International Trade and Organization.

The NBER's Working Group on International Trade and Organization met in Cambridge on April 1. Director Gordon H. Hanson of the University of California, San Diego, organized the meeting, at which these papers were discussed:

Robert C. Feenstra, University of California, Davis and NBER, and Barbara J. Spencer, University of British Columbia and NBER, "Contractual versus Generic Outsourcing: The Role of Proximity"

Dalia Marin, University of Munich, and Thierry Verdier, Centre for Economic Policy Research, "Corporate Hierarchies and International Trade: Theory and Evidence"

Volker Nocke, University of Pennsylvania, and Stephen Yeaple, University of Pennsylvania and NBER, "Endogenizing Firm Scope: Trade Liberalization and the Size Distribution of Multiproduct Firm"

Feenstra and Spencer explore the relationship between proximity of buyers and sellers and the organizational form of outsourcing. Outsourcing can be "contractual"--in which suppliers undertake specific investments--or involve "generic" market transactions. Proximity expands the variety of products sourced through contracts abroad rather than at home, but does not change the range of generic imports. A higher-quality foreign workforce raises the variety of contractual trade, but at the expense of generics. The authors confirm these predictions using data for ordinary versus processing exports from Chinese provinces to destination markets and the predictions of an extended model that allows for multinational production.

Corporate organization varies within a country and across countries with country size. Larger countries have larger firms with flatter more decentralized corporate hierarchies than smaller countries. Firms in larger countries change their corporate organization more slowly than firms in smaller countries. Furthermore, corporate diversity within a country is correlated with the pattern of heterogeneity among firms in size and productivity. Marin and Yerdier develop a theory to explain these stylized facts and link these features to the trade environment that countries and firms face. They introduce heterogenous firms with internal hierarchies into a Krugman (1980) model of trade. The model simultaneously determines firms' organizational choices and heterogeneity across firms in size and productivity. They show that international trade and the toughness of competition in international markets induce a power struggle in firms, eventually leading to decentralized corporate hierarchies. They show further that trade triggers inter-firm reallocations towards more productive firms in which CEOs have power. Based on unique data from 660 Austrian and German corporations, they offer econometric evidence consistent with the model's predictions.

Nocke and Yeaple develop a theory of multiproduct firms and endogenous firm scope that can explain a well-known empirical puzzle: larger firms appear to be less efficient in that they have lower values of Tobin's Q. The authors extend this theory to study the effects of trade liberalization and market integration on the size distribution of firms. They show that a symmetric bilateral trade liberalization leads to a less skewed size distribution. The opposite result obtains in the case of a unilateral trade liberalization in the liberalizing country. In this model, trade liberalization affects not only the distribution of observed productivities but also productivity at the firm level. In the empirical section, the authors show that the key predictions are consistent with the data.