Global Production is the first book to provide a fully comprehensive overview of the complicated issues facing multinational companies and their global sourcing strategies. Few international trade transactions today are based on the exchange of finished goods; rather, the majority of transactions are dominated by sales of individual components and intermediary services. Many firms organize global production around offshoring parts, components, and services to producers in distant countries, and contracts are drawn up specific to the parties and distinct legal systems involved. Pol Antràs examines the contractual frictions that arise in the international system of production and how these frictions influence the world economy.
Antràs discusses the inevitable complications that develop in contract negotiation and execution. He provides a unified framework that sheds light on the factors helping global firms determine production locations and other organizational choices. Antràs also implements a series of systematic empirical tests, based on recent data from the U.S. Customs and Census Offices, which demonstrate the relevance of contractual factors in global production decisions.
Using an integrated approach, Global Production is an excellent resource for researchers, graduate students, and advanced undergraduates interested in the inner workings of international economics and trade.
I survey the influence of Grossman and Hart's (1986) seminal paper in the field of International Trade. I discuss the implementation of the theory in open-economy environments and its implications for the international organization of production and the structure of international trade flows. I also review empirical work suggestive of the empirical relevance of the property-rights theory. Along the way, I develop novel theoretical results and also outline some of the key limitations of existing contributions.
The rise of offshoring of intermediate inputs raises important questions for commercial policy. Do the distinguishing features of offshoring introduce novel reasons for trade policy intervention? Does offshoring create new problems of global policy cooperation whose solutions require international agreements with novel features? In this paper we provide answers to these questions, and thereby initiate the study of trade agreements in the presence of offshoring. We argue that the rise of offshoring will make it increasingly difficult for governments to rely on traditional GATT/WTO concepts and rules—such as market access, reciprocity and non-discrimination—to solve their trade-related problems
This paper examines how costly financial contracting and weak investor protection influence the cross-border operational, financing and investment decisions of firms. We develop a model in which product developers have a comparative advantage in monitoring the deployment of their technology abroad. The paper demonstrates that when firms want to exploit technologies abroad, multinational firm (MNC) activity and foreign direct investment (FDI) flows arise endogenously when monitoring is nonverifiable and financial frictions exist. The mechanism generating MNC activity is not the risk of technological expropriation by local partners but the demands of external funders who require MNC participation to ensure value maximization by local entrepreneurs. The model demonstrates that weak investor protections limit the scale of multinational firm activity, increase the reliance on FDI flows and alter the decision to deploy technology through FDI as opposed to arm’s length licensing. Several distinctive predictions for the impact of weak investor protection on MNC activity and FDI flows are tested and confirmed using firm-level data.
This paper examines how costly nancial contracting and weak investor protection inuence the cross-border operational, nancing and investment decisions of rms. We develop a model in which product developers can play a useful role in monitoring the deployment of their technology abroad. The analysis demonstrates that when rms want to exploit technologies abroad, multinational rm (MNC) activity and foreign direct investment (FDI) ows arise endogenously when monitoring is nonveri able and nancial frictions exist. The mechanism generating MNC activity is not the risk of technological expropriation by local partners but the demands of external funders who require MNC participation to ensure value maximization by local entrepreneurs. The model demonstrates that weak investor protections limit the scale of multinational rm activity, increase the reliance on FDI ows and alter the decision to deploy technology through FDI as opposed to arms length licensing. Several distinctive predictions for the impact of weak investor protection on MNC activity and FDI ows are tested and con rmed using rm-level data.
We develop a dynamic bargaining model in which a leading country endogenously decides whether to sequentially negotiate free trade agreements with subsets of countries or engage in simultaneous multilateral bargaining with all countries at once. We show how the structure of coalition externalities shapes the choice between sequential and multilateral bargaining, and we identify circumstances in which the grand coalition is the equilibrium outcome, leading to worldwide free trade. A model of international trade is then used to illustrate equilibrium outcomes and how they depend on the structure of trade and protection. Global free trade is not achieved when the political-economy motive for protection is sufficiently large. Furthermore, the model generates both "building bloc" and "stumbling bloc" effects of preferential trade agreements. In particular, we describe an equilibrium in which global free trade is attained only when preferential trade agreements are permitted to form (a building bloc effect), and an equilibrium in which global free trade is attained only when preferential trade agreements are forbidden (a stumbling bloc effect). The analysis identifies conditions under which each of these outcomes emerges.
We study the trade policy choices of governments in an environment in which some of the trade flows being taxed or subsidized involve the exchange of customized inputs, and the contracts governing these transactions are incomplete. We show that the second-best policies that emerge in this environment entail free trade in fi nal goods but not in intermediate inputs, since import or export subsidies targeted to inputs can alleviate the international hold-up problem. We next show that the Nash equilibrium policy choices of governments do not coincide with internationally efficient choices, and that the Nash policies imply an inefficiently low level of intermediate input trade across countries. The reason is that in our environment trade policy choices serve a dual role: they can enhance investment by suppliers but, because of ex-post bargaining over prices, they can also be used to redistribute pro ts across countries. The inefficiencies inherent in the Nash policy choices of governments not only result in suboptimal input subsidies, but also in positive distortions in fi nal-good prices, even when countries cannot affect world (untaxed) prices in those goods. As a result, an international trade agreement that brings countries to the efficiency frontier will necessarily increase trade in inputs, but it may require a reduction in final-goods trade. When governments are not motivated by the impact of their policies on ex-post negotiated international input prices, the resulting policy choices are efficient, and hence a modifi ed terms-of-trade interpretation of the purpose of trade agreements can be offered, but only when governments maximize real national income. If governments preferences are sensitive to political economy (distributional) concerns, the purpose of a trade agreement becomes more complex, and cannot be reduced to solving a simple terms-of-trade problem.
The classical Heckscher-Ohlin-Mundell paradigm states that trade and capital mobility are substitutes, in the sense that trade integration reduces the incentives for capital to ow to capital-scarce countries. In this paper we show that in a world with heterogeneous nancial development, the classic conclusion does not hold. In particular, in less nancially developed economies (South), trade and capital mobility are complements. Within a dynamic framework, the complementarity carries over to ( nancial) capital ows. This interaction implies that deepening trade integration in South raises net capital inows (or reduces net capital outows). It also implies that, at the global level, protectionism may back re if the goal is to rebalance capital ows, when these are already heading from South to North. Our perspective also has implications for the e¤ects of trade integration on factor prices. In contrast to the Heckscher- Ohlin model, trade liberalization always decreases the wage-rental in South: an anti-Stolper- Samuelson result.
We generalize the Antràs and Helpman (2004) model of the international organization of production in order to accommodate varying degrees of contractual frictions. In particular, we allow the degree of contractibility to vary across inputs and countries. A continuum of firms with heterogeneous productivities decide whether to integrate or outsource the production of intermediate inputs, and from which country to source them. Final-good producers and their suppliers make relationship-specific investments which are only partially contractible, both in an integrated firm and in an arm’s-length relationship. We describe equilibria in which firms with different productivity levels choose different ownership structures and supplier locations, and then study the effects of changes in the quality of contractual institutions on the relative prevalence of these organizational forms. Better contracting institutions in the South raise the prevalence of offshoring, but may reduce the relative prevalence of FDI or foreign outsourcing. The impact on the composition of offshoring depends on whether the institutional improvement affects disproportionately the contractibility of a particular input. A key message of the paper is that improvements in the contractibility of inputs controlled by final-good producers have different effects than improvements in the contractibility of inputs controlled by suppliers.