International Trade and Organizations.

NBER's Working Group on International Trade and Organizations met in Cambridge on April 26. Pol Antras, NBER and Harvard University, organized the meeting and chose these papers for discussion:

Arnaud Costinot, University of California, San Diego and NBER, "Heterogeneity and Trade"

Discussant: Oteg Itskhoki, Harvard University

Natalia Ramondo, University of Texas, and Andres Rodriguez-Clare, Pennsylvania State University and NBER, "The Gains from Openness:

Trade, Multinational Production, and Diffusion"

Discussant: Costas Arkolakis, Yale University and NBER

Paola Conconi and Patrick Legros, ECARES, Universite Libre de Bruxelles, and Andrew F. Newman, Boston University, "Trade Liberalization and Organizational Choice"

Discussant: Emanuel Ornelas, London School of Economics 

Andrew B. Bernard, Dartmouth College and NBER; J. Bradford Jensen, Georgetown University and NBER; Stephen J. Redding, London School of Economics, and Peter K. Schott, Yale University and NBER, "Intra-Firm Trade and Product Contractibility"

Discussant: Nathan Nunn, Harvard University and NBER

Yongmin Chen, University of Colorado, Boulder; Ignatius Horstmann, University of Toronto; and James Markusen, University of Colorado, Boulder and NBER, "Physical Capital, Knowledge Capital and the Choice Between FDI and Outsourcing"

Discussant: Kalina Manova, Stanford University

Aggregate production functions are a standard feature of the trade theorist's toolbox. While this modeling device has generated some fundamental insights, it presents one obvious shortcoming: it necessarily ignores any effect that the distribution of factor endowments across agents may have on international trade flows. Costinot develops a general framework that can shed light on these effects and discusses several applications.

Ramondo and Rodriguez-Clare quantify the role played by trade, multinational production (MP), and diffusion of ideas in generating gains from "openness" They extend the Eaton and Kortum (2002) model of trade by introducing MP and diffusion of ideas. A key contribution is to model the simultaneous role of trade, MP, and diffusion, and explore some of the interactions among these different channels. Both trade and MP are substitutes with diffusion, but the relationship among trade and MP is more complex. Trade and MP are alternative ways to serve a foreign market, which makes them substitutes, but the authors also allow for complementarity by having MP rely on imports of intermediate goods from the home country. They use trade and MP data to estimate the model and quantify the gains from openness, trade, MP, and diffusion.

Conconi, Legros, and Newman embed a simple incomplete-contracts model of organization design in a standard two-country, perfectly-competitive trade model to examine how the liberalization of product and factor markets affects the ownership structure of firms. In their model, managers decide whether to integrate their firms, trading off the pecuniary benefits of coordinating production decisions with the private benefits of operating in preferred ways. The price of output is a crucial determinant of this choice, because it affects the size of the pecuniary benefits. In particular, non-integration is chosen at "low" and "high" prices, while integration occurs only at moderate prices. Organizational choices also depend on the terms of trade in supplier markets, which affect the division of surplus between managers. The authors obtain three main results. First, joint product and factor market integration leads to the convergence of organization design across countries. Second, even in the absence of factor movements, the price changes triggered by liberalization of product markets can lead to significant organizational restructuring within countries. Third, the removal of barriers to factor mobility can induce further organizational changes, sometimes adversely affecting consumers, which suggests a potential complementarity between trade policy and corporate governance policy.

Bernard and his co-authors examine the determinants of intra-firm trade in U.S. imports using detailed country-product data. They create a new measure of product contractibility based on the degree of intermediation in international trade for the product. They find important roles for the interaction of country and product characteristics in determining intra-firm trade shares. Intrafirm trade is high for products with low levels of contractability sourced from countries with weak governance, for skill-intensive products from skill-scarce countries, and for capital-intensive products from capital-abundant countries.

A somewhat older literature, supported by considerable empirical evidence, considered the multinational firm's mode choice for foreign production between an owned subsidiary and a licensing contract in an environment where the firm is transferring primarily knowledge-based assets. An important assumption in this literature is that the relevant knowledge is absorbed by the local manager or licensee over the course of time: knowledge is non-excludable. More recently, a number of papers have adopted a property-right view of the firm, and assume the application abroad of physical capital and that ownership rights guarantee that the owner retains full and exclusive rights to the capital should a relationship break down. Chen, Horstmann, and Markusen combine both forms of capital assets in a single model. Their model predicts that foreign direct investment (owned subsidiaries) is more likely than licensing when the ratio of knowledge capital to physical capital is high, or when market value is high relative to the book value of capital (high Tobin's-Q). They believe that this prediction is consistent with existing empirical evidence.