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The determinants of vertical integration in export processing: theory and evidence from China

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  • Ana Fernandes
  • Heiwai Tang

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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File URL: http://eprints.lse.ac.uk/28728/
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Bibliographic Info

Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 28728.

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Length: 40 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:ehl:lserod:28728

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Keywords: Intrafirm trade; vertical integration; export processing; outsourcing;

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References

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  1. 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.
  2. Bernard, Andrew & Jensen, J Bradford & Redding, Stephen J & Schott, Peter, 2007. "Firms in International Trade," CEPR Discussion Papers 6277, C.E.P.R. Discussion Papers.
  3. Antràs, Pol & Helpman, Elhanan, 2004. "Global Sourcing," CEPR Discussion Papers 4170, C.E.P.R. Discussion Papers.
  4. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Scholarly Articles 4554125, Harvard University Department of Economics.
  5. Gene M. Grossman & Elhanan Helpman, 2003. "Outsourcing Versus FDI in Industry Equilibrium," Journal of the European Economic Association, MIT Press, vol. 1(2-3), pages 317-327, 04/05.
  6. McLaren, J., 1996. "'Globalization' and Vertical Structure," Discussion Papers 1996_21, Columbia University, Department of Economics.
  7. 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.
  8. Andrei A. Levchenko, 2004. "Institutional Quality and International Trade," IMF Working Papers 04/231, International Monetary Fund.
  9. Pol Antràs, 2003. "Firms, Contracts, and Trade Structure," NBER Working Papers 9740, National Bureau of Economic Research, Inc.
  10. Antras, Pol, 2005. "Incomplete Contracts and the Product Cycle," Scholarly Articles 3196324, Harvard University Department of Economics.
  11. Paola Conconi & Patrick Legros & Andrew F. Newman, 2008. "Trade Liberalization and Organizational Choice," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-172, Boston University - Department of Economics.
  12. Robert C. Feenstra & Gordon H. Hanson, 2004. "Ownership and Control in Outsourcing to China: Estimating the Property-Rights Theory of the Firm," NBER Working Papers 10198, National Bureau of Economic Research, Inc.
  13. repec:hrv:faseco:4784029 is not listed on IDEAS
  14. Corcos, Gregory & Irac, Delphine & Mion, Giordano & Verdier, Thierry, 2009. "The Determinants of Intra-Firm Trade," CEPR Discussion Papers 7530, C.E.P.R. Discussion Papers.
  15. Stephen Ross Yeaple, 2006. "Offshoring, Foreign Direct Investment, and the Structure of U.S. Trade," Journal of the European Economic Association, MIT Press, vol. 4(2-3), pages 602-611, 04-05.
  16. Emanuel Ornelas & John L. Turner, 2012. "Protection and International Sourcing," Economic Journal, Royal Economic Society, vol. 122(559), pages 26-63, 03.
  17. John Romalis, 2004. "Factor Proportions and the Structure of Commodity Trade," American Economic Review, American Economic Association, vol. 94(1), pages 67-97, March.
  18. Yeaple, Stephen & Helpman, Elhanan & Melitz, Marc, 2004. "Export versus FDI with Heterogeneous Firms," Scholarly Articles 3229098, Harvard University Department of Economics.
  19. Timothy Dunne & J. Bradford Jensen & Mark J. Roberts, 2009. "Producer Dynamics: New Evidence from Micro Data," NBER Books, National Bureau of Economic Research, Inc, number dunn05-1, octubre-d.
  20. Eric J. Bartelsman & Wayne Gray, 1996. "The NBER Manufacturing Productivity Database," NBER Technical Working Papers 0205, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. 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.
  2. 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.
  3. Antràs, Pol, 2011. "Grossman-Hart (1986) Goes Global: Incomplete Contracts, Property Rights, and the International Organization of Production," CEPR Discussion Papers 8598, C.E.P.R. Discussion Papers.
  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. Debaere, Peter & Lee, Hongshik & Lee, Joonhyung, 2012. "Language, Ethnicity and Intra-firm Trade," CEPR Discussion Papers 9029, C.E.P.R. Discussion Papers.
  6. Antras, Pol, 2014. "Grossman-Hart (1986) Goes Global: Incomplete Contracts, Property Rights, and the International Organization of Production," Scholarly Articles 12220386, Harvard University Department of Economics.

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