I Introduction II Location III Internalization IV Appendixes · 2020. 6. 12. · Figure1.1 Ratio of Value Added to Gross Exports (VAX), 1970–2009. Source: Johnson and Noguera (2012b)

September 21, 2015 Time: 11:46am prelims.tex

Contents

Preface vii

I Introduction 1

1 Made in the World 3

2 Workhorse Models 28

II Location 57

3 Contracts and Export Behavior 59

4 Contracts and Global Sourcing 94

5 Contracts and Sourcing: Evidence 128

III Internalization 167

6 The Transaction-Cost Approach 169

7 The Property-Rights Approach 192

8 Internalization: Empirical Evidence 217

IV Appendixes 263

Bibliography 307

Index 319

September 22, 2015 Time: 04:47pm chapter1.tex

1Made in the World

It does not seem so long ago that I began my undergraduate studies inEconomics at Universitat Pompeu Fabra (UPF), the same institution that hoststhe Centre de Recerca en Economia Internacional (CREI), where these lectureswere delivered. It was 1994 and I felt I lived in a truly global economy. Themusic I listened to and themovies I watched were mostly British or American.Most of the clothes I wore were manufactured abroad, some of them in ratherexotic places such asMorocco or Taiwan.My favorite beer was Dutch. At UPF,about half of my teachers were foreign, a third of the classes were taught inEnglish, and most of the textbooks were the same ones used in universitiesaround the globe.

In hindsight it seems pretty clear, however, that the world had not yetwitnessed the full advent of globalization. What has changed since 1994?First and foremost, the last two decades have brought a genuine informationand communication technology (ICT) revolution that has led to a profoundsocioeconomic transformation of the world in which we live. The processingpower and memory capacity of computers have doubled approximately everytwo years (as implied by Moore’s law), while the cost of transmitting a bitof information over an optical network has decreased by half roughly everynine months (a phenomenon often referred to as Butter’s law). The number ofinternet users has increased by a factor of 100, growing from around 25 mil-lion users in 1994 to more than 2,500 million users in 2012 (see World Devel-opment Indicators). As a result of these technological developments, the costof processing and transmitting information at long distances has dramaticallyfallen in recent times. Consider the following example: in 2012, the 3.3GB filecontaining my favorite movie of 1994, Pulp Fiction, could be downloaded fromAmazon.com in about 11 minutes and 16 seconds using a standard broad-band connection with a download speed of 5 megabits per second. In 1994,downloading that same file using a dial-up connection and the state-of-the-art modem, which allowed for a maximum speed of 28.8 kilobits per second,would have kept your phone line busy for at least 33 hours and 23 minutes!1

1 Paraphrasing a memorable quote from Samuel L. Jackson’s character in Pulp Fiction,download speeds today and in 1994 “ain’t the same [freaking] ballpark. They ain’t the sameleague. They ain’t even the same [freaking] sport.”


4 • 1 Made in the World

Second, during the same period, governments have continued (andarguably intensified) their efforts to gradually dismantle all man-made tradebarriers. This process dates back to the initial signing of the General Agree-ment on Tariffs and Trade (GATT) in 1947, but it has experienced a revival inthe 1990s and 2000s with the gradual expansion of the European Union, theformation of the North American, Mercosur, and ASEAN free trade agree-ments, the signing of a multitude of smaller preferential trade agreementsunder the umbrella of GATT’s Article XXIV, and China’s accession to theWorld Trade Organization (WTO), just to name a few. As a consequence, theworld’s weighted average tariff applied on traded manufactured goods fellfrom 5.14 percent in 1996 to 3.03 percent in 2010 (see World DevelopmentIndicators).2

Third, political developments in the world have brought about a remark-able increase in the share of world population actively participating in theprocess of globalization. These changes largely stemmed from the fall ofcommunism in Eastern Europe and the former Soviet Union, but also froman ensuing ideological shift to the right in large parts of the globe. Thus, notonly did former communist countries embrace mainstream capitalist policies,but these policies themselves became more friendly toward globalization,as exemplified by the deepening of trade liberalization mentioned in thelast paragraph, but also by a notable relaxation of currency convertibilityand balance-of-payments restrictions in several low- and middle-incomecountries.3

The Slicing of the Value Chain

One of the manifestations of these three developments in the world economyhas been a gradual disintegration of production processes across borders.More and more firms now organize production on a global scale and chooseto offshore parts, components, or services to producers in foreign and oftendistant countries. The typical “Made in” labels in manufactured goods havebecome archaic symbols of an old era. These days, most goods are “Made inthe World.”

2 Technological developments since 1994 have also reduced the quality- (or time-) ad-justed costs of transporting goods across countries (see Hummels, 2007), while investments ininfrastructure in less developed economies have also contributed to spreading the effectsof globalization across regions in those countries.

3 The late 1990s also saw the emergence of a left-leaning anti-globalization movement, whichdrew particular attention during the 1999 WTO meetings in Seattle. Yet there is little evidence ofthis movement having led to any significant slowdown in the process of globalization (see, forinstance, Harrison and Scorse, 2010).


Slicing of the Value Chain • 5

A variety of terms have been used to refer to this phenomenon: the “slicingof the value chain,” “fragmentation of the production process,” “disintegrationof production,” “delocalization,” “vertical specialization,” “global productionsharing,” “unbundling,” “offshoring,” and many more (see Feenstra, 1998).I shall use these terms interchangeably throughout the book.4

The case of Apple’s iPad 3 tablet nicely illustrates the magnitude of thisnew form of globalization. The slim and sleek exterior of the tablet hides acomplexmanufacturing process combining designs and components providedby multiple suppliers with operations in various countries. Although Appledoes not disclose detailed information on its input providers, a clear picture ofthe global nature of the iPad 3 production process emerges when combininginformation from teardown reports (such as those published by isuppli.comand ifixit.com) with various press releases.5 For instance, it is well-knownthat the tablet itself is assembled in China (and since 2012 also in Brazil)by two Taiwan-based companies, Foxconn and Pegatron. The revolutionaryretina display is believed to be manufactured by Samsung of South Korea inits production plant in Wujiang City, China. The distinctive touch panel isproduced (at least, in part) by Wintek, a Taiwan-based company that alsoowns plants in China, India, and Vietnam, while the case is provided byanother Taiwanese company, Catcher Technologies, with operations inTaiwan and China. A third important component, the battery pack, alsooriginates in Taiwan and is sold by Simplo Technologies and DynapackInternational. Apart from these easily identifiable parts, the iPad 3 incorpo-rates a variety of chips and other small technical components provided byvarious firms with headquarters and R&D centers in developed economiesand manufacturing plants scattered around the world. A non-exhaustive listincludes (again) Korea’s Samsung, which is believed to manufacture the mainprocessor (designed by Apple), U.S.-based Qualcomm supplying 4G modules,and Italo-French STMicroelectronics contributing key sensors.6

Apple’s sourcing strategies are hardly an isolated example of a globalapproach to the organization of production. In fact, the increasing

4 At times, I will also use the buzzword “outsourcing,” but I will do so only when referringto arm’s-length sourcing relationships, that is, instances of fragmentation in which the firmsexchanging parts are not related (i.e., integrated). Outsourcing is often observed not only inforeign but also in domestic vertical relationships.

5 Facing strong criticism over the working conditions in its suppliers’ factories, Applereleased a full list of its 156 global suppliers early in 2012 (see http://images.apple.com/supplierresponsibility/pdf/Apple_Supplier_List_2011.pdf). Teardown reports further faciliate amapping between the iPad parts and their respective producers. Press releases sometimesalso identify particular suppliers with specific iPad 3 components (see, for instance, Forbes’s“Batteries Required?” available at http://www.forbes.com/global/2010/0607/best-under-billion-10-raymond-sung-simplo-technology-batteries-requried.html).

6 A more extensive list can be found at: http://www.chipworks.com/en/technical-competitive-analysis/resources/blog/the-new-ipad-a-closer-look-inside/.



international disintegration of production processes has been large enoughto be salient in aggregate statistics. During the 1990s and early 2000s,when this phenomenon was still in its infancy, researchers devised severalapproaches to measuring the quantitative importance of global productionsharing.7 Feenstra and Hanson (1996b), for instance, used U.S. Input-Outputtables to infer the share of imported inputs in the overall intermediate inputpurchases of U.S. firms; they found that this share had already increased from5.3 percent in 1972 to 11.6 percent in 1990. Campa and Goldberg (1997) foundsimilar evidence for Canada and the UK, but surprisingly not for Japan, wherethe reliance on foreign inputs appeared to have declined between 1974 and1993. Hummels, Ishii, and Yi (2001) instead constructed a measure of verticalspecialization capturing the value of imported intermediate inputs (goods andservices) embodied in a country’s exported goods and found that it alreadyaccounted for up to 30% of world exports in 1995, having grown by as muchas 40% since 1970.

The work of Johnson and Noguera (2012a, 2012b) constitutes the state ofthe art in the use of Input-Output tables to quantify the importance of globalproduction sharing and its evolution in recent years. The main innovationof their methodology is in the attempt to compute a global Input-Outputtable from which one can back out the value-added and intermediate inputcontents of gross international trade flows. In particular, their VAX ratio (thevalue-added to gross-value ratio of exports) is an appealing inverse measureof the importance of vertical specialization in the world production: thelower is this measure, the larger is the value of imported inputs embodiedin exports.8 As is clear from Figure 1.1, their VAX ratio has declined rathersignificantly since 1970, with about two-thirds of the decline occurring after1990. Johnson and Noguera (2012b) show that this decline is explainedsolely by increased offshoring within manufacturing. Furthermore, they findthat global production sharing has grown disproportionately in emergingeconomies and also appears to increase following the signing of regional tradeagreements.

Two limitations of the fragmentation measures discussed so far are thatthey rely on fairly aggregated Input-Output data and that they impose strongproportionality assumptions to back out the intermediate input componentof trade. A different approach to measuring the degree to which productionprocesses are fragmented across countries was first suggested by Yeats

7 The task is complicated by the fact that data on trade flows of goods are collected on agross output basis, without regard to the particular sources of the value added embodied in thesegoods.

8 In a very recent paper, Koopman, Wang, and Wei (2014) devise a methodology that nicelynests Johnson and Noguera’s (2012) VAX measure with the vertical specialization measuresdeveloped by Hummels, Ishii, and Yi (2001).


