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Trade Liberalisation and Vertical Integration

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  • Peter Arendorf Bache

    ()
    (Department of Economics and Business, Aarhus University)

  • Anders Laugesen

    ()
    (Department of Economics and Business, Aarhus University)

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    Abstract

    We build a three-country model of international trade in final and intermediate goods and study the relation between different types of trade liberalisation and vertical integration. Firms are heterogeneous with respect to both productivity and factor intensity as observed in data. Final-good producers face decisions on exporting, vertical integration of intermediate-input production, and whether the intermediate-input production should be offshored to a low-wage country. We find that due to firm-level complementarities, the shares of final-good producers that pursue either vertical integration, offshoring, or exporting are all increasing when intermediate- or final-goods trade is liberalised and when the cost of vertical integration is reduced. At the same time, one will observe individual firms that shift away from either vertical integration, offshoring, or exporting. All these results hold for a class of productivity distributions to which the Pareto distribution belongs.

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    Bibliographic Info

    Paper provided by School of Economics and Management, University of Aarhus in its series Economics Working Papers with number 2013-14.

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    Length: 31
    Date of creation: 02 Sep 2013
    Date of revision:
    Handle: RePEc:aah:aarhec:2013-14

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    Web page: http://www.econ.au.dk/afn/

    Related research

    Keywords: International Trade; Firm Heterogeneity; Incomplete Contracts; Vertical Integration; Offshoring; Exporting; Trade Liberalisation;

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    References

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    1. Gregory Corcos & Delphine M. Irac & Giordano Mion & Thierry Verdier, 2008. "The Determinants of Intra-Firm Trade," Development Working Papers 267, Centro Studi Luca d\'Agliano, University of Milano.
    2. Daron Acemoglu & Philippe Aghion & Rachel Griffith & Fabrizio Zilibotti, 2007. "Vertical Integration and Technology: Theory and Evidence," IEW - Working Papers 342, Institute for Empirical Research in Economics - University of Zurich.
    3. Antràs, Pol & Helpman, Elhanan, 2004. "Global Sourcing," CEPR Discussion Papers 4170, C.E.P.R. Discussion Papers.
    4. Ornelas, Emanuel & Turner, John L., 2008. "Trade liberalization, outsourcing, and the hold-up problem," Journal of International Economics, Elsevier, vol. 74(1), pages 225-241, January.
    5. Stefano Federico, 2010. "Outsourcing versus integration at home or abroad and firm heterogeneity," Empirica, Springer, vol. 37(1), pages 47-63, February.
    6. Andrew F. Newman & Patrick Legros & Paola Conconi, 2011. "Trade Liberalization and Organizational Change," Boston University - Department of Economics - Working Papers Series WP2011-037, Boston University - Department of Economics.
    7. Kasahara, Hiroyuki & Lapham, Beverly, 2013. "Productivity and the decision to import and export: Theory and evidence," Journal of International Economics, Elsevier, vol. 89(2), pages 297-316.
    8. Grossman, Gene & Helpman, Elhanan, 2003. "Managerial Incentives and the International Organization of Production," CEPR Discussion Papers 3737, C.E.P.R. Discussion Papers.
    9. McLaren, J., 1996. "'Globalization' and Vertical Structure," Discussion Papers 1996_21, Columbia University, Department of Economics.
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    11. repec:ulb:ulbeco:2013/137536 is not listed on IDEAS
    12. Tomiura, Eiichi, 2007. "Foreign outsourcing, exporting, and FDI: A productivity comparison at the firm level," Journal of International Economics, Elsevier, vol. 72(1), pages 113-127, May.
    13. Monika Mrázová & J. Peter Neary, 2012. "Selection Effects with Heterogeneous Firms," CEP Discussion Papers dp1174, Centre for Economic Performance, LSE.
    14. Bas, Maria, 2012. "Input-trade liberalization and firm export decisions: Evidence from Argentina," Journal of Development Economics, Elsevier, vol. 97(2), pages 481-493.
    15. Kohler Wilhelm K & Smolka Marcel, 2011. "Sourcing Premia with Incomplete Contracts: Theory and Evidence," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-39, February.
    16. repec:hrv:faseco:4784029 is not listed on IDEAS
    17. Gene M. Grossman & Elhanan Helpman, 2002. "Integration Versus Outsourcing In Industry Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 85-120, February.
    18. Laura Alfaro & Paola Conconi & Harald Fadinger & Andrew F. Newman, 2010. "Do Prices Determine Vertical Integration?," NBER Working Papers 16118, National Bureau of Economic Research, Inc.
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