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Institution-Driven Comparative Advantage, Complex Goods and Organizational Choice

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  • Ferguson, Shon

    ()
    (Dept. of Economics, Stockholm University)

  • Formai, Sara

    ()
    (Stockholm School of Economics)

Abstract

The theory of the rm suggests that firms can respond to poor contract enforcement by vertically integrating their production process. The purpose of this paper is to examine whether firms' integration opportunities affect the way institutions determine international trade patterns. We find that vertical integration lessens the impact of a country's ability to enforce contracts on the comparative advantage of complex goods. We also find that countries with good financial institutions export disproportionately more in sectors that produce complex goods and that have a high propensity for vertical integration. In doing so we use a new outcome-based measure of vertical integration propensity and we employ several empirical strategies: cross section, panel and event study analysis. Our results confirm the role of institutions as source of comparative advantage and suggest that this depends not only on the technological characteristics of the goods produced but also on the way firms are able to organize the production process.

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Bibliographic Info

Paper provided by Stockholm University, Department of Economics in its series Research Papers in Economics with number 2011:10.

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Length: 40 pages
Date of creation: 21 Mar 2011
Date of revision:
Handle: RePEc:hhs:sunrpe:2011_0010

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Keywords: International Trade; Comparative Advantage; Contract Enforcement; Financial Institutions; Vertical Integration;

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References

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Cited by:
  1. Heyman, Fredrik & Gustavsson Tingvall, Patrik, 2012. "The Dynamics of Offshoring and Institutions," Ratio Working Papers 190, The Ratio Institute.
  2. Patrik Tingvall & Andreas Poldahl, 2012. "Determinants of Firm R&D: The Role of Relationship-Specific Interactions for R&D Spillovers," Journal of Industry, Competition and Trade, Springer, vol. 12(4), pages 395-411, December.

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