Slicing of the Value Chain • 7

0.70

0.75

0.80

0.85

0.90

1970 1975 1980 1985 1990 1995 2000 2005 2010

Figure 1.1 Ratio of Value Added to Gross Exports (VAX), 1970–2009. Source: Johnsonand Noguera (2012b)

(2001), and consists of computing the share of trade flows accounted for bySITC Rev.2 industry categories that can be safely assumed to contain onlyintermediate inputs (as reflected by the use of the word “Parts of” at thebeginning of the category description). It turns out that all these industriesare in the “Machinery and Transport Equipment” industrial group (or SITC 7).Yeats (2001) found that intermediate input categories accounted for about 30percent of OECDmerchandise exports of machinery and transport equipmentin 1995, and that this share had steadily increased from its 26.1 percent valuein 1978. A limitation of Yeats’s measure is that, by focusing on industriescomposed exclusively of inputs, it naturally understates the importance ofinput trade. This might explain why, when updating this methodology topresent times, one finds little evidence of a further increase in this share.9

An alternative to categorizing trade flows as either final goods or inter-mediate inputs is to attempt to calculate a more continuous measure of the“upstreamness” of the goods being traded. This is the approach in Antràs,Chor, Fally, and Hillberry (2012), who use Input-Output data to construct

9 Other authors attempting to compute the share of intermediate inputs in world trade usingalternative methodologies have also found little evidence of a trend in the series (see, for instance,Chen, Kondratowicz, and Yi, 2005; or Miroudot, Lanz, and Ragoussis, 2009). I have obtainedsimilar results when computing the relative growth of overall trade and input trade using theclassification of goods developed by Wright (2014). As argued by Johnson and Noguera (2012b),even when taking this finding at face value, it is not necessarily inconsistent with the observedrise in indices of vertical specialization, which better capture the use of imported inputs inproducing goods that are exported.



2.00

2.05

2.15

2.10

2.25

2.20

2.35

2.30

1998 1999 2000 20022001 20042003 2005 2006 2007 2008 2009

All industries Nonpetroleum industries

Figure 1.2 Average Upstreamness of World Exports, 1998–2009

a weighted index of the average position in the value chain at which anindustry’s output is used (i.e., as final consumption, as direct input to otherindustries, as direct input to industries serving as direct inputs to otherindustries, and so on), with the weights being given by the ratio of theuse of that industry’s output in that position relative to the total output ofthat industry. Intuitively, the higher this measure is, the more removed fromfinal good use (and thus the more upstream) is that industry’s output. TheData Appendix contains a lengthier discussion of the construction of thisindex.10 Antràs et al. (2012) use the measure to characterize the averageupstreamness of exports of different countries in 2002, but it can also beemployed to illustrate how the upstreamness of world exports has evolvedin recent years. As shown in Figure 1.2, world exports became significantlymore upstream in recent years, particularly in the period 2002–2008. Thepatterns are in line with those illustrated in Figure 1.1, and also suggest anincreasing predominance of input trade in world trade. Although a significantshare of the observed increase in upstreamness is related to an increase therelative weight of petroleum-related industries, even when netting those out,one observes a significant upward trend in upstreamness (see Figure 1.2).Interestingly, both Figures 1.1 and 1.2 identify a disproportionate decline inglobal production sharing relative to the overall decline in world trade duringthe early years of the recent “great recession.”

10 This upstreamness index was independently developed by Antràs and Chor (2013) andFally (2012), and its properties were further studied in Antràs et al. (2012).


Old & New Theories • 9

Old and New Theories

The noticeable expansion in input trade has also captured the attentionof international trade theorists eager to bridge the apparent gap betweenthe new characteristics of international trade in the data and the standardrepresentation of these trade flows in terms of final goods in traditional andnew trade theory.

One branch of this new literature has focused on incorporating the notionof fragmentation in otherwise neoclassical models with homogeneous goods,perfectly competitive markets, and frictionless contracting. Key contributionsinclude Feenstra and Hanson (1996a), Jones (2000), Deardorff (2001), andGrossman and Rossi-Hansberg (2008). The main idea in these contributions isthat the production process (as represented by an abstract mapping betweenfactors of production and final output) can be decomposed into smallerparts or stages that are themselves (partly) tradable. Different authors assigndifferent labels to these parts: some refer to them as intermediate inputs,others call them vertical production stages, while others view them as tasks.Regardless of the interpretation of the process under study, a common lessonfrom this body of work is that the possibility of fragmentation generatesnontrivial effects on productivity, and that these endogenous changes inproductivity in turn deliver novel predictions for the effects of reductions intrade costs on patterns of specialization and factor prices. Antràs and Rossi-Hansberg (2009) elaborate on this broad interpretation of this branch of theliterature and also offer more details on the specific results of each of thesecontributions.11

As insightful as this body of work has proven to be, it seems clear thatmodeling global production sharing as simply an increase in the tradabilityof homogeneous inputs across countries misses important characteristics ofintermediate input trade. Prominent among these features is the fact that partsand components are frequently customized to the needs of their intendedbuyers (remember our earlier example with the iPad 3). In other words, thedisintegration of the production process is more suitably associated with thegrowth of trade in differentiated (rather than homogeneous) intermediateinputs.12

11 Another common feature of the theoretical frameworks developed in these papers is thatthe number of primitive factors of production is assumed to be small, and normally equal totwo. Another branch of the literature has developed perfectly competitive, frictionless models inwhich offshoring results from the assignment of a population of a large number of heterogeneousagents into international hierarchical teams (see Kremer and Maskin, 2006, or Antràs, Garicano,and Rossi-Hansberg, 2006).

12 Admittedly, not much evidence exists to substantiate this claim. Antràs and Staiger (2012a)offer a back-of-the-envelope quantification applying the methodology suggested by Schott (2004)



Another important characteristic of global production networks is thatthey necessarily entail intensive contracting between parties located in dif-ferent countries and thus subject to distinct legal systems. In a world withperfect (or complete) contracting across borders, this of course would be oflittle relevance. Unfortunately, this is not the world we (or at least, I) livein. Real-world commercial contracts are incomplete in the sense that theycannot possibly specify a course of action for all contingencies that couldarise during the course of a business relationship. Of course, the same can besaid about domestic commercial transactions, but the cross-border exchangeof goods cannot generally be governed by the same contractual safeguardsthat typically accompany similar exchanges occurring within borders.

Given the subject of this book, it is worth pausing to describe inmore detailsome of the factors that make international contract enforcement particularlyproblematic.

Contracts in International Trade

A first natural difficulty in contractual disputes involving international trans-actions is determining which country’s laws are applicable to the contractbeing signed. In principle, the parties can include a choice-of-law clausespecifying that any dispute arising under the contract is to be determinedin accordance with the law of a particular jurisdiction, regardless of wherethat dispute is litigated. Nevertheless, many international contracts do notinclude that clause and, in any case, it is up to the court of law adjudicating adispute to decide whether it will uphold the expressed desire of the parties. Ifthe court is not familiar with the law specified in the contract, as may oftenoccur in international transactions, the court might decide to rule on the basisof its own law, or may inadvertently apply the desired foreign law incorrectly.

A second difficulty relates to the fact that even when local courts arecompetent (in a legal sense), judges may be reluctant to rule on a contractdispute involving residents of foreign countries, especially if such a rulingwould entail an unfavorable outcome for local residents. The evidence onthe home bias of local courts is mixed, but even those authors advocatingthat a formal analysis of case law does not support the hypothesis of biases

to identify international trade in intermediate goods and using the “liberal” classification of Rauch(1999) to distinguish between differentiated and homogeneous goods. They find that the share ofdifferentiated inputs in world trade more than doubled between 1962 and 2000, increasing from10.56% to 24.85% of world trade. Behar and Freund (2011) show that during the late 1990s and2000s, intermediate inputs traded within the EU became more sophisticated and involved morerelationship-specific investments (in the sense of Nunn, 2007).


Contracts in International Trade • 11

against foreigners readily admit a widespread belief of the existence of suchxenophobic biases (see Clermont and Eisenberg, 2007).

A third complication with international contracts is the enforcement ofremedies stipulated in the court’s verdict. For instance, the court might rulein favor of a local importer that was unsatisfied with the quality of certaincomponents obtained from an exporter, and the verdict might require theexporter to compensate the importer for any amount already paid for thecomponents, as well as for any court or even attorney fees incurred. Anissue arises, however, if the exporter does not have any assets (say bankaccounts or fixed assets) in the importer’s country. In that case, it is notclear that the exporter will feel compelled to accept the verdict and pay theimporter.

In recent years, there have been several coordinated attempts to reducethe contractual uncertainties and ambiguities associated with internationaltransactions. A particularly noteworthy example is the United Nations Con-vention on Contracts for the International Sale of Goods (or CISG), or ViennaConvention, which attempts to provide a set of uniform rules to governcontracts for the international sale of goods. The idea is that even when aninternational contract does not include a choice-of-law clause, parties whoseplaces of business are in different signing countries can rely on the Conven-tion to protect their interests in courts. As ambitious as the CISG initiativeis, it has arguably fallen short of its objectives. For instance, several countriesor regions (most notably Brazil, Hong Kong, India, South Africa, Taiwan, andthe United Kingdom) have yet to sign the agreement. Furthermore, a few ofthe signing countries have expressed reservations and choose not to applycertain parts of the agreement. Finally, it is not uncommon for private partiesto explicitly opt out of the application of the Convention, as allowed by itsArticle 6. The reluctance to unreservedly embrace the Convention has beenassociated with the somewhat vague language of the text, which might fosterthe natural inclination of judges to interpret the Convention through the lensof the laws of their own states.13

Another attempt to ameliorate the perceived contractibility of interna-tional transactions consists in resorting to international arbitration. Morespecifically, an international trade contract can include a (so-called) forum-of-law clause establishing that a particular arbitrator, such as the InternationalChamber of Commerce (ICC) in Paris, will resolve any contractual disputethat may arise between the parties. International arbitration is appealingbecause it avoids the aforementioned uncertainties associated with litigation

13 The Institute of International Commercial Law at Pace Law School maintains a website(http://www.cisg.law.pace.edu/) with comprehensive information on the CISG, including adatabase of thousands of legal cases in which the Convention was invoked. The details of thesecases offer a vivid account of the nature of contractual disagreements in international trade.



in national courts. It is also relatively quick and parties benefit from thefact that arbitrators tend to have more commercial expertise than a typicaljudge. Furthermore, arbitration rulings are confidential and are generallyperceived to be more enforceable than those of national courts because theyare protected by the Convention on the Recognition and Enforcement ofForeign Arbitral Awards, also known as New York Convention. Despite itsattractive features, international arbitration is rarely used in practice becauseits cost is too high for most firms to bear.14

One might argue that even when explicit contracts are incomplete andperceived to be unenforceable, parties in international transactions can stillresort to implicit contracting to sustain “cooperation.”We shall briefly developthis idea in Chapter 3. Nevertheless, it is particularly difficult to renderinternational commercial relationships self-enforcing. On the one hand,international parties are less likely to meet face-to-face and to transact ona repeated basis than domestic parties, in part due to distance and tradecosts, but also due to shocks (such as exchange rate movements) that canquickly turn efficient relationships into inefficient ones. On the other hand,the possibility of collective or community enforcement is hampered againby distance but also by the fact that parties might have different culturaland societal values. In sum, and in the words of Rodrik (2000), “ultimately,[international] contracts are often neither explicit nor implicit; they simplyremain incomplete.”

