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The Determinants of Vertical Integration in Export Processing: Theory and Evidence from China

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  • Ana Fernandes

    ()
    (University of Sussex)

  • Heiwai Tang

    ()
    (Tufts University and Centro Studi Luca d’Agliano)

Abstract

Using detailed product-level export data for China and a variant of the Antràs and Helpman (2004) model that includes investments in component search, we examine the sectoral determinants of foreign direct investment (FDI) versus foreign outsourcing in export processing trade. We exploit the coexistence of two regulatory export processing regimes in China, which specify who owns and controls the imported components for export processing. We find that in the regime that Chinese plants own the imported components, the share of exports from vertically integrated plants is increasing in the intensity of headquarter inputs across sectors, and is decreasing in the contractibility of inputs. These results are consistent with the property- rights theory of intra-firm trade. However, in the regime that foreign firms own the imported components, no significant relationship is found between the prevalence of vertical integration, headquarter intensity and input contractibility across sectors. The positive relationship between productivity dispersion and the export share of integrated plants across sectors, as suggested by the existing literature, is found only in the regime that foreign firms own the imported components. These results are consistent with our model, which considers ownership of imported components as an alternative to asset ownership to alleviate the hold-up problem by the export-processing plant.

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Bibliographic Info

Paper provided by Centro Studi Luca d\'Agliano, University of Milano in its series Development Working Papers with number 289.

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Length: 38
Date of creation: 30 Apr 2010
Date of revision: 30 Apr 2010
Handle: RePEc:csl:devewp:289

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Keywords: Intra�rm trade; Vertical integration; Export processing; Outsourcing;

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References

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  1. Pol Antr�s, 2005. "Incomplete Contracts and the Product Cycle," American Economic Review, American Economic Association, vol. 95(4), pages 1054-1073, September.
  2. Yeaple, Stephen & Helpman, Elhanan & Melitz, Marc, 2004. "Export versus FDI with Heterogeneous Firms," Scholarly Articles 3229098, Harvard University Department of Economics.
  3. Andrew B. Bernard & J. Bradford Jensen & Stephen J. Redding & Peter K. Schott, 2007. "Firms in International Trade," NBER Working Papers 13054, National Bureau of Economic Research, Inc.
  4. 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.
  5. Eric J. Bartelsman & Wayne Gray, 1996. "The NBER Manufacturing Productivity Database," NBER Technical Working Papers 0205, National Bureau of Economic Research, Inc.
  6. Nathan Nunn, 2007. "Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade," The Quarterly Journal of Economics, MIT Press, vol. 122(2), pages 569-600, 05.
  7. Philippe Aghion & Jean Tirole, 1994. "Normal and Real Authority in Organizations," Working papers 94-13, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Andrei A. Levchenko, 2004. "Institutional Quality and International Trade," IMF Working Papers 04/231, International Monetary Fund.
  9. Fabrice Defever & Farid Toubal, 2007. "Productivity and the Sourcing Modes of Multinational Firms: Evidence from French Firm-Level Data," CEP Discussion Papers dp0842, Centre for Economic Performance, LSE.
  10. Gene M. Grossman & Elhanan Helpman, 2002. "Outsourcing versus FDI in Industry Equilibrium," NBER Working Papers 9300, National Bureau of Economic Research, Inc.
  11. Pol Antras & Elhanan Helpman, 2003. "Global Sourcing," Harvard Institute of Economic Research Working Papers 2005, Harvard - Institute of Economic Research.
  12. John Romalis, 2004. "Factor Proportions and the Structure of Commodity Trade," American Economic Review, American Economic Association, vol. 94(1), pages 67-97, March.
  13. Emanuel Ornelas & John L. Turner, 2012. "Protection and International Sourcing," Economic Journal, Royal Economic Society, vol. 122(559), pages 26-63, 03.
  14. Pol Antràs, 2003. "Firms, Contracts, and Trade Structure," NBER Working Papers 9740, National Bureau of Economic Research, Inc.
  15. John McLaren, 2000. ""Globalization" and Vertical Structure," American Economic Review, American Economic Association, vol. 90(5), pages 1239-1254, December.
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Citations

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Cited by:
  1. Pol Antràs, 2011. "Grossman-Hart (1986) Goes Global: Incomplete Contracts, Property Rights, and the International Organization of Production," NBER Working Papers 17470, National Bureau of Economic Research, Inc.
  2. Debaere, Peter & Lee, Hongshik & Lee, Joonhyung, 2012. "Language, Ethnicity and Intra-firm Trade," CEPR Discussion Papers 9029, C.E.P.R. Discussion Papers.
  3. Heiwai Tang & Yifan Zhang, 2012. "Exchange Rates and the Margins of Trade: Evidence from Chinese Exporters," CESifo Economic Studies, CESifo, vol. 58(4), pages 671-702, December.
  4. Sergey Mityakov & Heiwai Tang & Kevin K. Tsui, 2012. "InternationalPolitics and Import Diversification in the Second Wave of Globalization," Discussion Papers Series, Department of Economics, Tufts University 0770, Department of Economics, Tufts University.
  5. Ana Fernandes & Heiwai Tang, 2012. "Learning from Neighbors’ Export Activities: Evidence from Exporters’ Survival," Development Working Papers 337, Centro Studi Luca d\'Agliano, University of Milano, revised 16 Jul 2012.

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