Subcontracting and vertical integration in the Spanish cotton industry1

This paper examines changes in the organization of the Spanish cotton industry from 1736 to 1860 in its core region of Catalonia. As the Spanish cotton industry adopted the most modern technology available and experienced the transition to the factory system, cotton spinning and weaving mills became increasingly vertically integrated. Asset specificity, more than other factors, explains this tendency towards vertical integration. The probability of a firm being vertically integrated was higher among firms located in districts with high concentration ratios, and rose with size and the use of modern machinery. At the same time, subcontracting predominated in other phases of production and distribution, where transaction costs appear to be less important.     

Were British cotton entrepreneurs technologically backward? Firm-level evidence on the adoption of ring spinning

I study the slow adoption of ring spinning in Great Britain's cotton industry at the end of the 19th century, which has been used as evidence of British entrepreneurs' declining efficiency and conservatism (Musson, 1959; Aldcroft, 1964; Lazonick, 1981, 1981b). To this purpose I use firm-level data from all of Lancashire's cotton firms over several years. The data are from Worrall's The Cotton Spinners and Manufacturers' Directory for the years 1885, 1886–1887, 1890, 1894, 1902, and 1910.First, I show that the vertical organization of the industry, with its firms specializing in spinning or weaving, did not act as an impediment to the adoption of the ring spinning technology, as was argued by Lazonick. In particular, I show the following: i) non-integrated firms were the first to adopt rings in Great Britain; ii) the large majority of firms that adopted rings were incumbents; iii) vertically integrated firms that were spinning only either twist or weft yarn were still in existence in 1910; and iv) only a negligible number of firms changed their organizational structure upon adopting ring spinning. I also show that a large fraction of firms installed very small numbers of ring spindles upon the adoption of ring spinning, suggesting that firms were slowly adopting ring spindles to replace old mule spindles rather than transitioning over to ring spinning at a single point in time.Then, I show that the rate at which vertically integrated firms adopted rings suddenly accelerated after 1902. I interpret this as evidence that British entrepreneurs were fully aware of the technological complementarities between rings and automatic looms. These complementarities could only be fully exploited by vertically integrated firms.     

Market Performance Implications of the Transfer Price Rule

The “transfer price rule” (TPR) defines a vertical price squeeze as an input price, output price combination set by a vertically‐integrated firm monopoly producer of an essential input that would not allow the firm's downstream unit to earn at least a normal rate of return on investment in the “as‐if” case that it had to purchase the input at the price charged independent firms. In its 2009 linkLine decision, the U.S. Supreme Court rejected the TPR for the purpose of enforcing the anti‐monopolization prohibition of Section 2 of the Sherman Act. In contrast, a vertical price squeeze, defined by a TPR‐like standard, is an abuse of a dominant position under Article 102 of the Treaty on the Functioning of the European Union. In this article, we model the impact of the TPR on market performance. We find that the TPR increases consumer surplus and net social welfare if all firms remain active in the downstream market. It sometimes induces the upstream firm to refuse to supply the downstream firm, and in such cases, consumer surplus and net social welfare are reduced. The impact of the TPR on market performance thus depends on whether or not an upstream firm can refuse to supply downstream firms on terms that would offer it at least a normal rate of return on investment.     

Multi‐Market Competition,R&D,and Welfare in Oligopoly

We investigate a multi‐market Cournot model with strategic process research and development (R&D) investments wherein a multi‐market firm meets new competitors that enter one of the markets. We show that entry can enhance the total R&D expenditures of the multi‐market firm. Moreover, the incumbent's profit nonmonotonically changes as the number of entrants increases. Depending on the fixed entry costs and R&D technologies, both insufficient and excess entry can appear. Our results imply that diversification of their products can be a useful strategy for firms.     

Downstream Research Joint Venture with Upstream Market Power

In a vertically related industry, we examine the downstream firms' incentives to invest in cost‐reducing Research and Development (R&D), and to form a Research Joint Venture (RJV), under two alternative structures of input supply: exclusive vertical relations and a single supplier. In contrast to the “hold‐up” argument, in which downstream firms invest non‐cooperatively and spillovers are low, R&D investments are higher under a single supplier than under competing vertical chains. Downstream firms' incentives to form a RJV are also stronger in the former case than they are in the latter. We identify conditions under which an RJV is beneficial for society. Integrated innovation and competition policies are also discussed.     