Although contractual risks are also of relevance for the exchange of finalgoods (see Chapter 3), the detrimental effects of imperfect international con-tract enforcement are likely to be particularly acute for transactions involvingintermediate inputs. This is so for at least two reasons. First, input transac-tions are often associated with relatively long time lags between the time anorder is placed (and the contract is signed) and the time the goods or servicesare delivered (and the contract is executed). Second, parts and componentsoften entail significant relationship-specific investments and other sourcesof lock-in on the part of both buyers and suppliers, which make contractualbreaches particularly costly. As argued above, suppliers often customize theiroutput to the needs of particular buyers and would find it difficult to sell thosegoods to alternative buyers, should the intended buyer decide not to abide

14 It may be instructive to illustrate this claim with some figures. Using the arbitration costcalculator available from the ICC website, the estimated cost of arbitration (involving a singlearbitrator) would be $5,401 for a $10,000 dispute (or a 54% cost-to-dispute-amount ratio), $15,425for a $100,000 dispute, $61,094 for a $1 million dispute, and $170,799 for a $10 million dispute (ora mere 1.7% cost-to-dispute-amount ratio). It is thus little surprise that there were only 796 ICCarbitration requests in 2011 and that the amount in dispute was under one million U.S. dollarsin only 22.7% of these cases (see http://www.iccwbo.org/products-and-services/arbitration-and-adr/arbitration/cost-and-payment/cost-calculator/).


Firm Responses to Contractual Insecurity • 13

by the terms of the contract. Similarly, buyers often undertake significantinvestments whose return can be severely diminished by incompatibilities,production line delays, or quality debasements associated with suppliers notfulfilling their contractual obligations.15

Firm Responses to Contractual Insecurity

When designing their global sourcing strategies, firms face two key decisions.The first concerns the location of the different stages in the value chain andinvolves deciding in which country or region firms will conduct R&D andproduct development, where parts and components should be produced, whatis the best place to assemble the finished good, and so on. The second keydecision relates to the extent of control that firms exert over these differentproduction stages. For instance, firms may decide to keep these productionstages within firm boundaries, thus engaging in foreign direct investment(FDI) when the integrated entity is in a foreign country. Other firms maybe less inclined to keep tight control over certain stages and thus choose tocontract with suppliers or assemblers at arm’s length.

Neoclassical models of fragmentation focus exclusively on the first ofthese decisions and emphasize that fragmentation will emerge as part ofa competitive equilibrium whenever firms find it cost-minimizing to breakup production processes across countries. The source of the cost advantageassociated with fragmentation varies by model; sometimes it stems fromdifferences in relative factor endowments across countries (which, forinstance, naturally confer comparative advantage in labor-intensive stagesto relatively labor-abundant countries), while other times they are motivatedby technological differences across countries.

Neoclassical models are silent on the issue of control. This is not becausethese models assume perfect competition, constant returns to scale, or ho-mogeneous goods. Instead, the key assumption that renders those models(and just about any model in the field of International Trade) vacuous whentackling the notion of control is the assumption of perfect or completecontracting. Indeed, if firms could foresee all possible future contingencies,and if they could costlessly write contracts that specify in an enforceablemanner the course of action to be taken in all of these possible contingencies,

15 A third, more specific reason for which input trade might be perceived to be lesscontractually secure relates to the fact that Article 3 of CISG explicitly excludes from theapplicability of the Convention situations in which “the party who orders the goods undertakesto supply a substantial part of the materials necessary for such manufacture or production,” thusmaking the Convention less relevant for sustaining cooperation in global production sharingnetworks.



then firms would no longer need to worry about “controlling” the workers,the internal divisions, or the supplying firms with whom they interact inproduction. The complete contract would in fact confer full control to the firmregardless of the ownership structure that governs the transactions betweenall these producers. In other words, and as Coase (1937) anticipated morethan seventy-five years ago, firm boundaries are indeterminate in a worldof complete contracts.16

In the real world, however, contracts are very much incomplete andespecially so in international transactions where, as argued above, theenforceability of contracts is particularly questionable. In response to thisperceived contractual insecurity, firms spend a substantial amount of timeand resources figuring out the best possible way to organize production inthe global economy. In some cases, foreseeing that producers located in aparticular country might not feel compelled to follow through with theircontractual obligations, firms contemplating doing business in that countrymight decide to do so within their firm boundaries, either by setting up anew, wholly, or partially owned affiliate or by acquiring a controlling stakein an existing firm in that country. In some circumstances, however, the lackof contract enforceability might turn firms to independent suppliers for theprocurement of parts precisely because such an arrangement might elicit thebest performance from foreign producers. In other words, it is importantto keep in mind that internalization is a double-edged sword: it may partlyprotect the integrating party from the vagaries of international contracting,but it might dilute the incentives to produce efficiently of the integrated party,which is now more tightly controlled and has less power in the relationship(cf. Grossman and Hart, 1986).

The boundaries of firms in the world economy are thus the result of the(constrained) optimal decisions of firms attempting to organize production inthe most profitable way possible. A recurring theme of this book, particularlyin Part III, is that much can be learned from a theoretical and empiricalstudy of the fundamental forces that appear to shape whether internationaltransactions are internalized or not, independently of the firm or sector oneis studying.

Some readers might be asking themselves at this point: why should onecare about the boundaries of multinational firms? Surely the fact that wecan write testable models of the internalization decision is not a convinc-ing enough argument to care about it. A first answer to this question is

16 It is worth stressing that even in the presence of product differentation and market power,firm boundaries remain indeterminate when contracts are complete. For example, the often-cited double-marginalization rationale for vertical integration rests on the assumption that firmsand suppliers cannot sign simple two-part tariff contracts, and as such, it also constitutes anincomplete-contracting theory of firm boundaries.


Comparative Advantage of Trade Statistics • 15

that understanding the boundaries of firms, and of multinational firms inparticular, is interesting in its own right. Ever since the pioneering work ofRonald Coase (1937), this topic has preoccupied the minds of many distin-guished economists, and constitutes one of the central themes of the fieldof organizational economics. A second, perhaps more compelling answer isthat delineating the boundaries of multinational firms constitutes a necessaryfirst stage for properly studying the causal implications of multinationalactivity on various objects of interest, such as measures of economic activityand growth, absolute and relative factor price movements, and welfare. Inother words, because multinational activity is not randomly assigned acrosscountries and sectors, understanding the key drivers behind such selectioninto multinational activity may be crucial for identification purposes. I willfall short of demonstrating this point in the current book, but I do hope thatthe stylized models overviewed in Part III will prove to be useful for thatpurpose.

Practitioners (and perhaps some academics too) might react skepticallyto the idea that low-dimensional models may be able to capture the rea-soning behind the complex and idiosyncratic decisions of firms in the worldeconomy. Business school cases often highlight the peculiarities of particularorganizational decisions, making it hard to envision that much can be gainedfrom extrapolating from those particular cases. The fact that comprehensivedatasets on the integration decisions of firms are not readily available mighthave only compounded this belief, as most empirical studies of integrationdecisions rely on data from specific industries or firms.17

A Comparative Advantage of Trade Statistics

An advantage of studying the global integration decisions of firms is that dataon international transactions are particularly accessible due to thewidespreadexistence of official records of goods and services crossing borders. Forinstance, it is well-known that researchers can easily access data on U.S.imports from any country of the world at the remarkably detailed ten-digitHarmonized Tariff Schedule classification system, which consists of nearly17,000 categories.18 A less well-known fact is that, in some countries, thesesame detailed country- and product-level data contain information on the

17 See Baker and Hubbard (2003) for a particularly careful study using data from the truckingindustry, and Lafontaine and Slade (2007) and Bresnahan and Levin (2012) for broad surveys ofthe empirical literature on vertical integration.

18 Downloading these data from the NBER website, one can readily verify that in 2001 Franceexported $15,747 worth of frozen potatoes to the United States (HTS code 2004.10), yet none ofthose were French fries (HTS code 2004.10.8020)!



extent to which trade flows involve related parties or non-related parties.Most notably, the “U.S. Related-Party Trade” data collected by the U.S. Bureauof Customs and Border Protection and managed by the U.S. Census Bureauprovides data on related and non-related-party U.S. imports and exports atthe six-digit Harmonized System (HS) classification (which consists of over5,000 categories) and at the origin/destination country level. This amounts tohundreds of thousands of observations per year on the relative prevalence ofintegration versus non-integration across products and countries.19

What do these data tell us about the global sourcing strategies of firms?The first thing that one notices when using U.S. related-party trade data ishow predominant intrafirm transactions are in U.S. trade. In 2011, intrafirmimports of goods totaled $1,056.2 billion and constituted a remarkable 48.3percent of total U.S. imports of goods ($2,186.9 billion). In fact, the share ofintrafirm trade has been higher than 46.5 percent in every year since 2000.On the export side, related-party exports are also pervasive, with their sharein total U.S. exports ranging from 28 percent to 31 percent in recent years.These figures illustrate the importance of multinational firms for U.S. trade.20

A second evident feature of the data is that the share of U.S. intrafirmimports varies widely across countries. On the one hand, in 2011 intrafirmimports equaled 0 for ten countries and territories (including Cuba), allexporting very low volumes to the United States. On the other hand, in thatsame year the share of intrafirm trade reached a record 89.6 percent forU.S. imports from Western Sahara. Leaving aside communist dictatorshipsand disputed territories, and focusing on the fifty largest exporters to theUnited States, Figure 1.3 illustrates that the share of intrafirm trade still variessignificantly across countries, ranging from amere 2.4 percent for Bangladeshto an astonishing 88.5 percent for Ireland.

Similarly, the share of intrafirm trade varies widely depending on thetype of product being imported. Again, the raw data contain infrequentlytraded goods with shares equal to 0 and 100, but even when focusing onthe top 20 six-digit HS manufacturing industries by importing volume, inFigure 1.4 one observes significant variation in the share of intrafirm trade,

19 The U.S. Related Party Trade data are publicly available at: http://sasweb.ssd.census.gov/relatedparty/. This website permits downloading the data at the six-digit NAICS level.The finer six-digit Harmonized System (HS) data are available from the U.S. Census for a fee, butI have also made them available at http://scholar.harvard.edu/antras/books.

20 In contrast, Atalay, Hortacsu, and Syverson (2013) study intrafirm shipments across U.S.multiplant firms and find that these constitute a very small share of total shipments, a finding thatthey interpret as indicating that firm boundaries are shaped by issues related to the transfer ofintangible inputs, rather than of physical goods. However, as argued above, contractual insecurityin the exchange of physical inputs is much more significant in international transactions than indomestic ones, and thus firm boundaries might well be shaped by different factors in cross-borderrelationships than in the domestic ones in the Atalay et al. (2013) database.



