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Trade Liberalisation and Vertical Integration

  • Peter Arendorf Bache

    ()

    (Department of Economics and Business, Aarhus University)

  • Anders Laugesen

    ()

    (Department of Economics and Business, Aarhus University)

Registered author(s):

    We build a three-country model of international trade in final goods and intermediate inputs 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 the fractions of final-good producers that pursue either vertical integration, offshoring, or exporting are all increasing when intermediate-input or final-goods trade is liberalised and when the fixed cost of vertical integration is reduced. At the same time, one observes firms that shift away from either vertical integration, offshoring, or exporting. Further, we provide guidance for testing the open-economy property rights theory of the firm using firm-level data. Finally, we notice that our model's sorting pattern is in line with recent evidence when the wage difference across countries is not too big.

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    File URL: ftp://ftp.econ.au.dk/afn/wp/13/wp13_14.pdf
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    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: 46
    Date of creation: 02 Sep 2013
    Date of revision:
    Handle: RePEc:aah:aarhec:2013-14
    Contact details of provider: Web page: http://www.econ.au.dk/afn/

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    1. Mark J. Melitz, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," NBER Working Papers 8881, National Bureau of Economic Research, Inc.
    2. Grossman, Gene M. & Helpman, Elhanan, 2004. "Managerial incentives and the international organization of production," Journal of International Economics, Elsevier, vol. 63(2), pages 237-262, July.
    3. Daron Acemoglu & Philippe Aghion & Rachel Griffith & Fabrizio Zilibotti, 2010. "Vertical Integration and Technology: Theory and Evidence," Journal of the European Economic Association, MIT Press, vol. 8(5), pages 989-1033, 09.
    4. Pol Antras & Elhanan Helpman, 2004. "Global Sourcing," Journal of Political Economy, University of Chicago Press, vol. 112(3), pages 552-580, June.
    5. Bas, Maria, 2012. "Input-trade liberalization and firm export decisions: Evidence from Argentina," Journal of Development Economics, Elsevier, vol. 97(2), pages 481-493.
    6. repec:ulb:ulbeco:2013/137536 is not listed on IDEAS
    7. Paola Conconi & Patrick Legros & Andrew Newman, 2012. "Trade Liberalization and Organizational Change," ULB Institutional Repository 2013/145500, ULB -- Universite Libre de Bruxelles.
    8. 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.
    9. Hiroyuki Kasahara & Beverly Lapham, 2008. "Productivity and the Decision to Import and Export: Theory and Evidence," CESifo Working Paper Series 2240, CESifo Group Munich.
    10. 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.
    11. 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.
    12. John McLaren, 2000. ""Globalization" and Vertical Structure," American Economic Review, American Economic Association, vol. 90(5), pages 1239-1254, December.
    13. 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.
    14. Peter Neary & Monika Mrazova, 2011. "Selection Effects with Heterogeneous Firms," Economics Series Working Papers 588, University of Oxford, Department of Economics.
    15. repec:hrv:faseco:4784029 is not listed on IDEAS
    16. 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.
    17. 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.
    18. Stefano Federico, 2010. "Outsourcing versus integration at home or abroad and firm heterogeneity," Empirica, Springer, vol. 37(1), pages 47-63, February.
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