than its market value. The ’trust view’ sees barter as an institution to deal with the absence of trust and liquidity in the Russian economy. We confront the prediction of both explanations with actual data on barter in Ukraine in 1997. The data reject the ’illusion view‘ in favor of the ‘trust view‘ of barter

The Opening Up of Eastern Europe at 20-Jobs, Skills, and ‘Reverse Maquiladoras’ in Austria and Germany

Many people in the European Union fear that Eastern Enlargement leads to major job losses. More recently, these fears about job losses have extended to high skill labor and IT jobs. The paper examines with unique firm level data whether these fears are justified for the two neighboring countries of Eastern Enlargement Austria and Germany. We find that Eastern Enlargement leads to surprising small job losses of less than 0.5 percent of total employment in Germany and of 1.5 percent in Austria, because jobs in Eastern Europe do not compete with jobs in Austria and Germany. Low cost jobs of affiliates in Eastern Europe help Austrian and German firms to stay competitive in an increasingly competitive environment. However, we also find that multinational firms in Austria and Germany are outsourcing skill intensive activities to Eastern Europe taking advantage of cheap abundant skilled labor there. We find that the firms’ outsourcing activities to Eastern Europe are a response to a human capital scarcity in Austria and Germany which has become particularly severe in the 1990s. We indeed find a reverse pattern of ‘Maquiladoras’ emerging with Eastern Enlargement in Austria and Germany compared to what economists have found for the North American Free Trade Agreement. Skilled workers in Austria and Germany are losing from outsourcing. In both countries outsourcing contributes 35 percent and 41 percent, respectively, to changes in relative wages for skilled workers in Austria and Germany. To address the skill exodus to Eastern Europe we suggest liberalizing the movement of high skill labor

The Theory of the Firm goes Global

What insights can be gained from bringing the theory of the firm to the global economy? I discuss several new features of the world economy that can be explained by incorporating the theory of the firm into the theory of international trade. Among the new features I discuss are the move to flatter corporate hierarchies and the decentralization of authority in firms, the “war for talent”, the rise of CEO pay in rich countries, organizational convergence across countries, and firm heterogeneity

The Theory of the Firm goes Global

What insights can be gained from bringing the theory of the firm to the global economy? I discuss several new features of the world economy that can be explained by incorporating the theory of the firm into the theory of international trade. Among the new features I discuss are the move to flatter corporate hierarchies and the decentralization of authority in firms, the “war for talentâ€, the rise of CEO pay in rich countries, organizational convergence across countries, and firm heterogeneity.International Trade and Organizations; Firm heterogeneity; Organizational convergence; Decentralization in the firm; The rise of CEO pay

A New International Division of Labor in Europe: Outsourcing and Offshoring to Eastern Europe

Europe is reorganizing its international value chain. I document these changes in Europe’s international organization of production with new survey data of Austrian and German firms investing in Eastern Europe. I show estimates of the share of intrafirm trade between Austria or Germany on the one hand and Eastern Europe on the other. Furthermore, I present empirical evidence of the drivers of the new division of labor in Europe. I find among other things that falling trade costs and reduced levels of corruption as well as improvements in the contracting environment in Eastern Europe are affecting the level of intrafirm imports from that region. These factors also favor outsourcing over offshoring. In contrast, low organizational costs of hierarchies and large costs of holdup (when there are no alternative investors in Old Europe or no alternative suppliers in Eastern Europe) favor offshoring over outsourcing. Tax holidays granted by host countries in Eastern Europe also mildly affect the organizational choice.the empirics of global sourcing; intrafirm trade; contract enforcement; comparative advantage in Eastern Europe; empirical test of the theory of the firm

The new corporation in Europe

This Policy Brief examines how Europeâ??s corporations are changing the way they do business since the 2004 EU Enlargement. Dalia Marin argues that firms are adapting to heightening global competition by shifting decision-making processes. The author gives policy recommendations in the areas of EU neighbourhood and trade policies.