0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

BangladeshPeru

EcuadorVietnam

GabonChile

ArgentinaColombiaIndonesia

ChinaIndia

RussiaNigeriaAngolaTurkeyTaiwanAlgeria

SpainVenezuela

ItalyBrazil

TrinidadAustralia

South AfricaPhilippines

IsraelCanadaNorway

ThailandFrance

BelgiumKuwait

United KingdomMalaysia

FinlandHonduras

MexicoKorea

SwitzerlandNetherlands

SwedenIraq

AustriaGermanyDenmark

Saudi ArabiaJapan

SingaporeCosta Rica

Ireland

Figure 1.3 Share of U.S. Intrafirm Imports for Fifty Largest Exporters to the UnitedStates in 2011. Source: U.S. Census Related-Party Trade Database



0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Medicaments n.e.s., in dosage

Electronic integrated circuitsas processors and controllers

Automobiles, spark ignitionengine of >3000 cc

Automobiles, spark ignitionengine of 1500–3000 cc

Parts and accessoriesof printers, etc., n.e.s

Other medical, surgical,or veterinary instruments

Storage units for computers andother data processing machines

Reception apparatusfor television, color

Processing units for automaticdata processing machines

Parts and accessories of computers

Computer laptops and notebooks

Telephones for cellular networksor for other wireless networks

Parts of turbojets or turbopropellers

Electronic integrated circuits, n.e.s.

Machines for the r/c/t or reg.of voice, images, or other data

Other motor vehicleparts and accessories

Other parts and accessories ofbodies for the motor vehicles

Other parts of airplanesor helicopters

Other toys, reduced size(“scale”) models

Sweaters, pullovers,sweatshirts...of cotton 11%

17%

21%

39%

43%

52%

53%

54%

56%

56%

61%

64%

65%

74%

77%

79%

84%

89%

97%

99%

Figure 1.4 Share of U.S. Intrafirm Imports in Top Twenty Industries by U.S. ImportVolume in 2011. Source: U.S. Census Related-Party Trade Database



0% 10% 20% 30% 40% 50% 60% 70% 80%

Steering wheels

Safety airbags

Gear boxes

Clutches

Other parts

Suspension absorbers

Bumpers

Parts and accessories of bodies

Brakes and servo-brakes

Wheels

Radiators

Mufflers and exhaust pipes

Seat belts

Drive axles

Figure 1.5 Variation in the Share of IntrafirmTradewithin HS Sector 8708 (Auto Parts)in 2011. Source: U.S. Census Related-Party Trade Database

which ranges from a share of 11.4 percent for U.S. imports of sweaters,pullovers, and sweatshirts made of cotton (HS 611020) to 98.8 percent forimports of automobiles with engines of more than 3000 cc (HS 870324). Thisvariation persists even when focusing on much narrower sectors. As shownin Figure 1.5, when analyzing imports across subcategories of the four-digitHarmonized System sector 8708 (“Parts and accessories of motor vehicles”),the share of intrafirm trade still ranges from 19.8 percent for drive axles(HS 870850) to 71.2 percent for steering wheels (HS 870894). It is thus clearthat U.S.-based producers appear to source different auto parts under quitedifferent ownership structures.

As a final illustration of the richness and variation in the data, consider thesix-digit HS industry with the largest share of intrafirm imports in Figure 1.5,namely HS 870894 (steering wheels, columns, and boxes for motor vehicles).



Figure 1.6 reports the share of intrafirm trade for all fifty-six countries withpositive exports to the United States in that sector. As is clear from thegraph, even when focusing on a narrowly defined component, a similarpattern to that in Figure 1.3 emerges, with U.S.-based producers appearingto source particular inputs quite differently depending on the location fromwhich these products are bought. Imports from seventeen of the fifty-sixcountries are exclusively transacted at arm’s length, while one country(Liechtenstein) sells steering wheels to the United States almost exclusivelywithin multinational firm boundaries. The remaining thirty-eight countriesfeature shares of intrafirm trade fairly uniformly distributed between 0 and100 percent.

The large variation in the relative importance of intrafirm transactionsacross types of goods and countries might seem to validate the skeptics’ viewthat the decision to integrate or outsource foreign production processes islargely driven by idiosyncratic factors that cannot possibly be captured byparsimonious models of the organization decisions of firms. If that were thecase, however, not only would we observe large variation in the share ofintrafirm trade, but we would also expect this variation to be uncorrelatedwith simple industry- or country-level variables. As first demonstrated byAntràs (2003), the evidence suggests otherwise. Chapter 8 will describe indetail several stylized facts regarding the intrafirm component of trade. Asa sneak preview, Figures 1.7 and 1.8 illustrate that the share of intrafirmimports in total U.S. imports is significantly higher, the higher the U.S. capitalintensity in production of the good being imported, and is also significantlyhigher, the higher the capital-labor ratio of the exporting country. Thesescatter plots suggest that, as argued above, theremay indeed be some commonfundamental factors that shape the integration decisions of firms acrosssectors and countries. The theories of internalization exposited in Chapters6 and 7 will attempt to shed some light on these factors and will provide avaluable lens throughwhich to study the intrafirm trade data in amore formaland structured manner.

While several features of the U.S. Related-Party Trade database makeit particularly attractive to empirical researchers, it has some importantlimitations. Some of the shortcomings of the data relate to the extent towhich the characteristics of the data permit a formal test of the theories ofinternalization developed later in the book, so it is convenient to postponethat discussion until after we have covered those theories in Chapters 6 and 7.Other potential limitations are more fundamental, so it is important to tacklethem up front.

The U.S. database defines “related-party imports” as import transactionsbetween parties with various types of relationships, including “any persondirectly or indirectly, owning, controlling or holding power to vote, 6 percentof the outstanding voting stock or shares of any organization.” A first natural



0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Turks and CaicosColombia

PeruArgentina

IrelandEstonia

MaltaSlovenia

MontenegroBulgaria

UAEPakistan

SingaporeIndonesia

TokelauEgypt

CameroonPhilippines

NetherlandsTurkeyTaiwan

MalaysiaIsrael

BelgiumSweden

United KingdomAustria

SwitzerlandItaly

CanadaFinland

PortugalSpainChinaIndia

VietnamGermany

Czech RepublicAustraliaThailand

FranceHong Kong

TunisiaBrazil

South AfricaHungary

Denmark

SlovakiaPoland

HondurasMexico

RomaniaNorway

JapanLiechtenstein

South Korea

Figure 1.6 Variation in the Share of U.S. Intrafirm Imports within HS 870884 (SteeringWheels) in 2011. Source: U.S. Census Related-Party Trade Database



0.1

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e of

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orts

by

NA

ICS

4, a

vera

ge 2

000–

05

Log U.S. capital / Employment by NAICS 4, average 2000–05

y = –0.142 + 0.108 x(0.122) (0.025)

R2 = 0.182

3161

31123121

3122

32213241

3251

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3311

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334333453353

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32193231

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3261

3271

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32743312

33213322

3323

3324

33253326

3329

33513352

3366

3372

3212

Figure 1.7 The Share of Intrafirm U.S. Imports and Capital Intensity. Source: U.S. Cen-sus Related-Party Trade Database and NBER-CES Manufacturing IndustryDatabase

concern is that the 6 percent threshold might be too low for that “relatedness”to have any significant economic meaning, such as one of the entities havinga controlling stake in the other entity. In practice, however, extracts fromthe confidential foreign direct investment dataset collected by the Bureauof Economic Analysis suggest that intrafirm trade is generally associatedwith one of the entities having a majority-ownership stake in the otherentity. More specifically, in 2009, of all U.S. imports associated with U.S.parents purchasing goods from their affiliates, 93.8 percent involvedmajority-owned foreign affiliates. Similarly, majority-owned U.S. affiliates accountedfor 95.5 percent of U.S. imports by all U.S. affiliates of foreign companies in2009.21

A second general concern relates to overall quality of the data. In thatrespect, the technical documentation that accompanies the dataset stressesthat the data are not subject to sampling error, since an indicator of whetherthe transaction involves related parties or not is required for all importor export transactions recorded by the U.S. Bureau of Customs and Border

21 See Table 9 in http://www.bea.gov/scb/pdf/2011/11%20November/1111_mnc.pdf, and TableI.A.1 in http://www.bea.gov/international/pdf/fdius_2009p/I%20A1%20to%20I%20A9.pdf.



0.1

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6.5 7.5 8.5 9.5 10.5 11.5 12.5

Shar

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orts

, ave

rage

200

0–05

Log capital / Labor ratio, average 2000–05

y = –0.485 + 0.075 x(0.117) (0.011)

R2 = 0.214

HTI

AUT

BEL

CHE

CRI

FIN

IRLIRQ

JPN

KWTLUX

NOR

SGP

BHS

BIH

BOLBRA

CAN

COGCZE

DNKDOM

FRA

GAB

GBRHND

HUN

ISLJAM

KORLBY

LCA

MARMDV

MEX

MLI

MLT

MRT

MYSNLD

NZL

PHL

SAU

SLB

SLV

STP SUR

SVK

SVN

SWE

THA

VCT VENYEM

ZMB

ALB

AREARG

AUS

BGR

BHR

BLZ

BRB

BRNBTNBWA

CHLCOL

CYP

DMA

DZA

ECU

ESPEST

FJIGRC

GRD

GTMGUY HKG

HRV

ISR

ITA

LBNMAC

MKD

NAM

OMN

PANPER

QAT

RUS

SYC

TONTTO

TUN

TUR

TWN

URY VUT

WSM

ZAF

AGOBDI

BEN

BFA

BGD

CAF

CHN

CIV

CMR COM

CPVCUB

DJI

EGYETH

GHA

GIN

GMB

GNB IDN

IND

IRNJOR

KEN

KHMLAO

LBR

LKA

LSO

MDG

MNG

MOZ

MWI

NER

NGA

NIC

NPL

PAK

PNG

PRYRWA

SDNSLE

SOM

SWZ

SYRTCD

TGO

TZAUGA

UZB

VNMZWE

AFG

ZAR

GNQ

SEN

MUS

PRT

POL

Figure 1.8 The Share of Intrafirm U.S. Imports and Capital Abundance. Source: U.S.Census Related-Party Trade Database and Penn World Tables (using per-petual inventory method of Caselli, 2005)

Protection. Despite this requirement, importers and exporters do not alwaysreport that information in their shipment documents. Luckily, these trans-actions are categorized on the data tables as “nonreported,” so it is easilyverified that these account for a very low share of trade volumes (for instance,just 1.4 percent of total imports in 2011). One might also worry about non-sampling errors related to the imputation of trade values for undocumentedshipments and for low-valued transactions (which are sometimes estimated).Nevertheless, quality assurance procedures are performed at every stage ofcollection, processing, and tabulation, thus there is no reason to believe thatthese data are any less reliable than U.S. customs data on trade flows.22

One way to gain reassurance regarding the usefulness of the data is tosee whether it delivers patterns that are consistent with what one wouldexpect based on independent and reliable sources of data. For example,from a quick search of press releases from recent years, one learns that in2005, Boston-based Gillette Company completed the construction of a 120million-euro plant in Łódź (Poland), which manufactures disposable razorsand other shaving products.23 Although production was mostly directed to

22 Ruhl (2013) provides a useful overview of alternative U.S. intrafirm trade data sources.23 See http://www.paiz.gov.pl/nowosci/?id_news=502.



