Location of vertically linked industries: agglomeration versus comparative advantage

This paper analyses the effects of trade liberalisation on the location of manufacturing firms that are vertically linked and differ in factor intensities. I extend the new economic geography literature, by embedding a model with vertical linkages within a Heckscher-Ohlin framework. I show that lower trade costs can lead to an agglomeration of all upstream and downstream firms in one country, even when they differ in factor intensities. These industrial location patterns do not always lead to factor price convergence; and may result in an increase in returns to both factors in the country where the agglomeration locates.     

Agglomeration economies and location choice of Korean manufacturers within the United States

Employing the micro data for 1997–2004, we investigate the location decision of Korean-affiliated manufacturing investments in the United States. The conditional logit estimates confirm that although industry-specific Korean agglomeration and domestic agglomeration play an important role, the Foreign Direct Investment (FDI) location is more sensitively affected by the interstate difference in endowment conditions than by the same nationality agglomeration. Both business service and intermediate good agglomeration are main determinants of FDI location. Furthermore, estimation results show substantial change in the location pattern after recovery from the Asian financial crisis. We find quite different patterns of location decision across industry groups; dispersion forces work greater than the agglomeration force in the consumer goods industry, forward linkages with US upstream firms can be seen in the assembly and processing industry, and typical follow-the-leader pattern mixed with market potential effect by Korean immigrants is seen in the basic material manufacturing industry.     

Evaluating investment projects in the presence of sectoral linkages1

In this paper we develop a framework to assess the economic impact of foreign investment projects. If investment projects interact with other industries in the host economy, either by buying inputs locally or by selling their own product to local downstream firms, they can create sectoral linkages. The expansion of upstream and downstream industries can feed back to the project's own industry leading to a further expansion of the local industry. We study the circumstances under which investment projects lead to the creation of sectoral linkages and characterize the factors that determine the project's welfare impact. We link analytical findings to case studies undertaken for the EBRD.     

Exposure to FDI and new plant survival: evidence in Canada

Abstract This paper examines the effects of FDI on indigenous new plants’ survival, through intra‐ and inter‐industry economic linkages. It includes all manufacturing plants born to indigenous firms from 1973 to 1997 in Canada. The study finds that indigenous plants tend to have shorter lives (more deaths) due to competition with FDI affiliates operating in the same industry, but they benefit from FDI affiliates operating both in downstream industries as customers and in upstream industries as suppliers. The positive inter‐industry effects of FDI outweigh the negative intra‐industry effects, resulting in a net positive impact of FDI on the durations of indigeneous plants.     

Does Tariff Induce Intellectual Property Right Protection and Reduce Incidence of Piracy?

We consider a model with North exporting a copyrighted product to South where there is IPR violation, and South exports a basic good to North. We examine the impact of North's imposition of import tariff on South's monitoring of IPR violation and the incidence of piracy. If South values IPR compliance “lowly”, then tariff imposition do not alter the pre‐tariff no monitoring equilibrium outcome but unambiguously raises the incidence of piracy. If IPR compliance is valued “highly” then tariff either switches the equilibrium outcome from not monitoring to monitoring or increases its rate. However, the incidence of piracy may increase.     

Does FDI in manufacturing cause FDI in business services? Evidence from French firm‐level data

Abstract .  This paper uses a large French firm-level data set to evaluate the determinants of location choices in services. In a first step, estimates for four broad services sectors are compared with the estimates for the manufacturing sector. Using a discrete choice model, we find that this framework does fairly well in explaining location choices in services and that the parameter estimates for services are close to the ones for manufacturing. We then investigate whether the similarity in estimated parameters is due to a complementarity between location choices in manufacturing and in services, in the sense that manufacturing location choices may cause the location of services. A particularly appropriate services sector, for this purpose is the business services sector, for which input-output linkages with the manufacturing sector are particularly strong. It is found that the downstream demand of French manufacturing firms has a positive effect on the location choice probabilities of French business services firms. This effect is robust.     

Does FDI Facilitate Domestic Entry? Evidence from the Czech Republic

This paper analyzes the impact of FDI on domestic firm entry and firm size distributions in the Czech Republic during 1994–2000. We find that larger foreign presence stimulates the entry of domestic firms within the same industry, indicating the existence of positive horizontal spillovers from FDI. We also find evidence of significant vertical entry spillovers—FDI in downstream (upstream) industries initiates entry in upstream (downstream) sectors. Our results also show that entry spillovers through vertical linkages are stronger than horizontal spillovers and that while service industries benefit from both horizontal and vertical spillovers, manufacturing industries do not experience significant positive entry spillovers of any kind. We also find that country of origin of FDI matters—horizontal spillovers are driven by FDI from the EU countries. The right skewness of the firm size distributions in industries without FDI further emphasizes an important role of FDI presence for overall industry dynamics.     

