anu trevor swan distinguished lectures in economics
Post on 04-Jan-2016
37 Views
Preview:
DESCRIPTION
TRANSCRIPT
1
ANU Trevor Swan Distinguished Lectures in Economics
2
Major Contributions to Economics
• 1943 - circulated the first econometric model of the Australian economy– Only previous macroeconomic model was Tinbergen (1936).
• 1953 - policy instruments and targets – published 1960– foreshadowed Mundell (1999 -Nobel prize).
• 1955 - “the Swan diagram” – published in 1963– concerned with achieving both internal and external balance
• 1956 – published “Economic Growth and Capital Accumulation” – Known as the “Solow - Swan” growth model. Solow (1956)
independently published a similar model (1987- Nobel prize)
3
Trevor: Reserve Bank Board 1975 - 1985
4
Trevor and Pat Swan – early 1940’s
Understanding International Outsourcing: New Theories of Trade and
Organizational Form
Barbara J. SpencerUniversity of British Columbia and the NBER
March 8, 2007
ANU Trevor Swan Distinguished ANU Trevor Swan Distinguished Lectures in EconomicsLectures in Economics
6
Objective• Provide a perspective on international
outsourcing based on the new literature that combines the choice of organizational form with international trade.
– partly based on my survey article “International Outsourcing and Incomplete Contracts” CJE, 2005.
• Main question: What explains international outsourcing versus other options for procurement?
– What explains the decision by firms to outsource rather than vertically integrate?
– What explains the decision to outsource abroad?
IntroductionIntroduction, IO Theory, International Outsourcing, Conclusion, IO Theory, International Outsourcing, Conclusion
88
9
Outline of Talk1. Introduction
– The firm’s choice set: make or buy and location
2. Domestic outsourcing – Insights from the theory of Industrial Organization• Central concept - Incomplete contracts and the
hold-up problem • Three different theoretical approaches
3. International Outsourcing: • general equilibrium models• partial equilibrium – empirical work on outsourcing
to China
4. Conclusion - Summary and future directions
Introduction, IO Theory, International Outsourcing, Conclusion , IO Theory, International Outsourcing, Conclusion
10
Add location (domestic or foreign) to the firm’s make or buy decision
Make or Buy
Location
Internal to firm - make
Outsource - buy
Domestic Domestic Vertical Integration
Domestic Outsourcing
Foreign Foreign Direct Investment - FDI
International Outsourcing
11
Distinguish between outsourcing of specialized and generic inputs
Make or
Buy
Location
Internal
- make
Outsource - buy
Generic
Input
Specialized
Input
Domestic
Vertical Integration
- Domestic
Buy from domestic spot market
Contract with domestic supplier
Foreign Foreign direct investment (FDI)
International
-buy from foreign spot market
International-Contract with foreign supplier
12
What is meant by organizational form?
The different options for procurement correspond to different organizational forms.
Organizational forms– Vertical integration
• produce the input at home • Become a multinational firm by undertaking FDI so
as to produce the input abroad
– Outsource a specialized input • Contract with a domestic supplier• Contract with a foreign supplier
– Outsource a generic input – buy it on the market1212
Introduction, IO Theory, International Outsourcing, Conclusion, IO Theory, International Outsourcing, Conclusion
13
2. Theory – Domestic Outsourcing
Central concept - Incomplete contracts and the hold-up problem– If contracts are complete (cover every
contingency) and are enforceable, vertical structure does not matter
Three theoretical approaches– Property Rights
– Transaction Costs
– Principal-agent models/ design of incentive systems
Introduction, Introduction, IO TheoryIO Theory, International Outsourcing, Conclusion, International Outsourcing, Conclusion
14
Incomplete Contracts & Hold-up Problem• Relationship-specific investment : investment designed
for a particular firm - NO value to other firms.
– Since there is no outside market for products arising from the specific investment, the investment is rewarded only through contracts with the particular firm.
• Contract is incomplete: not possible to write contracts conditional on the level of the specific investment.
– Return that suppliers receive for investment is determined by bargaining between the parties after investment is sunk.
• Hold-up problem: investment not fully rewarded
→ too little investment or effort
Introduction, Introduction, IO TheoryIO Theory, International outsourcing, Conclusion, International outsourcing, Conclusion
Darth Vader & the Holdup Problem
• IMPERIAL OFFICER: Skywalker has just landed, my Lord
• VADER: Good. See to it that he finds his way here. Lando, take the princess to my ship.
• LANDO: You said that the princess would be left in the city under my supervision.
• VADER: I am altering the deal. Pray I don’t alter it any further.