0%

20%

40%

60%

80%

10%

30%

50%

70%

90%

100%

2000 2001 2003 2004 2005 20072006 2008 2009 2010 20112002

Figure 1.9 Share of Intrafirm Imports of NAICS 332211 (Razors) from Poland. Source:U.S. Census Related-Party Trade Database

the Europeanmarket, it seems reasonable to assume that some of the productsproduced in the plant were shipped back to the United States, a transactionthat would naturally occur within firm boundaries. As shown in Figure 1.9,it is reassuring to observe that the share of intrafirm imports in total U.S.imports from Poland of NAICS code 332211, which is dominated by non-electric razors and razor blades, went up dramatically around the time ofthe plant opening, jumping from essentially 0 percent in 2004 to close to 100percent from 2005 onward.

Back to the Location Decision

We have emphasized above that the internalization decisions of firms inthe global economy cannot be understood without appealing to contractualfrictions, and we have also illustrated the importance of these frictions inthe real world. It seems natural, however, to posit that imperfect contractingnot only shapes the ownership structure decisions of firms but might alsoimpact their geographical location decisions. As emphasized by neoclassicalmodels of offshoring, profit-maximizing firms will organize production ina cost-minimizing manner, but the effective costs of doing internationalbusiness are not explained solely by the factors highlighted by neoclassical


Back to the Location Decision • 25

theory. Certainly, other things equal, wages will tend to be relatively lowerin relatively labor-abundant countries. And, other things equal, costs ofproductionwill also tend to be relatively low in countries or regionswhere thetechnologies used in production are particularly advanced. Yet, firmsmight bereluctant to offshore production lines to low-wage countries where suppliersare unreliable and tend not to honor their contracts, andwhere local courts areunlikely to effectively enforce contracts. Similarly, firmsmight be unwilling tooperate in countries in which their advanced technologies could be effectivelydeployed (given the existence of local complementary factors), but in whichthe contractual environment might not provide enough security to firms,in terms of quality contracting but also in terms of the risk of intellectualproperty rights expropriation.

A key factor that makes contractual aspects important for sourcing deci-sions is the existence of huge variation among countries in judicial qualityand contract enforcement. Empirical researchers often make use of easilyaccessible measures of the quality of the rule of law which are themselvesbased on weighted averages of various indices of the perceived effectivenessand predictability of courts in different countries. An advantage to thesewidely used measures, such as the “Rule of Law” variable produced by theWorldwide Governance Indicators, is that they capture broad features of thecontracting environment. A disadvantage is that they are partly based onsubjective assessments rather than objective measures of institutional quality.Furthermore, they may provide a useful ordinal measure of legal quality butthey are less well equipped to help quantify the existence of cross-countryheterogeneity in judicial quality and contract enforcement.

Djankov, La Porta, Lopez-De-Silanes, and Shleifer (2003) have proposedan ingenious alternative measure of judicial quality which is narrower innature but more powerful in illustrating the relevance of differences in thelegal system across countries. In particular, Djankov al. (2003) estimate for109 countries the time it takes a plaintiff using an official court to evict anonpaying tenant and to collect a bounced check. Figure 1.10 depicts thesecond of these two variables, which is more likely to be of relevance forfirms considering doing business in a particular country. Their estimated totalduration of a legal procedure aimed at collecting a bounced check ranges from7 days in Tunisia to 1,003 in Slovenia. Even when focusing on the forty-threeof the top fifty largest exporters to the United States for which they providedata, the estimated duration ranges from 39 days for the Netherlands to 645days for Italy.

The extent of contractual insecurity not only varies across countries (orjurisdictions) but it naturally also varies depending on the characteristicsof the goods being transacted. For instance, basic goods with low levelsof differentiation and which are traded in relatively thick markets canbe relatively safely procured even from countries with weak contracting



0 100 200 300 400 500 600 700

NetherlandsSingapore

JapanKorea

DenmarkSouth Africa

NorwayMalaysia

United KingdomTurkey

IndiaVietnamBelgium

IrelandSpain

GermanyRussiaChinaBrazil

FranceSwedenTrinidad

ChileThailand

SwitzerlandIndonesiaHonduras

FinlandNigeria

BangladeshMexico

ArgentinaIsrael

AustraliaEcuador

KuwaitVenezuelaCosta Rica

CanadaAustria

PeruColombia

Italy

Days

Figure 1.10 Duration of a Legal Procedure Aimed at Collecting a Bounced Check.Source: Djankov et al. (2003)


A Brief Road Map • 27

institutions. Conversely, transactions involving highly complex or differ-entiated goods will tend to be much more “contract dependent,” and onewould expect firms to be significantly more sensitive to the institutionalenvironment when choosing the country from which to procure those goods.

A Brief Road Map

This book will study the various ways in which the contracting environmentshapes the location and internalization decisions of firms in the globaleconomy. I will focus first on an analysis of the location decision and howit is affected by contracting factors, and only in Part III of the book will Iallow firms to optimally decide the extent of control they want to exert overproduction processes. This does not follow the chronological order in whichthese topics were developed in the literature, but I will adopt this sequencingfor pedagogical reasons.

Before diving into the world of incomplete contracts, it is necessary,however, to provide an overview of the “complete-contracting” frameworksthat will serve as the basis or skeleton for the models to be developed in futurechapters. A succinct overview of thesemodels is offered in Chapter 2, towhichI turn next. Readers familiar with Melitz’s (2003) classic paper and its variousextensions might want to jump straight to Part II of the book, starting inChapter 3.

September 21, 2015 Time: 11:46am index.tex

Index

absorption, 55, 69, 84, 85, 134Acemoglu, D., 120, 209, 210, 213adaptation, 191affiliates, 14, 22, 32, 132, 143, 220, 233, 254,256, 257

—integrated, 243—majority-owned, 221Aghion, P., 100, 216Ahn, J., 91Albornoz, F., 60Alchian, A. A., 173Alfaro, L., 215, 259Amiti, M., 61, 91Anderson, J. E., 39, 69, 70, 71, 82Annual Survey of Manufacturing (ASM), 135,298, 301

Antràs, P., 7, 8, 9, 20, 31, 41, 42, 49, 50, 54,55, 56, 62, 76, 79, 91, 92, 95, 108, 111, 114,117, 120, 122, 123, 124, 125, 126, 132, 139,148, 149, 176, 184, 186, 194, 197, 203, 204,205, 208, 209, 210, 211, 212, 213, 214, 215,226, 228, 229, 230, 237, 238, 254, 255, 261,270–71, 273, 275, 276, 277, 279, 280, 281,282, 293, 300, 302, 303, 304, 305

Apple, 5Araujo, L. F., 67, 76, 77, 78arbitration, 11, 12, 75Argentina, 129, 130, 132Arkolakis, C., 35, 38, 39arm’s length, 13, 20, 31, 169, 170, 181, 183,189, 191, 199, 221, 229

Association of Southeast Asian Nations(ASEAN), 4

assets, 11, 94, 147, 149, 169, 173, 193, 197—firm, 169—fixed, 11—non-human, 193—physical, 169, 196Atalay, E., 16, 178, 221Aumann, R. J., 120authority, 176, 177, 191, 216, 280

Bagwell, K., 127Baker, G. P., 15, 218, 260Baldwin, R. E., 39Bardhan, P., 62bargaining, 97, 102, 107, 108, 113, 174, 176,207, 280

—ex-post, 102, 106, 111, 119, 195, 209—symmetric, 145, 266, 267bargaining power, 62, 109, 121, 194, 197, 210,211

—effective, 211—generalized Nash, 107, 108, 109, 146, 196,197, 202, 203, 207, 224, 268, 271, 273

—primitive, 107–8, 197, 202—relative, 62—symmetric Nash, 124Barro, R. J., 305Bas, M., 256Basco, S., 215Bauer, C. J., 201BEA (Bureau of Economic Analysis), 22, 31,221, 253, 293, 294, 296, 302, 303

BEA concordance, 299, 300, 301Becker, R. A., 301Behar, A., 10behind-the-border policies, 127Belgium, 67, 144Berkowitz, D., 82, 83, 84, 86, 87, 90Bernard, A. B., 31, 32, 38, 44, 56, 148, 158, 161,253, 304

beta coefficients, 89, 159, 226Bhagwati, J., 30, 126bilateral monopoly, 101, 173bilateral trade flows, 69, 71, 74, 79, 81, 82, 83,84, 86

bilateral trade frictions, 39, 67Blaum, J., 53Botero, J. C., 158, 306Braun, M., 147, 158, 160, 161, 164, 247, 248,304

Brazil, 5, 11, 59


320 • Index

Bresnahan, T., 15Broda, C., 136, 148, 156, 228, 238, 302, 303Broda-Weinstein demand elasticity, 238Bureau of Economic Analysis. See BEA

(Bureau of Economic Analysis)—buyers, 12, 13, 31, 59, 94, 130, 140, 142, 185,207, 218, 241, 254

—alternative, 12, 94, 101, 102, 116, 190—first-time, 92—intended, 9, 12, 101, 190

Calvo Pardo, H. F., 60Campa, J. M., 6Carluccio, J., 215, 256Caselli, F., 23cash-in-advance, 79, 91, 93Chaney, T., 35, 38Chen, H., 7Chen, M., 59Chen, Y., 190Chile, 129, 130China, 5, 17, 26, 29, 36, 59, 62, 94, 98, 254—plants in, 5, 254choice-of-forum, 81choice-of-law, 10, 11, 64, 81, 115Chor, D., 7, 8, 90, 123, 124, 125, 132, 139, 140,148, 149, 158, 159, 184, 211, 212, 213, 229,230, 237, 238, 255, 279, 280, 281, 293, 300,302, 303, 304, 305

CISG. See Vienna ConventionCivil law, 63, 91, 92Clermont, K. M., 11coalitions, 120, 121Coase, R. H., 14, 15, 170, 171, 172, 173, 192commitment, 63, 64—limited, 79, 81Common law, 91, 92company, 59, 94, 171, 259—parent, 220, 254comparative advantage, 13, 28, 50, 87, 89, 90,95, 130, 138, 151

