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The Determinants of Vertical Integration in Export Processing: Theory and Evidence from China

  • Ana Fernandes

    (University of Sussex)

  • Heiwai Tang

    (Tufts University ,Centro Studi Luca d'Agliano ,Hong Kong Institute for Monetary Research)

This paper uses detailed product-level export data for China and proposes an extension of the Antrˆjs and Helpman (2004) framework that includes investments in component search to investigate the determinants of foreign direct investment (FDI) versus foreign outsourcing. We exploit the coexistence of two regulatory trade regimes for export-processing in China, pure-assembly and import-and-assembly. We find that if Chinese plants import materials and assemble them, the share of exports from vertically integrated plants is increasing in the intensity of headquarter inputs across sectors, and is decreasing in the contractibility of inputs. These results are consistent with existing theories. However, if Chinese plants engage in pure-assembly, under which regime ownership over the materials shipped to China remains with the foreign firm, we find little support for the existing theories on FDI and outsourcing that focus on contract incompleteness and the relative importance of relationship-specific investments. We also find that more dispersed firm productivity in a sector is associated with a larger export share of integrated plants under pure-assembly but not under import-and-assembly. These results are consistent with the predictions of our model, which focuses on ownership of imported components as an alternative to asset ownership for alleviating the hold-up problem by the export-processing plant.

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Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 052010.

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Length: 43 pages
Date of creation: Mar 2010
Date of revision:
Handle: RePEc:hkm:wpaper:052010
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  1. Pol Antras, 2004. "Incomplete Contracts and the Product Cycle," 2004 Meeting Papers 19, Society for Economic Dynamics.
  2. 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.
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  4. Nunn, Nathan, 2007. "Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade," Scholarly Articles 4686801, Harvard University Department of Economics.
  5. Andrew B. Bernard & J. Bradford Jensen & Stephen J. Redding & Peter K. Schott, 2007. "Firms in International Trade," Journal of Economic Perspectives, American Economic Association, vol. 21(3), pages 105-130, Summer.
  6. Pol Antras & Elhanan Helpman, 2003. "Global Sourcing," Harvard Institute of Economic Research Working Papers 2005, Harvard - Institute of Economic Research.
  7. Emanuel Ornelas & John L. Turner, 2008. "Protection and International Sourcing," CEP Discussion Papers dp0900, Centre for Economic Performance, LSE.
  8. Grossman, G.M. & Helpman, E., 2002. "Outsourcing in a Global Economy," Papers 218, Princeton, Woodrow Wilson School - Public and International Affairs.
  9. Grossman, Gene & Helpman, Elhanan, 2002. "Outsourcing Versus FDI in Industry Equilibrium," CEPR Discussion Papers 3647, C.E.P.R. Discussion Papers.
  10. Robert C. Feenstra & Gordon H. Hanson, 2004. "Ownership and Control in Outsourcing to China: Estimating the Property-Rights Theory of the Firm," NBER Working Papers 10198, National Bureau of Economic Research, Inc.
  11. Yeaple, Stephen & Helpman, Elhanan & Melitz, Marc, 2004. "Export versus FDI with Heterogeneous Firms," Scholarly Articles 3229098, Harvard University Department of Economics.
  12. Pol Antràs, 2003. "Firms, Contracts, and Trade Structure," NBER Working Papers 9740, National Bureau of Economic Research, Inc.
  13. Stephen Ross Yeaple, 2006. "Offshoring, Foreign Direct Investment, and the Structure of U.S. Trade," Journal of the European Economic Association, MIT Press, vol. 4(2-3), pages 602-611, 04-05.
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  15. John Romalis, 2004. "Factor Proportions and the Structure of Commodity Trade," American Economic Review, American Economic Association, vol. 94(1), pages 67-97, March.
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  17. Fabrice Defever & Farid Toubal, 2007. "Productivity and the sourcing modes of multinational firms: evidence from French firm-level data," LSE Research Online Documents on Economics 19655, London School of Economics and Political Science, LSE Library.
  18. John McLaren, 2000. ""Globalization" and Vertical Structure," American Economic Review, American Economic Association, vol. 90(5), pages 1239-1254, December.
  19. repec:hrv:faseco:4784029 is not listed on IDEAS
  20. Timothy Dunne & J. Bradford Jensen & Mark J. Roberts, 2009. "Producer Dynamics: New Evidence from Micro Data," NBER Books, National Bureau of Economic Research, Inc, number dunn05-1.
  21. Eric J. Bartelsman & Wayne Gray, 1996. "The NBER Manufacturing Productivity Database," NBER Technical Working Papers 0205, National Bureau of Economic Research, Inc.
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