Plant location and strategic environmental policy with inter-sectoral linkages

In recent debates on trade liberalisation the concern has often been expressed that with more competitive international trade governments will be worried that by setting tougher environmental policies than their trading rivals they will put domestic producers at a competitive disadvantage, and in the extreme case this could lead to firms relocating production in other countries. The response by governments to such concerns will be to weaken environmental policies (‘eco-dumping’). In competitive markets such concerns are ill founded, but there is a small amount of literature which has analysed whether governments will indeed have incentives for eco-dumping in the more relevant case of markets where there are significant scale economies; even here there is no presumption that the outcome will involve eco-dumping.In this paper we extend the analysis of strategic environmental policy and plant location decisions by analysing the location decision of firms in different sectors which are linked through an input-output structure of intermediate production. The reason why we introduce inter-sectoral linkages between firms is that they introduce an additional factor, relative to those already analysed in the literature, in the plant location decision, which is the incentive for firms in different sectors to agglomerate in a single location. This has a number of important effects. First, there is now the possibility of multiple equilibria in location decisions of firms. Following from this there is the possibility of catastrophic effects where a small increase in an environmental tax can trigger the collapse of an industrial base in a country; however there is also the possibility that a country which raises its environmental tax could attract more firms to locate in that country, because of the way the tax affects incentives for agglomeration. Finally, and again related to the previous effects, there is the possibility of a hysteresis effect where raising an environmental tax in one country can cause firms to relocate to another country, but subsequently lowering that tax will not induce firms to relocate back into the original country.We consider a simple model with two countries, two industries, an upstream and a downstream sector, and two firms per industry. The analysis proceeds through a three-stage game: in the first stage the governments of the two countries set their environmental policies; in the second stage the firms in both industries choose how many plants to locate and where; in the third stage firms choose their output levels, with the demand for the upstream firms being determined endogenously by the production decisions of the downstream firms. We assume that there are no limits to production capacity, so that firms do not build more than one plant in any country. However, firms may build plants in different countries because of positive transport costs. Although the model appears very simple, it cannot be solved analytically, so all the conclusions must be drawn from numerical simulations.     

Trade Policy in Lobbying Equilibrium: With Non‐Traded and Traded Final Goods and Intermediate Inputs

The paper derives trade policies endogenously for final consumption and intermediate input industries in the presence of a non‐traded sector. Contrary to what the existing literature suggests, results show that there is no definite relation between lobbying status and the direction of trade policy of an industry. Trade protection of an industry depends on how its consumption (horizontal) and production (vertical) linkages with other industries reinforce or cancel out its lobbying efforts. To cite a few results, (i) an organized industry may face trade tax, whereas an unorganized one may obtain protection; (ii) an organized downstream industry may not be able to impose trade tax to an unorganized upstream industry, (iii) an organized upstream industry may not hurt unorganized downstream industry, (iv) lobby for non‐traded industry alone can influence trade policies, and (v) lobby for traded industry affects the size of the non‐traded sector in the economy.     

双重古诺竞争下的FDI关联溢出效应

扩展了以往理论研究的基本假设,在古诺竞争框架下分析FDI进入东道国上下游双边市场时的关联溢出效应。结果显示:当FDI仅进入东道国的下游市场时,FDI产生的竞争效应会增加下游市场的总产出,从而增大对上游市场中东道国本土供应商的后向关联程度,且其增大程度与技术差距正相关;在FDI同时进入东道国上下游双边市场的情况下,上游市场的FDI会对东道国本土供应商产生挤出效应,且两者的技术差距越大,挤出效应越明显,同时会对下游市场中的东道国本土生产者产生明显的前向关联,上游市场总产出的增加使得中间产品的均衡价格下降,直接减少了下游本土生产者的边际生产成本,从而增加了其产出和利润,部分抵消了下游市场的FDI的挤出效应。     

FDI and productivity growth: the role of inter‐industry linkages

Abstract There is a large literature on the effects of foreign direct investment (FDI) on productivity through inter‐industry economic linkages. This paper contributes to the literature by focusing on the developed economy of Canada. It finds that FDI generates strong effects on total factor productivity (TFP) growth through both forward and backward inter‐industry linkages, and increase in an industry's absorptive capacity raises the effects of FDI on TFP growth through forward inter‐industry linkages. For R&D intensive industries, the effects of FDI on TFP growth through inter‐industry linkages are small, but imports turn out to be an important source for TFP growth.     

Coordination of sectoral climate policies and life cycle emissions

Drastically reducing greenhouse gas emissions involves numerous specific actions in each sector of the economy. The costs and abatement potential of these measures are interdependent because of sectoral linkages. For instance, the carbon footprint of electric vehicles depends on the electricity mix. This issue has received large attention in the literature on Life Cycle Assessments (LCA). This paper analyzes how life cycle considerations should be integrated into policy design. We model a partial equilibrium with two vertically connected sectors, an upstream (e.g. electricity) and a downstream (e.g. transportation) one. In each sector, a dirty and a clean technology are available. The clean downstream technology consumes the upstream good and may thus shift emissions to the upstream sector. Our main contribution is to detail how optimal subsidies on clean technologies should incorporate life cycle emissions when carbon pricing is limited. The optimal downstream subsidy should be corrected for all external costs generated in the upstream sector, not only unpriced pollution but also the fiscal externality due to the subsidy to the clean upstream technology. We also analyze the joint optimization of upstream and downstream policies. The upstream subsidy should not incorporate features of the downstream sector, whereas the downstream optimal subsidy depends upon the upstream sector characteristics. All results are illustrated using a calibrated example of the electrification of passenger cars.     

