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Welfare gains by reducing transaction costs: Linking trade and innovation policy

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  • Baeten, Joost

    (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics)

  • Butter, Frank A.G. den
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    Abstract

    Specialisation and trade are major sources of productivity increases, and therefore of welfare gains. With reference to the Netherlands this paper discusses how (international) fragmentation of production and outsourcing may enhance productivity. In order to promote further specialisation and trade, innovations which lead to lower transaction costs - trade innovations - are needed. When trading countries, which are likely to have a comparative advantage in reducing transaction costs, focus on the coordination function in the production chain, they are able to internalize part of the welfare gains from increased trade. Infrastructure and knowledge investments that reduce transaction costs, the so called trade capital, partly have the character of a public good. Moreover, trade innovations bring about positive externalities, which is another reason for government intervention and for linking trade and innovation policy. From this perspective the paper gives some policy recommendations.

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    Bibliographic Info

    Paper provided by VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics in its series Serie Research Memoranda with number 0012.

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    Date of creation: 2006
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    Handle: RePEc:dgr:vuarem:2006-12

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    Web page: http://www.feweb.vu.nl

    Related research

    Keywords: Outsourcing; transaction costs; Knowledge spill-overs; Trade policy; Innovations; Coordination function;

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    1. Piet H. Pellenbarg, 1999. "The Dynamics of the International Economic and Demographic Exchange Relationships of The Netherlands," Tijdschrift voor Economische en Sociale Geografie, Royal Dutch Geographical Society KNAG, vol. 90(4), pages 441-447, November.
    2. Trefler, Daniel, 1995. "The Case of the Missing Trade and Other Mysteries," American Economic Review, American Economic Association, vol. 85(5), pages 1029-46, December.
    3. Ono, Yukako, 2003. "Outsourcing business services and the role of central administrative offices," Journal of Urban Economics, Elsevier, vol. 53(3), pages 377-395, May.
    4. Offerman, Theo, 2002. "Hurting hurts more than helping helps," European Economic Review, Elsevier, vol. 46(8), pages 1423-1437, September.
    5. Yeaple, Stephen Ross, 2003. "The complex integration strategies of multinationals and cross country dependencies in the structure of foreign direct investment," Journal of International Economics, Elsevier, vol. 60(2), pages 293-314, August.
    6. Frank A.G. den Butter & Robert H.J. Mosch, 2003. "Trade, Trust and Transaction Cost," Tinbergen Institute Discussion Papers 03-082/3, Tinbergen Institute.
    7. Borjas, George J., 1999. "The economic analysis of immigration," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 28, pages 1697-1760 Elsevier.
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