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Trade Liberalization and Organizational Change

Author

Listed:
  • Paola Conconi

    (Université Libre de Bruxelles, ECARES and CEPR)

  • Patrick Legros

    (Université Libre de Bruxelles, ECARES and CEPR)

  • Andrew F. Newman

    (Boston University and CEPR)

Abstract

We embed a simple incomplete-contracts model of organization design in a standard two-country perfectly-competitive trade model to examine how the liberalization of product and factor markets affects the ownership structure of firms. In our model, managers decide whether or not to integrate their firms, trading off the pecuniary benefits of coordinating production decisions with the private benefits of operating in their preferred ways. The price of output is a crucial determinant of this choice, since it affects the size of the pecuniary benefits. In particular, non-integration is chosen at “low” and “high” prices, while integration occurs at moderate prices. Organizational choices also depend on the terms of trade in supplier markets, which affect the division of surplus between managers. We obtain three main results. First, even when firms do not relocate across countries, the price changes triggered by liberalization of product markets can lead to significant organizational restructuring within countries. Second, the removal of barriers to factor mobility can lead to inefficient reorganization and adversely affect consumers. Third, “deep integration” the liberalization of both product and factor markets ­ leads to the convergence of organizational design across countries.

Suggested Citation

  • 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.
  • Handle: RePEc:csl:devewp:262
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Kukharskyy, Bohdan & Gorodnichenko, Yuriy & Roland, Gerard, 2015. "Culture and Global Sourcing," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113015, Verein für Socialpolitik / German Economic Association.
    3. Creane, Anthony & Jeitschko, Thomas D., 2016. "Exporting to bypass weak institutions," European Economic Review, Elsevier, vol. 83(C), pages 185-197.
    4. Koch, Michael & Egger, Hartmut, 2013. "Trade and the Firm-Internal Allocation of Workers to Tasks," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79841, Verein für Socialpolitik / German Economic Association.
    5. Pol Antràs, 2014. "Grossman–Hart (1986) Goes Global: Incomplete Contracts, Property Rights, and the International Organization of Production," Journal of Law, Economics, and Organization, Oxford University Press, vol. 30(suppl_1), pages 118-175.
    6. Defever, Fabrice & Toubal, Farid, 2013. "Productivity, relationship-specific inputs and the sourcing modes of multinationals," Journal of Economic Behavior & Organization, Elsevier, vol. 94(C), pages 345-357.
    7. Ildikó Magyari, 2017. "Firm Reorganization, Chinese Imports, and US Manufacturing Employment," Working Papers 17-58, Center for Economic Studies, U.S. Census Bureau.
    8. Marianna Belloc & Samuel Bowles, 2009. "International Trade, Factor Mobility and the Persistence of Cultural-Institutional Diversity," UMASS Amherst Economics Working Papers 2009-08, University of Massachusetts Amherst, Department of Economics.
    9. Fabrice Defever, "undated". "Incomplete Contracts and the Impact of Globalization on Consumer Welfare," Discussion Papers 11/08, University of Nottingham, GEP.
    10. P. Giannoccolo & C. Vergari, 2015. "Revealing incentives for vertical integration in the presence of glocal policies," Working Papers wp1015, Dipartimento Scienze Economiche, Universita' di Bologna.
    11. Alfaro, Laura & Conconi, Paola & Fadinger, Harald & Newman, Andrew, 2010. "Trade Policy and Firm Boundaries," CEPR Discussion Papers 7899, C.E.P.R. Discussion Papers.
    12. Simone Moriconi, 2012. "Taxation and Incomplete Contracts," DISCE - Quaderni dell'Istituto di Teoria Economica e Metodi Quantitativi itemq1263, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    13. Patrick Legros & Andrew F. Newman, 2008. "Competitive Prices and Organizational Choices," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-173, Boston University - Department of Economics.
    14. Fernandes, Ana P. & Tang, Heiwai, 2012. "Determinants of vertical integration in export processing: Theory and evidence from China," Journal of Development Economics, Elsevier, vol. 99(2), pages 396-414.
    15. Maria Guadalupe & Julie Wulf, 2008. "The Flattening Firm and Product Market Competition: The Effect of Trade Liberalization," NBER Working Papers 14491, National Bureau of Economic Research, Inc.
    16. Antrà s, Pol & Yeaple, Stephen R., 2014. "Multinational Firms and the Structure of International Trade," Handbook of International Economics, Elsevier.
    17. Peter Arendorf Bache & Anders Laugesen, 2013. "Trade Liberalisation and Vertical Integration," Economics Working Papers 2013-14, Department of Economics and Business Economics, Aarhus University.
    18. Friberg, R & Tinn, K, 2012. "Holdup and Comparative Advantage," Working Papers 12193, Imperial College, London, Imperial College Business School.

    More about this item

    Keywords

    Firms; Contracts; Globalization;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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