The transfer of workers within multinationals and ownership of foreign affiliates

We study the variation in ownership shares across affiliates of the same multinational firm. Using the micro-level data on foreign affiliates of South Korean multinationals, we construct a proxy for the headquarter intangible asset using transferred Korean workers from the parent to the affiliate. Our results show a strong relationship with the parent ownership share even after controlling for the parent fixed effect. Our empirical evidence thus extends support for the theory on multinational firm boundaries at the micro-level.     

Firm location decisions,regional grants and agglomeration externalities

We examine whether discretionary government grants influence where domestic and multinational firms locate new plants, and how the presence of agglomeration externalities interacts with these policy instruments. We find that a region's existing industrial structure has an effect on the location of new entrants. Grants do have a small effect in attracting plants to specific geographic areas, but importantly, we find that firms are less responsive to government subsidies in areas where there are fewer existing plants in their industry. This suggests that these subsidies are less effective in influencing firms' location decisions in the face of countervailing co-location benefits.     

International trade, flexible manufacturing, and outsourcing

Abstract .  This study analyzes the impact of opening up markets on the diffusion of flexible manufacturing in a general equilibrium framework. With flexible manufacturing, suppliers can service a range of downstream industries and do not have to be concerned about being held up. Instead, the vertical structure is determined by the trade-off between economies of scale in flexible manufacturing and product specificity of in-house production. The analysis derives a number of testable predictions with regard to firm size and productivity measures and shows that globalization can lead to a consolidation in upstream markets, lower real wages, and reduce welfare.     

Local linkages: The interdependence of foreign and domestic firms in Ireland

This paper contributes to the literature on backward linkages—the degree of localization in input usage, focusing on the potential interdependence between foreign and domestic producer firms. Drawing on Irish sectoral data during 2000–2013, our main objective is to empirically examine how foreign and domestic producer firms' backward linkages might dynamically influence each other, and the extent to which they respond to export intensity and productivity levels from the two groups of firms. We find an interesting asymmetric interdependence pattern: (1) domestic firms' backward linkages are not impacted by the backward linkages of foreign firms; (2) more robust backward linkages of domestic firms can potentially induce more backward linkages from foreign firms; and (3) domestic firms' productivity shocks could generate a dynamic crossover impact on foreign firms' backward linkage status, but similar shocks originating from foreign firms generate little crossover impact on domestic firms’ backward linkage status. Our result on interdependent local linkages points to a potentially important role for domestic-to-domestic backward linkage formation in promoting foreign-to-domestic backward linkages.     

A study on the military alliance of South Korea–United States with the existence of threat from North Korea: a public good demand approach

The military alliance between South Korea and the USA is examined in the context of the North Korean threat. The findings are as follows: First, South Korea is more sensitive to the North Korean threat than the USA. Second, defense goods are affected more by national income and own price than by the North Korean threat. Third, the spill-in elasticity of demand for defense goods in South Korea is increasing in absolute value. The policy implications are that South Korea needs to strengthen the military alliance with the USA and to put emphasis on national income growth in defense budget planning. We would like to thank two anonymous referees for their helpful comments. This research was supported by Korea National Defense University and Hankuk University of Foreign Studies Research Fund.     

Import sensitive products and perverse tariff‐rate quota liberalization

Abstract This paper shows that a Tariff‐Rate‐Quota's (TRQ) minimum access expansion can perversely trigger domestic price increases. Often, TRQs have prohibitive over‐quota tariffs to mimic import quotas in providing minimum market access. In the WTO's Doha Round, it is likely that countries using TRQs will avoid aggressive tariff reductions if they increase the quota portion of TRQs. We show that when the import price lies between the unit cost of production and the price received by domestic upstream firms, an increase in import quota as a share of domestic production may cause an increase in the domestic retail price.     

Agglomeration and fair wages

Abstract.  This paper implements a fair wage constraint into an analytically tractable core-periphery agglomeration model. This enables us to study the role of imperfect labour markets for the pattern of agglomeration. In the short run, a marginal increase in fair wage preferences leads to an unambiguous compression of the national factor price differential between skilled and unskilled labour, involving an increase in the unemployment rate of unskilled workers. In the long run, this mechanism renders full dispersion of an unstable equilibrium already at higher trade costs than in perfect labour markets. There is a tendency for fair wage preferences to enforce agglomeration.     

(Un)stable vertical collusive agreements

In this paper, we extend the concept of stability to vertical collusive agreements involving downstream and upstream firms, using a setup of successive Cournot oligopolies. We show that a stable vertical agreement, the unanimous vertical agreement involving all downstream and upstream firms, always exists. Thus, stable vertical collusive agreements exist even for market structures in which horizontal cartels would be unstable. We also show that there are economies for which the unanimous agreement is not the only stable one. Furthermore, the Stigler statement according to which the only ones who benefit from a collusive agreement are the outsiders need not be valid in vertical agreements.