—institutional determinants of, 84, 90, 161—source of, 87, 157compatibility, 98–99competition, 39, 52, 104, 146—perfect, 13, 29, 30, 34computers, 3, 18, 138, 228, 301Conconi, P., 215, 259, 260continuum, 32, 111, 119, 120, 131, 152, 154,175, 197, 213

contract enforcement, 25, 63, 65, 68, 69, 75, 76,78, 84, 85, 86, 88, 99, 122, 129, 165, 221, 248,250, 275, 276, 277

—exporter country, 85—formal, 148, 158, 159, 303—imperfect, 169—importer country, 91—incomplete, 126—international, 10, 12, 62, 63, 90—level of, 88, 125—source country, 152, 248—weak, 65, 85, 93, 94, 98, 107, 115, 117, 122, 128contractibility, 75, 78, 114, 126, 146, 149, 156,185, 205, 206, 224, 234, 236, 241, 245, 250,279

—buyer, 240—degree of, 115, 147, 148, 154, 189, 195, 204,235, 285

—effects of, 239, 274, 285—financial, 223—improvements in, 115, 118, 273, 275, 276—level of, 207, 208, 285—measures of, 303, 304—perceived, 11—seller, 240contract incompleteness, 114, 173, 174, 192,214

contracting, 10, 60, 61, 62, 64, 96, 101, 125,158, 177, 192, 209, 234, 235, 280

—bilateral, 228—complete, 13, 101, 108, 114, 119, 139, 145,174, 185, 196, 266, 267, 269, 270

—formal, 170—frictionless, 9, 96—imperfect, 24, 65, 128, 174—implicit, 12—incomplete. See incomplete contracting—intensive, 10—international, 14—multilateral, 118, 209, 276, 286—perfect, 65, 170—weak, 25, 78, 107, 115, 128, 129, 169contracting institutions, 68, 82, 84, 86, 118,148, 151, 158

—domestic, 90—effect of, 69, 87, 89, 95—exporter country, 81—importer country, 70, 82—quality of, 67, 81, 82, 84, 85, 87, 112, 115—strong, 93—weak, 70, 77, 78, 81, 91


Index • 321

contract intensity, 87, 88, 129, 148, 159contracts, 10, 11, 13, 25, 59, 60, 63, 64, 76, 77,82, 90, 91, 92, 94, 96, 97, 98, 101, 102, 104,105–6, 108, 111, 114, 115, 116, 118, 119, 120,122, 124, 126, 128–30, 132, 134, 136, 138,140, 142, 144, 146, 148, 152, 154, 156, 158,162, 164, 172, 173, 185, 190, 191, 192, 194,205, 214, 227, 255, 259, 261

—all-encompassing, 193—cash-in-advance, 79—complete, 14, 99, 103, 110, 117, 133—comprehensive, 99, 170—enforceable, 112—explicit, 12—incomplete. See incomplete contracts—quality-contingent, 189—revenue-sharing, 100, 107, 109—simple, 61, 62, 100—static, 78contractual difficulties, 86, 175contractual efficiency, 129, 146, 177, 178, 196,201, 209, 223, 243, 244, 280, 281

contractual enforcement, 66, 91, 128, 247—high, 70—weak, 91contractual insecurity, 13, 16, 59, 62, 64,68–70, 74–75, 77, 115, 126, 258, 279

—extent of, 25, 78—perceived, 14, 74contractual security, 63, 67, 69, 70, 72, 73, 75—perceived, 64control, 13, 14, 27, 70, 82, 84, 169, 170, 192,193, 203, 216, 256

—effective corporate, 253cooperation, 12, 13, 119, 120, 195Corcos, G., 60, 256, 257, 258, 261core productivity, 51, 53, 153, 182Costinot, A., 39, 56, 62, 87, 148, 158, 160, 161,191, 247, 253, 303

courts, 10, 11, 25, 64—foreign, 81—local, 10, 25Crawford, R. G., 173Cuñat, A., 90, 158, 161, 164, 248, 304, 306customization, 117, 147, 148, 152, 190, 207customs, 16, 22, 23, 131, 218, 219, 254, 290,291

damages, 64, 81, 97, 115Davidson, W. H., 218Davis, D. R., 29, 61Deardorff, A. V., 9, 29

Defever, F., 256, 257Delgado, M. A., 257demand elasticities, 128, 143, 144, 148, 149,165, 230, 238, 249, 252, 270, 302

Demidova, S., 35, 68, 82Devereux, M. P., 201Dewatripont, M., 100Díez, F. J., 215, 230, 253differentiated-good sectors, 31, 32, 33, 40, 95,213

differentiation, 25, 30, 34, 78, 114, 115, 122,148, 269, 273, 288, 289

disintegration, 5, 9, 40—gradual, 4—international, 6distance, 12, 52, 69, 71, 73, 74, 83, 84, 129,305

divestment, 172—foreign direct, 171Dixit, A. K., 30Dixit-Stiglitz preferences, 32Djankov, S., 25, 26, 158, 306domestic integration, 176, 178, 185, 186, 187,196, 199, 221, 258, 259

domestic outsourcing, 175, 176, 177, 179, 185,186, 187, 194, 196, 199, 200, 224, 259

domestic sourcing, 43, 45, 47, 48, 53, 95, 101,104, 107, 108, 114, 117, 119, 126, 145, 176,179, 181, 183, 187, 258, 270

—contractual frictions in, 185, 202downstreamness, 149, 150, 184, 185, 234, 237,238, 239, 241, 279, 280, 304

—effect of, 149, 213, 237—measure of, 149, 305Du, J., 209Dun & Bradstreet’s WorldBase, 259, 260Dunning, J., 169

Eaton, J., 39, 50, 51, 52, 53, 55, 152, 153,efficiency, 87, 104, 190, 202, 203, 204, 244—ex-post, 189—organizational, 223—relative, 224Eisenberg, T., 11Encuesta sobre Estrategias Empresariales(ESEE), 45, 131, 257

end-use categories, 294—five-digit, 142enforcement, 11, 92, 103—community, 12—cross-border, 99—international, 90


322 • Index

entities, 22, 169, 218, 257, 291—foreign, 218—integrated, 13, 193entry, 34, 40, 42, 51, 95, 97, 257—free, 34, 35equilibrium, 35, 62, 77, 86, 102, 108, 110, 111,117, 120, 121, 179, 185, 187, 188, 190, 195,199, 207, 209, 210, 213, 215, 271, 286

—general, 33, 155, 214—sectoral, 131—trigger-strategy, 77equilibrium sorting, 105, 177, 178, 179, 180,186, 187, 188, 199, 200, 222, 241, 255, 257

equity shares, 220, 221Erumban, A. A., 221Ethier, W. J., 30, 189Euler-Lagrange equation, 125exchange, 10, 12, 16, 61, 76, 79, 97, 98, 101,103, 113, 119, 132, 170, 204, 218

—cross-border, 10—international, 93—organized, 87, 148, 303exit, 35, 39, 257export behavior, 31, 59–60, 62, 64, 66, 68, 70,72, 74, 76, 78, 80, 82, 84, 86, 88, 90, 92

exporter misbehavior, 79, 80, 82, 86, 90, 93exporters, 11, 23, 31, 36, 39, 60, 61, 62, 63, 64,65, 67, 69, 70, 71, 73, 74, 75, 76–86, 90, 91,93, 180, 253, 254, 291

exporting decision, 40, 61, 115, 128exports, 6, 8, 32, 34, 36, 40, 60, 62, 65, 66, 69,75, 87, 90, 91, 118, 130, 134, 135, 142, 155,159, 214, 219, 232, 255, 294, 296,299

—aggregate, 31, 37, 38—aggregate sectoral, 67—firm-level, 38, 77, 78, 86—positive, 20, 44, 291—related-party, 16—total, 88, 256, 298ex-post division, 190, 205—ex-post gains, 102, 107, 108, 195, 207—optimal, 206ex-post inefficiencies, 173, 174, 191extensive margin, 31, 37, 38, 39, 54, 55, 56, 65,66, 71, 72, 73, 74, 77, 81, 95, 152, 153, 201,244, 279

factor endowments, 151, 157—relative, 13, 29, 214, 249Fadinger, H., 215, 259

Fally, T., 7, 8, 215, 238, 256, 305Fariñas, J. C., 257FDI (foreign direct investment), 13, 32, 170,176, 178, 199, 201, 202, 255, 257

Federico, S., 258, 259Feenstra, R. C., 5, 6, 9, 190, 254, 302, 303Felbermayr, G., 68Fernandes, A., 254financial constraints, 79, 110, 111, 145, 147,149, 156, 183, 196, 204, 234, 235, 236, 240,245, 270, 283–84

—effect of, 156, 215financial development, 164, 215, 247, 306firm boundaries, 13, 14–16, 24, 169, 170, 171,174, 175, 179, 185, 186, 191–92, 197, 199,207, 212, 215, 218, 220, 221, 222, 227, 242,243, 244, 248, 254, 255, 259

—models of multinational, 229, 230, 253—transaction-cost theories of multinational,236, 239

firm-level data, 31, 131, 218, 219, 221, 229, 255,257, 258, 259, 260, 261

fixed costs, 34, 35, 37, 41, 48, 49, 51, 54, 95, 97,119, 153, 172, 176, 183, 184, 187, 188, 196,197, 243, 257, 266, 277, 278

Foley, C. F., 59, 76, 79, 91, 92foreign affiliates, 22, 31, 32, 233, 253, 257foreign outsourcing, 170, 175, 178, 179, 180,181, 199, 204, 255, 256, 257, 259

foreign sourcing, 45, 114–15, 117, 122, 125,126, 170, 185, 222, 279

Forslid, R., 39Fort, T. C., 45, 49, 50, 54, 56, 261forum-of-law clauses, 64, 115fragmentation, 5, 6, 9, 13, 41, 44, 46, 48,106, 134

France, 15, 144, 256, 257, 258Fréchet distribution, 50, 51, 152, 153, 243freight costs, 135, 139, 140, 142, 157, 161, 165,227, 228, 230, 231, 234, 241, 244, 249,251–52, 299, 300

Freund, C., 10

Gans, J. S., 30Garetto, S., 50Garicano, L., 9GATT (General Agreement on Tariffs andTrade), 4, 127

Gennaioli, N., 100Gil, R., 218global sourcing, 32, 40, 41, 46, 56, 60, 93,


Index • 323

94–96, 98, 100, 102, 104, 106, 108, 110, 112,114, 116, 118, 120, 122, 124, 126, 151, 152,174, 184, 194, 214, 217, 239, 261

Goldberg, L. S., 6Goldberg, P. K., 52Gopinath, G., 52governance costs, 174, 175, 178, 179, 182, 185,187, 189, 192, 201, 244, 280

Graham, F., 28gravity equation, 38, 39, 55, 67, 69, 72, 84Gray, W. B., 301Grossman, G. M., 9, 116, 189, 190Grossman, S. J., 14, 193, 195, 214Guadalupe, M., 257

Halpern, L., 52Hanson, G., 6, 9, 254Harmonized System (HS), 16, 19, 21, 88, 136,142, 219, 232, 291, 294, 296, 300, 302, 303