Star Wars – The Empire Strikes BackStar Wars – The Empire Strikes Back
16
Property Rights Theory (Grossman & Hart, 1986; Hart & Moore, 1990)
• Contracts are incomplete– for both an outside supplier or a manager within the firm
• Outsourcing can reduce the hold-up problem – Property rights theory defines a firm by the ownership of assets.– Since a firm can withhold assets if bargaining breaks down, but a
manager cannot, the firm has a better bargaining position. independent suppliers have more incentive to invest
• Who should invest?– If specific investment in an input is best done by those directly
responsible for its production, then production should be outsourced to encourage investment.
– If investment in an input at the head-quarter’s level by the owner of the firm would be more productive than investment by a supplier, then
• vertical integration is more efficient
17
Transaction Costs Lower transaction costs inside the firm make
vertical integration more efficient than outsourcing
– Coase (1937); Williamson (1975, 85) Outsourcing involves costs of search and
matching (McLaren 2000)• Thickness of the market
– markets are thicker if there are more firms to match with.
More outsourcing in thicker markets
• Outsourcing may also involve inefficiencies due to incomplete contracts
Introduction, Introduction, IO TheoryIO Theory, International Outsourcing, Conclusion, International Outsourcing, Conclusion
18
Principal and agent models
• The principal is typically the owner of the firm and the agent is the manager
• The principal designs optimal contracts to induce effort by the agent under imperfect monitoring.
The greater ease of monitoring within the firm favours vertical integration
Introduction, Introduction, IO TheoryIO Theory, International Outsourcing, Conclusion, International Outsourcing, Conclusion
19
General equilibrium models• Vertical integration vs. contractual outsourcing of
specialized inputsA. Antràs (2003)- Property rights
Antràs & Helpman (2004) – Property Rights
Grossman and Helpman (2004) – Principal & Agent
B. McLaren (2000), Grossman & Helpman (2002, 2005) - Thickness of market – transaction costs
– Simplifying assumptions for general equilibrium
Partial equilibrium• Contractual vs. generic outsourcing
– Feenstra and Spencer (2006) – Outsourcing to China
Introduction, IO Theory, Introduction, IO Theory, International Outsourcing, Conclusion, Conclusion
3. International Outsourcing
20
What is new about the theory?• Traditional general equilibrium trade theory assumes
perfect competition– atomistic firms: firm size and vertical structure is not relevant
• Monopolistic competition has been widely adopted– Fixed costs determine the size of firms under free entry.– Products are differentiated– But, vertical structure and trade in intermediate goods are not
considered.
• Theories of trade and organizational form require a theory of the firm in which vertical structure matters. A major achievement has been to embed contracting models
into general equilibrium models of monopolistic competition.
Introduction, IO theory, Introduction, IO theory, International Outsourcing, Conclusion, Conclusion
21
Embeds a property rights model of the firm into a general equilibrium model of monopolistic competition and trade.• differences in factor endowments across countries
explains the choice of organizational form Prediction: Capital intensive intermediate goods are
likely to be produced by vertically integrated firms rather than outsourced
What drives the model?• Hold-up problem: alleviated if final-good firms
contribute capital to suppliers so as to share in the cost of production of specialized inputs.
• If the capital contributed is sufficiently large: property rights theory ⇨ vertical integration
Introduction, IO Theory, Introduction, IO Theory, International Outsourcing, Conclusion, Conclusion
Antràs (2003*) – Property rights
22
Share of intra-firm US imports and relative factor endowments (Antras, 2003)
23
Property rights vs principal & agent
• Antràs & Helpman (2004) - Property Rights
• Grossman and Helpman (2004) – Principal & agent
• Both papers incorporate monopolistic competition models of trade involving differences in productivity across firms that determine organizational form– Melitz (2003) introduced firm-specific differences in
productivity into general equilibrium trade models.
• But the Property Rights and Principal and Agent approaches give very different predictions as to the choice of organizational form.
Introduction, IO Theory, Introduction, IO Theory, International Outsourcing, Conclusion, Conclusion
Outsource
VerticallyIntegrate
SouthSouth
SouthSouth
NorthernNorthernFirmFirm
NorthNorth
NorthNorth
N firm -Productivity RankN firm -Productivity Rank
AH(2004)FDIFDI
11
33
44
22
25
Outsource
VerticallyIntegrate
SouthSouth
SouthSouth
NorthernNorthernFirmFirm
NorthNorth
NorthNorth
N firm -Productivity RankN firm -Productivity Rank
AH(2004)FDIFDIGH(2004)
22
33
1, 41, 4
11
33
44
22
26
B. Thickness of the Market Transaction cost approach: hold-up problem solved
by vertical integration• Outsourcing due to a fixed cost of vertical integration
Multiple equilibria possible (McLaren, 2000): • a thicker market increases outsourcing, which in turn
makes the market thicker
Grossman &Helpman (2002)• Combines thickness of market with general equilibrium
monopolistic competition
• Outsourcing based on incomplete contracts.
