global sourcing antras & helpman 2004. overview n-s model final goods producers situated in...
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Global SourcingAntras & Helpman 2004
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Overview• N-S Model• Final Goods Producers situated in North.• Choice of location to source inputs
• Equilibrium in which firms with different productivity levels choose different ownership structures
• Effects of within-sectoral heterogeneity and variations in industry on prevalance of organizational forms.
• Antràs 2003 with incorporation of heterogeneity a la Melitz 2003.
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Background• Different ownership models: Standard vertical integration,
FDI, outsourcing abroad, outsourcing in domestic country• Example: Intel’s FDI strategy• Example: Nike’s arm’s-length import strategy• Powerful role of international specialization• WTO 1998 Annual Report: In the production of an
American car, 30% of the car’s value in Korea, 17.5%in Japan, 7.5% in Germany…only 37% of production value in America!
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The Model• representative consumer in each country with quasi-linear
preferences:
• Aggregate consumption in sector j is a CES function• Elasticity of substitution within sector between varieties:
1/1-Alpha
• Inverse Demand function:
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Technology• Producers of differentiated goods face a perfectly elastic supply
of labor.• wN > wS
• Monopolistic competition• As in Melitz (2003), producers needs to incur sunk entry costs
wN fE, after which they learn their productivity: θ G (θ).∼
• As in Antràs (2003a), final-good production combines two specialized inputs, according to the technology:
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Technology• H: final-good producer (agent H), m: supplier (agent M).• Sectors vary in their intensity of headquarter services• Within sectors, firms differ in productivity θ• After observing θ, H decides exit or produce.• Producing incurs additional fixed costs depending on • k {V, O} and l {N, S},∈ ∈
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Contracts• Incomplete contracts:
• δN ≥ δS In times of contractual breach, Integration in North can recover a higher fraction of output.
• The outside option of H under outsourcing is zero.• The outside option of M is zero regardless of ownership
structure and location.• H’s profit-maximizing organizational mode will also maximize
joint profits.
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Equilibrium• Profit function:
• By choosing k and l, H is chooses triplet (βl
k, wl, f lk)
• Profit is decreasing in f and w
• πlk is largest when βl
k = β (∗ η)
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Industry Equilibrium
• Upon observing θ, a final-good producer H chooses the ownership structure and the location maximizing profit, or exits the industry and forfeits the fixed cost of entry wN fE
• j• Firms with θ ≥ θ (X) stay in the industry• Free entry condition:
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Organizational Forms: Trade offs• Location decision: Variable costs are lower in the South, but
fixed costs are higher there.
• Integration decision: Integration improves efficiency of variable production when the intensity of headquarter services is high, but involves higher fixed costs. This decision will depend on η, but also on θ.
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Component Intensive Sector• • This implies ψO (η) > ψV (η) for l = N, S, which together with the
fixed costs ordering implies that any form of integration is dominated in equilibrium.
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Headquarter Intensive Sector• All four organizational forms exist in equilibrium
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Relative Prevalence• Relative prevalence is measured by the share of products
produced in various organizational forms (V or O, in N or S).• Distribution:• σMO: the fraction of active firms that outsource in country l in
the component-intensive sector.• Then:
• Substituting for the cutoffs yields:
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Relative Prevalance – Component-intensive
• Decline in Southern wage rate?
• Fall in Transport costs?
• Increase in dispersion of productivity?
z
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Relative Prevalance – Headquarter-intensive• A fall in the relative wage in the South or in trading costs, raise
the share of imported inputs and also raise outsourcing relative to integration in every country.
• Industries with more productivity dispersion (lower z), have a higher share of imported inputs and integration is higher relative to outsourcing in every country.
• Sectors with higher headquarter intensity (higher η), the share of imported inputs is lower and integration is higher relative to outsourcing. Consistent with Antràs (2003a) that the share of intra-firm imports in total U.S. imports is significantly higher, the higher the R&D intensity of the industry.