Harrison, A., 4Hart, O., 14, 63, 193, 195, 214, 215Haveman, J., 294Heckscher, E., 28Heckscher-Ohlin, 28, 29, 35, 39, 89, 151, 158,159, 162, 164, 247, 249, 250, 251

Helleiner, G. K., 253Helpman, E., 29, 30, 32, 33, 35, 39, 41, 42, 46,56, 61, 71, 72, 73, 74, 90, 95, 108, 111, 114,116, 117, 120, 122, 126, 176, 186, 189, 190,194, 197, 204, 205, 208, 209, 210, 213, 214,215, 230, 270–71, 273, 276, 277, 282

heterogeneous firms, 35, 37, 40, 41, 53, 95, 194,213, 217, 222

Hillberry, R., 7, 238, 305Hoefele, A., 79, 91, 93hold-up problem, 102, 104, 117, 211, 280Holmstrom, B., 100, 110, 120, 215Hortacsu, A., 16, 178, 221Hubbard, T. N., 15, 218, 260Hummels, D., 4, 6

ICC (International Chamber of Commerce),11, 12, 75

imported inputs, 6, 7, 47, 106, 131, 147, 175,181, 182, 184, 188, 277

incomplete contracting, 100, 101–2, 104, 106,107, 108, 118, 125, 145, 146, 154, 196, 197,207, 266, 267, 273

—effect of, 103, 104incomplete contracts, 27, 98, 126, 191, 195,201, 215, 228, 280

—totally, 100, 101, 103, 114information, 3, 5, 15, 23, 39, 96, 132, 139, 142,218, 219, 220, 221, 230, 235, 253, 255, 257,258, 259, 261, 291, 303

—complete, 60—comprehensive, 11, 91—detailed, 5, 219, 254, 255, 259—private, 77—symmetric, 100, 102Input-Output industry codes (IO2002), 140,142, 231, 293, 294, 296, 299, 300, 301, 302,303, 304

Input-Output tables, 6, 87, 132, 139, 142, 148,230, 238, 240, 241, 260, 293

institutions, 3, 27, 85, 86, 89, 90, 115, 129, 151,158, 247, 260

—bad, 129—domestic, 87—exporter-country, 79, 82, 82, 83, 84, 85, 90—financial, 79, 89, 158, 215—importer-country, 90, 91—labor market, 90, 158, 249, 256—legal, 73, 83integration, 171, 176, 184, 185, 189, 190, 191,193, 195, 197, 199, 201, 202, 203, 204, 206,207, 209, 210, 211, 212, 215, 220, 224, 228,237, 238, 239, 240, 241, 244, 245, 250, 279,280, 282

—attractiveness of, 205, 206, 283, 284—backwards, 233—costs of, 172, 184, 194, 202—deep, 127—foreign, 196, 200—forward, 233—relative prevalence of, 16, 184, 260—upstream, 212intrafirm imports, 16, 19, 21, 182, 220, 221,230, 245, 246, 253–54, 296

—share of, 20, 22, 23, 24, 183, 201, 214, 222,224, 225, 226, 228, 231, 232, 234, 236, 238,239, 241, 242, 244, 245, 246, 248, 249, 250,252, 258, 260

intrafirm trade, 20, 22, 32, 131, 187, 221, 222,223, 230, 243, 244, 248, 253, 254, 255, 256,291

—share of, 16, 19, 20, 180, 181, 182, 183, 184,189, 196, 199–202, 219, 222, 223, 224, 225,226, 227, 228, 229–32, 235, 236, 237, 239–40,242, 246, 247, 249, 250, 253, 258, 277,278–79, 283, 285, 293

iPad, 5, 9, 133, 220


324 • Index

Irac, D. M., 256Ishii, J., 6Italy, 25, 26, 144, 233, 254, 258Itskhoki, O., 61

Jensen, J. B., 32, 38, 44, 56, 148, 253, 304Johnson, M., 59Johnson, R. C., 6, 7Jones, R. W., 9, 29Joskow, P. L., 217Jovanovic, B., 61Jung, B., 68

Kaufmann, D., 305Keefer, P., 92Keuschnigg, C., 201Khandelwal, A. K., 52Klein, B., 173, 174Klenow, P. J., 35Knack, S., 91knowledge, 154, 254—common, 96Kogut, B., 218Kohler, W., 257, 258Kondratowicz, M., 7Koopman, R., 6Koren, M., 52Kortum, S., 39, 50, 51, 52, 53, 55, 152, 153, 154Kraay, A., 305Kramarz, F., 53Kremer, M., 9Krugman, P., 29, 30, 31, 32, 33, 35, 38, 39, 214Kuhn, T. S., 31Kumar, N., 254Kuzmina, O., 257

labor markets, 61, 247, 261Lafontaine, F., 15, 174Lall, S., 254Langenmayr, D., 201Lanz, R., 7, 254La Porta, R., 25, 73, 158, 306Larch, M., 68Lavergne, R., 253law, 10, 11, 25, 82, 85, 154, 158, 159, 162, 164,251, 305

Leamer, E. E., 29Lee, J. W., 305legal origins, 71, 73, 74, 89, 90, 92Legros, P., 215, 260Lelarge, C., 53

Lerner, A., 28Levchenko, A., 87, 129, 148, 150, 157, 158, 160,161, 164, 235, 247, 248, 303, 304

Levin, J., 15Li, Z., 254lock-in, 12, 101–2, 126Lopez-De-Silanes, F., 25, 73, 158, 306Los, B., 221Lu, D., 36Lu, Y., 209

managers, 97–98, 101, 103, 108, 110, 111, 116,119, 175, 192, 215, 216

Manova, K., 79, 89Mansfield, E., 218Marcouiller, D., 69, 70, 71, 82Marin, D., 216markets, 30, 31, 34, 35, 36, 38, 54, 60, 66–69,74, 80, 116, 142, 175, 190–92

—foreign, 31, 34, 36, 40, 74—secondary, 116, 117, 207Markusen, J. R., 189Marvakov, J., 301Maskin, E., 9, 100Masten, S. E., 217Mastruzzi, M., 305McFetridge, D. G., 218McKenzie, L., 28McLaren, J., 190, 191mechanism design, 100Melitz, M. J., 27, 32, 33, 35, 37, 38, 39, 40, 41,43, 46, 56, 59, 60, 61, 62, 67, 71, 79, 90, 95,96, 158, 304, 306

Melitz model, 32, 33, 35, 40, 60, 61, 62–63, 68Mexico, 17, 172Meyer, L., 59Midler, P., 94, 98, 99Milgrom, P., 100Mill, J. S., 28Mion, G., 67, 76, 77, 256Miroudot, S., 7, 254misbehavior, 76, 80, 81, 86, 177—counterparty, 79—potential, 177Moenius, J., 82Monteverde, K., 217Mookherjee, D., 62Moore, J., 63, 193, 195, 214multinational firm boundaries, 14, 15, 20, 174,175, 189, 191, 194, 215, 217, 218, 219, 226,229, 230, 236, 239, 253, 254, 257, 259


Index • 325

multinational firms, 14, 15, 16, 31–32, 50, 172,174, 180, 189, 201, 214, 215, 221, 233, 253,254, 255, 257, 259

—foreign-based, 220—internalization decisions of, 189, 218, 219,261

Mutreja, P., 138

Nash bargaining. See bargainingNBER-CES Manufacturing Industry Database,22, 134, 135, 143, 298, 299, 301

Neary, P., 29negotiations, 94, 113, 116, 119, 120, 125, 154—bilateral, 123—direct, 127—ex-post, 102, 108, 119, 209—real, 94Neiman, B., 52Newhouse, J., 171Newman, A. F., 215, 259, 260New York Convention, 12, 81, 90Nguyen, D. X., 60Noguera, G., 6–7North American Industry ClassificationSystem (NAICS), 22, 24, 130, 132, 140, 231,290, 293, 299, 303, 304

—five-digit, 290, 301—six-digit, 45, 136, 293, 298, 300Novy, D., 33Nunn, N., 10, 85, 87, 88, 89, 118, 129, 130,132, 136, 140, 144, 157, 158, 159, 160–61,164, 227, 228, 241, 247, 253, 296, 298,300, 302

Nunn measure of contractibility, 148, 149, 150,235, 236, 240, 303

Nunn-Trefler correction, 144, 149, 159, 162,233, 234, 235, 248

offshoring, 5, 6, 24, 40, 41, 42–45, 48, 50, 51,93, 95–96, 107, 119, 126, 127, 143, 144, 145,146, 147, 148, 153, 175, 178, 183, 185, 187,222, 224, 266, 270, 279, 293

—equilibrium profitability of, 205, 209—extensive margin of 157, 182, 201—firm-level extensive margin of, 152, 242—fixed costs of, 54, 55, 95, 110, 176—level of, 49, 246, 248—outsource, 223—profitability of, 108, 111, 165, 169—relative prevalence of, 46, 49

offshoring shares, 135, 136, 145, 147, 148, 149,151, 152, 156, 159, 165, 226, 229, 266, 268,275, 299

—construction of, 139, 142, 298, 299—country-industry-level, 298—explaining, 143, 242, 252—industry-level, 298—key determinants of, 140, 142—recorded, 296—sectoral, 138—zero, 144Ohlin, B., 28Oldenski, L., 191, 253Olley, G. S., 45, 258, 259Olsen, M., 91opportunism, 173, 174, 191optimal contracts, 62, 109organizational decisions, 126, 169, 171, 190,215, 261, 281

organizational forms, 176, 179, 180–83, 188,190, 195, 199, 200, 201, 204, 205, 207, 241,243, 244, 255, 257, 258, 259

organizational modes, 170, 171, 177, 187, 211,282

Ornelas, E., 60, 67, 76, 77, 126Osborne, M. J., 120Ottaviano, G. I. P., 33outsourcing, 5, 176, 178, 184, 185, 187, 190,191, 195–97, 199, 201, 203, 204, 206, 210,212, 215, 223, 243, 244, 255, 258, 280, 284

—contractual efficiency of, 197, 202, 211—relative profitability of, 205ownership, 169, 177, 193, 196, 217, 254, 259—foreign, 254, 260ownership decisions, 195, 214, 215, 220—global, 172ownership rights, 171, 197, 234ownership structure, 14, 19, 171, 176, 187, 197,205, 214, 243, 244

Pakes, A., 45, 258, 259parents, 22, 132, 144, 233—foreign, 254—global, 259Pareto, 35, 38, 39, 46, 106, 182Pareto distribution, 46, 66, 67, 106, 133, 182,186, 188, 200, 222, 267, 277

partial contractibility, 101, 107, 111, 112, 113,115, 119, 123, 154, 177, 183, 204, 205, 206,270, 275, 279, 282, 285