• Closed economy
Introduction, IO Theory, International Outsourcing, Conclusion
27
B. Thickness of the market: Domestic vs. International Outsourcing
Grossman & Helpman (2005)• No vertical integration
• Countries with more labour attract outsourcing – due to thicker markets.
• Complex results due to general equilibrium interactions:
- an expansion in Southern labour actually reduces the wage gap between the North and the South.
Introduction, IO Theory, International Outsourcing, Conclusion
28
Simplifying assumptions: general equilibrium
Requires a simplified model of contracting
• The parties share in profit through lump-sum transfers.
– May better capture profit-sharing joint ventures than contractual purchase of inputs from independent firms.
• If suppliers commit to a quantity up-front, the price of an input is zero. Otherwise inputs are priced at marginal cost.
– Realism? Customs officials could view as suspicious.
Introduction, IO Theory,Introduction, IO Theory, International Outsourcing, Conclusion, Conclusion
29
Implications for Boeing 787?
30
Problems: Airbus A380
31
Feenstra & Spencer (2006), “Contractual versus Generic Outsourcing”
Variety in intermediate goods – A final good producer, such as an automaker, requires a continuum of parts.
– parts are ordered on the continuum in terms of increasing productivity of specific investment by suppliers.
– Property Rights approach - all parts are outsourced Free entry of suppliers, but one final-good producer More structure in the model of contracts.
– Trade-off between specialized and generic parts is built into the Nash bargaining process.
Introduction, IO Theory, Introduction, IO Theory, International Outsourcing, Conclusion, Conclusion
3. International Outsourcing: partial equilibrium
32
1
4
3
2
1
Multinational
RSI Productivity
North
Assembler
Contractual Outsourcing
Generic Generic OutsourcingOutsourcing
South Supplier
Ranking
Plant in South
South Market
NorthSupplier
Feenstra and Spencer (2006)
Manufacturing Exports from China (bn $)
0
50
100
150
200
250
300
350
400
450
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
year
bn
$
FIE Processing Export Other Processing Export Ordinary Export3333
34
Variety or Volume?• Feenstra and Spencer (2006) explore the
effect of distance on the variety of exports covered by each organizational form.
• Data: manufacturing exports from each province in China to all destination countries (1988 – 2003) – Enormous literature of the effect of distance on the
volume of international trade (gravity equations), but consideration of variety is relatively recent.
Introduction; IOIntroduction; IO Theory; Theory; International Outsourcing; Conclusion; Conclusion
35
Empirical Results• Two measures of distance
– Internal distance from the province to the nearest port– External distance from the port to the destination country
• As predicted, greater internal distance reduces the proportion of exported varieties from China that
– are contractual (processing exports) rather than generic (ordinary manufactures)
– involve contracts with multinationals
• External distance from the port to the destination county has essentially no effect.
– As in standard gravity equations, the value of exports to more distant countries are reduced.
Introduction, IO Theory, Introduction, IO Theory, International Outsourcing, Conclusion, Conclusion
36
4. Summary and Concluding Remarks Why contract with foreign firms rather than produce
at home?1. Lower costs of foreign production- lower wages
• Greater physical distance reduces the variety of goods that are outsourced abroad rather than at home (Feenstra and Spencer, 2006).
2. Industries with a low capital intensity of production outsource to countries where capital is scarce (Antràs, 2003)
3. Reduced costs of international transactions• Lower costs of international search and matching
(Grossman & Helpman, 2005)
• Thicker markets due to the combining of economies with the formation of free trade areas (McLaren, 2000)
• Improvements in communications (internet)
Introduction, IO Theory,Introduction, IO Theory, International Outsourcing, International Outsourcing, Conclusion
Why contract with foreign firms rather than produce through FDI
1. High fixed costs of FDI2. Shifting of costs to component suppliers
(Grossman & Helpman, 2004)
3. Nature of differences across firms– Moderate productivity level (Antràs & Helpman, 2004)
– Very high or very low productivity (Grossman & Helpman, 2004)
– Relatively low productivity of investment (Feenstra and Spencer)
4. Low capital intensity of production (Antràs, 2003)
5. Greater geographic distance (Feensta & Spencer)
Introduction, IO Theory,Introduction, IO Theory, International OutsourcingInternational Outsourcing, , Conclusion
38
Future Directions More partial equilibrium modeling so as to
focus on the effects of policy on organizational form
Explore the strategic motives that affect outsourcing by large oligopolistic firms
Empirical research:1) distinguish between role of thicker markets and better
institutions for the enforcement of contracts
2) on the factors (distance, quality of institutions, worker skill) that link the variety of exports with organizational form.
Introduction, IO Theory,Introduction, IO Theory, International Outsourcing, International Outsourcing, Conclusion
top related