Andrew Atkeson, UC, Los Angeles and NBER, and
Ariel Burstein, UC, Los Angeles and NBER
Innovation, Firm Dynamics, and International Trade
Atkeson and Burstein present a general equilibrium model of the decisions of firms to innovate and to engage in international trade. The researchers use the model to study the changes in aggregate productivity and welfare that arise as firms exit, export, process, and product innovation decisions respond to a change in the marginal cost of international trade. They first consider three important special cases of the model that they can solve analytically: in the first, all firms export; in the second, as in the model of Melitz (2003), only the most productive firms export but firms have no productivity dynamics after entry; in the third, firms have endogenous productivity dynamics but exit and export decisions are independent of size. The researchers then extend their results to parameterized specifications of the model for which they must solve numerically. Their central finding is that, despite the fact that a change in trade costs can have a substantial impact on individual firms exit, export, and process innovation decisions, the firms free-entry condition places a constraint on the overall response of aggregate productivity to the change in trade costs. In particular, they show that the steady-state response of product innovation largely offsets the impact of changes in firms exit, export, and process innovation decisions on aggregate productivity. They also find that the dynamic welfare gains from a reduction in trade costs are very similar to the welfare gains that arise directly from the reduction in trade costs. These results suggest that micro evidence on individual firms responses to changes in international trade costs may not be informative about the macroeconomic implications of changes in these trade costs for aggregate productivity and welfare.
Maria Guadalupe, Columbia University and NBER, and
Julie Wulf, Harvard University
The Flattening Firm and Product Market Competition
Guadalupe and Wulf establish a causal effect of product market competition on various characteristics of organizational design. Using a unique panel dataset on firm hierarchies of large U.S. firms (1986-99) and a quasi-natural experiment (trade liberalization), they find that increasing competition leads firms to flatten their hierarchies, that is, firms reduce the number of positions between the CEO and division managers and increase the number of positions reporting directly to the CEO (span of control). Firms also alter the structure and level of division manager compensation, increasing total pay as well as local (division-level) and global (firm-level) incentives. The estimates show that for the average firm, span of control increased by 6 percent and depth decreased by 11 percent as a result of the quasi-natural experiment.
Federico Diez, University of Wisconsin
The Asymmetric Effects of Tariffs on Offshoring Industries: How North/South Tariffs Affect Intra-Firm Trade
Diez studies the effects of tariffs on outsourcing and offshoring. Building on the Antras and Helpman (2004) North-South theoretical framework, he shows that higher Northern tariffs reduce the incentives for both outsourcing and offshoring. Conversely, higher Southern tariffs increase incentives for both phenomena. He also shows that increased offshoring and outsourcing imply an increase in the ratio of Northern intra-firm imports to total Northern imports, which is an empirically testable prediction. Using a highly disaggregated dataset of U.S. imports and relevant tariffs, Diez finds robust evidence to support the following predictions of the model: higher U.S. tariffs increase the ratio of American intra-firm imports to total imports; and higher foreign tariffs decrease the same ratio. In the baseline results, he finds that a one percentage point increase in the American tariff is associated with a one percentage point increase in the ratio, while a one percentage point increase in the foreign tariff implies a 0.3 percentage point decrease in the ratio.
Wolfgang Keller, University of Colorado and NBER, and
Stephen Yeaple, Pennsylvania State University and NBER
Global Production and Trade in the Knowledge Economy
Keller and Yeaple present and test a new model of multinational firms to explain a rich array of multinational behavior. In contrast to most approaches, here the multinational faces costs to transferring its know-how that are increasing in technological complexity. Costly technology transfer gives rise to increasing marginal costs of serving foreign markets, which explains why multinational firms are often much more successful in their home market compared to foreign markets. The model has several key predictions. First, as transport costs between multinational parent and affiliate increase, firms with complex production technologies find it relatively difficult to substitute local production for imports from the parent, because complex technologies are relatively costly to transfer. Second, the activity of affiliates with complex technologies declines relatively strongly as transport costs from the home market increase, both at the intensive and the extensive margin. The researchers also show that as transport costs from the home market increase, affiliates concentrate their imports from the parent on intermediates that are technologically more complex. They test these hypotheses by employing information on the activities of individual multinational firms, on the nature of intra-firm trade at the product level, and on the skills required for occupations with different complexity. The empirical analysis finds strong evidence in support of the model by confirming all four hypotheses. The analysis shows that accounting for costly technology transfer within multinational firms is important for explaining the structure of trade and multinational production.