Pavcnik, N., 39, 52


326 • Index

payment, 53, 61, 76, 91, 98, 101, 103, 106, 110—ex-ante, 80—post-shipment, 79, 90—upfront, 147Peters, M., 53Pierce, J. R., 300, 302Pistor, K., 82plants, 5, 24, 31, 44, 254, 259—foreign-owned, 254—soybean processing, 59productivity, 9, 35, 36, 37, 38, 39, 43, 44, 46–48,50, 53, 60, 61, 63, 65, 71, 87, 96, 106, 124,133, 153, 179, 182, 185, 186, 199, 222, 232,241, 242–43, 255, 267, 277, 302

—aggregate, 31—firm, 46, 51, 54, 66, 188—input-location-specific, 51—physical, 42—revenue-based, 52—technological, 155—total factor, 45, 258productivity dispersion, 106, 128, 134, 136,138, 139, 140, 143, 144, 183, 201, 227, 229,231, 234, 240, 245, 246, 302

property-rights model, 188, 195, 196, 199, 201,202, 205, 209, 221, 222, 223, 224, 228, 231,234, 236, 238, 239, 240, 241, 242, 244, 249,250, 252–53, 255, 258, 260, 278, 279, 283, 284

property-rights theory, 170, 171, 193, 194, 197,204, 205, 210, 213, 214, 219, 226, 227, 239,240, 241, 254, 255

Puga, D., 216

Qiu, L. D., 190quality, 4, 11, 22, 25, 30, 66, 70, 81, 82, 84, 86,87, 88, 89, 90, 99, 112, 115, 260

—judicial, 25, 88, 89—legal, 25, 90

Ragoussis, A., 7Rajan, R. G., 89, 147, 149, 151, 158, 159, 160,161, 236, 247, 304

Ramaswami, V. K., 126Ramondo, N., 32Rappoport, V., 32Rauch, J., 10, 86, 87, 148, 191, 253, 303Rauch classification, 87, 303Redding, S. J., 35, 38, 39, 40, 44, 56, 61, 67, 148,253, 304

related-party imports, 20, 225, 229, 232, 291,293, 296

related-party trade, 16, 20, 219, 220, 224, 225,253, 254, 290, 291, 301

related-party trade database, 219, 233, 253,256, 260, 261

relationship specificity, 116, 117, 118, 120, 132,174, 193, 195, 196, 207, 208, 218, 223, 224,228, 234, 235, 239, 241, 245, 275

—variable degrees of, 177, 183renegotiation, 97, 173, 176, 266—costly, 191residual rights, 170, 193, 203Rey, P., 100Ricardo, D., 28risk, 25, 79, 169—default, 91—enforcement, 100—expropriation, 82Rodríguez-Clare, A., 35, 39, 56, 68, 82Rodrik, D., 12Romalis, J., 151, 302Romeo, A., 218Rossi-Hansberg, E., 9Roth, A. E., 108Ruano, S., 257Rubinstein, A., 108, 120Rubinstein, Y., 35, 71Ruhl, K. J., 23, 32, 253Rybczinski theorem, 29

Samuelson, P., 28Schmidt-Eisenlohr, T., 79, 91Schott, P. K., 32, 38, 44, 56, 135, 148, 228, 253,296, 299, 300, 302, 304

Schwarz, C., 209Scorse, J., 4search frictions, 62, 101, 189, 190secondary market price, 117security, 25, 81, 87Segura-Cayuela, R., 60selection, 15, 35, 36, 37, 42, 43, 44, 45, 48, 49,53, 54, 66, 72, 75, 76, 222, 224, 228, 234, 236,239, 243, 245, 246, 249, 266, 278

sequential production, 123–26, 185, 212, 237Shapley, L. S., 120Shapley value, 120, 121, 209Shepherd, G. B., 30Shleifer, A., 25, 73, 158, 306Siddharthan, N. S., 254Slade, M., 15, 174Smolka, M., 257, 258Sony Corporation, 172, 193


Index • 327

sorting pattern, 44, 45, 47, 49, 178, 180, 199,201, 222, 229, 255, 258, 259

—equilibrium, 241—implied, 278Spain, 45, 48, 144, 258, 259, 277specificity, 150, 155, 165, 190, 235, 236, 239,249, 251, 276, 303

—asset, 173—buyer, 240—degree of, 116, 118, 208—partial, 207Spencer, B. J., 190Staiger, R. W., 9, 126, 127Stehrer, R., 221Stiglitz, J. E., 30Stolper-Samuelson theorem, 29strategy, 41, 179, 196, 199, 242—dominated, 178, 185, 199—empirical, 82, 89, 165—identification, 130subsidiary, 144, 171Suedekum, J., 209suppliers, 5, 12, 13, 14, 25, 52, 102, 107, 116,117, 118, 120, 121, 122, 123, 124, 125, 139,147, 154, 171, 177, 189, 194, 204, 209, 210,211, 212, 214, 215, 226, 227, 239, 240, 254,257, 259, 280, 283, 298

—alternative, 101—coal, 217—domestic, 187, 196—downstream, 125, 212—foreign, 125, 143, 171, 180, 191, 218, 230, 261—global, 5—integrated, 257—multiple, 5, 107, 123, 171, 177, 183, 211, 271—upstream, 189, 212surplus, 61, 98, 99, 120, 121, 124, 125, 126, 185,189, 190, 194, 203, 206, 211–12

—distribution of, 203—ex-ante, 206—ex-post, 122, 204, 205—joint, 61, 119—net, 61symmetric Nash bargaining, 102, 111, 113,116, 197, 201, 205, 267

Syverson, C., 16, 178, 221Szeidl, A., 52

take-it-or-leave-it offer, 62, 64, 101, 103, 190Tang, H., 62, 254, 301Tao, Z., 209

tariffs, 135, 136, 137, 139, 144, 155, 157, 161,162, 163, 227, 228, 230, 231, 241, 244, 249,251–52, 300

—applied, 135, 300—effect of, 143, 162technology, 25, 29, 30, 34, 41, 48, 50, 113, 117,119, 209, 213, 259

—advanced, 25—communication, 3—constant-returns-to-scale, 34Teece, D. J., 217Thomas, J., 63Thomas, C., 257Timmer, M. P., 221Tinbergen, J., 69Tintelnot, F., 50, 54, 56, 261Tirole, J., 100, 216Tomiura, E., 255, 258Topalova, P., 52Toubal, F., 256, 257trade, 6, 7, 9, 16, 20, 29–31, 35, 39, 55, 62, 65,67, 71, 72, 73, 77, 81, 84, 85, 89, 96, 102, 107,108, 127, 129, 142, 148, 151, 158, 191, 195,207, 213, 215, 220, 233, 247, 253, 254, 291,296, 298

—bilateral, 214—final-good, 52—foreign, 28—intensive margin of, 66, 73, 78, 89—intersectoral, 29—intraindustry, 89—non-related-party, 170—ordinary, 254—processing, 254—unreported, 229trade barriers, 4, 36, 69, 70, 136, 241, 245, 246,249, 251, 258

—bilateral, 72—iceberg, 85trade costs, 9, 12, 31, 39, 41, 128, 136, 147,155, 165, 182, 189, 201, 222, 279, 300,302

—bilateral, 84—iceberg, 34, 81trade elasticity, 39trade finance, 90, 91, 93trade frictions, 38, 68, 135, 147, 157, 161, 228,244, 258, 279

trade liberalization, 4, 39—effects of, 31, 61trade policy, 126, 260


328 • Index

trade theory, 28, 29, 31—neoclassical, 28, 29, 30—new, 9, 29, 30, 31, 32, 214—traditional, 191transaction costs, 170–72, 174, 183, 187, 191,193, 195, 196, 197, 198

—arm’s-length, 179—sources of, 170, 174, 192, 248transaction-cost theory, 169–78, 180, 182, 184,186, 188, 189, 190, 191, 192, 197, 217, 218,227, 241, 248, 254

transfer, 16, 63, 68, 103, 110, 190, 270—exchange lump-sum, 110, 215—initial, 110—lump-sum, 100, 103, 113, 176transfer prices, 195, 201Trefler, D., 29, 87, 132, 136, 140, 144, 158, 161,216, 227, 228, 233, 253, 296, 298, 300, 302

Tsumagari, M., 62Turner, J. L., 126

unbundling, 5underinvestment, 108, 109, 194United States, 15, 16, 20, 24, 25, 29, 31, 45, 69,91, 94, 129, 130, 131, 132, 133, 134, 135, 139,144, 157, 159, 162, 218, 220, 221, 231, 232,233, 235, 237, 238, 240, 253, 254

unit labor requirements, 34, 41, 153—inverse, 50Universitat Pompeu Fabra (UPF), 3upstreamness, 7, 8, 125, 305upstream stages, 123, 125, 126, 185, 211, 212,213, 280, 281

value chain, 4, 5, 7–8, 13, 123, 124, 125, 133,169, 171, 184, 212, 213, 221, 237, 304, 305

—slicing of the, 5Van Biesebroeck, J., 209van Djik’s Orbis Database, 132, 144Vanek, J., 29, 30van Wincoop, E., 39varieties, 5, 30, 31, 33, 34, 39, 40, 52, 98, 100,132, 255, 257

—continuum of, 33—final-good differentiated, 96

VAX ratio, 6Venables, A. J., 67Verdier, T., 216, 256Vernon, R., 215vertical integration, 14, 15, 171, 176, 187, 193,194, 210, 211, 215, 224, 244

—domestic, 176, 260Vienna Convention, 11, 13Vilarrubia, J. M., 60Viner, J., 172Vishny, R., 73Vries, G. J., de, 221

Wagner, S., 218Wang, Z., 6Waugh, M. E., 84, 85Wei, S.-J-., 6Weinstein, D. E., 29, 91, 136, 148, 156, 228, 238,302, 303

welfare, 15, 39, 65, 68—social, 261Whinston, M. D., 217Williamson, O. E., 101, 171, 173, 174, 191,192

World Bank, 3, 4, 79, 93, 135, 158, 300, 306world economy, 4, 14, 15, 32, 40, 93World Trade Organization (WTO), 4, 127, 260Worrall, T., 63Wright, G. C., 7, 132, 142, 143, 144, 159, 231,233, 248, 294, 296, 297–98, 300

Wright correction 143, 144, 149, 159, 162, 232,233, 234, 235, 296, 298, 299

Yeaple, S. R., 31, 32, 46, 56, 227, 254Yeats, A. J., 6, 7Yi, K-.M-., 6, 7Yu, Z., 79

Zander, U., 218Zeile, W. J., 253Zhang, L., 209Zhang, Y. 62Zhu, S. C., 29Zingales, L., 89, 147, 149, 151, 158, 161, 236,304

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I Introduction II Location III Internalization IV Appendixes · 2020. 6. 12. · Figure1.1 Ratio of Value Added to Gross Exports (VAX), 1970–2009. Source: Johnson and Noguera (2012b)