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Trade Liberalisation and Vertical Integration

Author

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  • Peter Arendorf Bache

    (Department of Economics and Business, Aarhus University)

  • Anders Laugesen

    (Department of Economics and Business, Aarhus University)

Abstract

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.

Suggested Citation

  • Peter Arendorf Bache & Anders Laugesen, 2013. "Trade Liberalisation and Vertical Integration," Economics Working Papers 2013-14, Department of Economics and Business Economics, Aarhus University.
  • Handle: RePEc:aah:aarhec:2013-14
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    File URL: https://repec.econ.au.dk/repec/afn/wp/13/wp13_14.pdf
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    References listed on IDEAS

    as
    1. Peter Arendorf Bache & Anders Laugesen, 2013. "Monotone Comparative Statics for the Industry Composition," Economics Working Papers 2013-10, Department of Economics and Business Economics, Aarhus University.
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    Cited by:

    1. Smolka, Marcel & Kohler, Wilhelm, 2015. "Global Sourcing of Heterogeneous Firms: Theory and Evidence," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113012, Verein für Socialpolitik / German Economic Association.
    2. Facundo Albornoz & Ezequiel García Lembergman, 2015. "Importing After Exporting," Working Papers 122, Universidad de San Andres, Departamento de Economia, revised Jul 2015.

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    More about this item

    Keywords

    International Trade; Firm Heterogeneity; Incomplete Contracts; Vertical Integration; Offshoring; Exporting;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F61 - International Economics - - Economic Impacts of Globalization - - - Microeconomic Impacts
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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