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Trade Policy and Firm Boundaries

  • Alfaro, Laura
  • Conconi, Paola
  • Fadinger, Harald
  • Newman, Andrew

We study how trade policy affects firms’ ownership structures. We embed an incom- plete contracts model of vertical integration choices into a standard perfectly-competitive international trade framework. Integration decisions are driven by a trade-off between the pecuniary benefits of coordinating production decisions and the managers’ private benefits of operating in preferred ways. The price of output is a crucial determinant of this choice, since it affects the size of the pecuniary benefits: higher prices lead to more integration. Because tariffs increase domestic product prices, this effect provides a novel theoretical channel through which trade policy can influence firm boundaries. We then examine the evidence, using a unique dataset to construct firm-level indexes of vertical integration for a large set of countries. In line with the predictions of our model, we obtain three main results. First, higher tariffs lead to higher levels of vertical integration. Second, differences in ownership structure across countries, measured by the difference in sectoral vertical integration indexes, are smaller in sectors with similar levels of protection. Finally, ownership structures are more alike among members of regional trade agreements.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7899.

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Date of creation: Jun 2010
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Handle: RePEc:cpr:ceprdp:7899
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  1. Pinelopi K. Goldberg & Nina Pavcnik, 2004. "Trade, Inequality, and Poverty: What Do We Know? Evidence from Recent Trade Liberalization Episodes in Developing Countries," NBER Working Papers 10593, National Bureau of Economic Research, Inc.
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  4. repec:eca:wpaper:2008_025 is not listed on IDEAS
  5. Christian Broda & Nuno Limao & David E. Weinstein, 2008. "Optimal Tariffs and Market Power: The Evidence," American Economic Review, American Economic Association, vol. 98(5), pages 2032-65, December.
  6. Patrick Legros & Andrew F. Newman, 2013. "A Price Theory of Vertical and Lateral Integration," The Quarterly Journal of Economics, Oxford University Press, vol. 128(2), pages 725-770.
  7. Paola Conconi & Patrick Legros & Andrew F. Newman, 2008. "Trade Liberalization and Organizational Change," Development Working Papers 262, Centro Studi Luca d\'Agliano, University of Milano.
  8. Patrick Legros & Andrew F. Newman, 2004. "Competing for Ownership," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-148, Boston University - Department of Economics.
  9. Paula Bustos, 2009. "Trade liberalization, exports and technology upgrading: Evidence on the impact of MERCOSUR on Argentinean firms," Economics Working Papers 1173, Department of Economics and Business, Universitat Pompeu Fabra.
  10. Antràs, Pol & Helpman, Elhanan, 2004. "Global Sourcing," CEPR Discussion Papers 4170, C.E.P.R. Discussion Papers.
  11. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817, March.
  12. Nick Bloom & Raffaella Sadun & John Van Reenen, 2009. "Does product market competition lead firms to decentralize?," LSE Research Online Documents on Economics 51581, London School of Economics and Political Science, LSE Library.
  13. Pol Antràs, 2003. "Firms, Contracts, and Trade Structure," NBER Working Papers 9740, National Bureau of Economic Research, Inc.
  14. 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.
  15. Rodney D. Ludema & Anna Maria Mayda, 2010. "Do Terms-of-Trade Effects Matter for Trade Agreements? Evidence from WTO Countries," Development Working Papers 293, Centro Studi Luca d\'Agliano, University of Milano.
  16. Harrison, Ann E. & Love, Inessa & McMillan, Margaret S., 2004. "Global capital flows and financing constraints," Journal of Development Economics, Elsevier, vol. 75(1), pages 269-301, October.
  17. Holger Breinlich, 2006. "Trade liberalization and industrial restructuring through mergers and acquisitions," LSE Research Online Documents on Economics 19868, London School of Economics and Political Science, LSE Library.
  18. Van den Steen, Eric, 2003. "Organizational Beliefs and Managerial Vision," Working papers 4224-01, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  19. Bombardini, Matilde, 2008. "Firm heterogeneity and lobby participation," Journal of International Economics, Elsevier, vol. 75(2), pages 329-348, July.
  20. repec:hrv:faseco:4784029 is not listed on IDEAS
  21. 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.
  22. 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.
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