Vertical linkages and agglomeration effects in Japanese FDI in Thailand

This paper formally investigates how industrial linkages between Japanese firms in Thailand affect the inter-industry pattern of FDI. It does so in the context of a model of FDI where production is vertically integrated between the home and host economies, using a distinctive industry data set constructed from firm-level information. The econometric evidence indicates that, in addition to the factors that facilitate vertical integration (lower transport costs, lower labour cost, etc.), the opportunity to create industrial linkages or supply networks leads to additional clustering or agglomeration of FDI. J. Japanese Int. Economies 20 (2) (2006) 193–208.     

Quality and capacity choices in a vertical differentiation model with congestion

We consider a vertically differentiated market in which consumers’ utility is assumed to depend on the price, congestion level and the stand‐alone quality of the good or service. Two firms compete on this market, choosing capacities, stand‐alone qualities and prices. We characterize completely the subgame perfect equilibrium for the homogenous market case (where only one firm is active without congestion). We prove that both firms are active, choosing minimal differentiation along the capacity and quality dimensions. Therefore, the presence of congestion rules out market preemption as a possible outcome in equilibrium and weakens the incentive to differentiate.     

比较优势、规模经济和贸易成本:国际生产分割下垂直关联产业的空间分布

在国际生产分工背景下,比较优势和规模经济成为影响企业生产区位的重要因素。本文在新经济地理框架下构建开放条件下理论模型,探讨不同贸易成本下比较优势和规模经济对垂直关联产业空间分布的影响。结果刻画出在比较优势和规模经济共同作用下,伴随贸易成本变化出现的4种垂直关联产业空间分布模式。表明我国目前所处的国际分工地位是在现有贸易成本条件下比较优势和规模经济相互作用的均衡结果,而吸引上游产业在中国聚集是实现我国产业结构升级的合理路径。     

Access to Bottleneck Inputs under Oligopoly: A Prisoners' Dilemma?

We analyze the incentives of vertically integrated oligopolists to concede access to their bottleneck inputs to an entrant in the downstream market. First, two vertically integrated incumbents make access price offers to an entrant that chooses which one to accept, if any. Second, firms compete on Salop's circle. The firms may be asymmetrically located on the circle, to reflect differences in consumer shares. For some levels of asymmetry, the incumbents face a prisoners' dilemma with respect to conceding access to their bottleneck inputs. Entry by a downstream firm may lead to lower retail prices. However, entry may also lead to higher retail prices for the access provider and for the entrant. We also consider the cases where there are several incumbents and where the entrant makes the access price offers.     

The Impact of Multinational Presence on Domestic Investment: Firm‐Level Evidence from South Korea

In order to analyze the effects of foreign multinationals' presence on domestic firms' investment, we use a detailed firm level data set from South Korea for the 2006–2014 period. We combine it with the input‐output tables provided by the Bank of Korea to construct industry level measures of multinational presence in sectors that are horizontally and vertically linked, and estimate dynamic investment equations that are augmented with these foreign presence measures. We find a positive and significant effect of foreign presence in both horizontally and vertically linked industries on domestic firm's investment rate, with larger effects arising from multinational presence in the supplying sectors. Quantitatively, a 2 percentage point increase in the presence of multinational suppliers increases the domestic firm's investment rate by 3.24 percentage points. We also find that this effect is larger for small and medium firms, private firms, nonexporters, firms that are not part of a chaebol, and for firms in external finance dependent industries. A similar 2 percentage point increase in the foreign presence in downstream sectors increases the investment rate of domestic suppliers by 0.55 percentage points. This effect is larger if the domestic firm is part of a chaebol, or is in a less external finance dependent industry. Investment increase by 0.53 percentage points following a 2 percentage point increase in horizontal linkages.     

EQUIVALENCE OF COMPETITION MODE IN A VERTICALLY DIFFERENTIATED DUOPOLY WITH DELEGATION

This paper aims to examine the equivalence of competition mode in a vertically differentiated product market with the relative performance delegation. It demonstrates the equivalence of product quality and social welfare in this delegation game, irrespective of modes of product competition. In addition, in a three‐stage game of quality‐delegation‐quantity (or price), it shows that the delegation coefficient is different between high‐quality and low‐quality firms in an asymmetric vertical differentiated model, and a high‐quality firm makes better use of the delegation than a low‐quality firm.     

The Impact of R&D Cooperations and Mergers in Pharmaceuticals on Research Activities and Drugs Offered on the Market

In the last 10 years, the pharmaceutical industry has experienced steep, unprecedented price increases which are frequently attributed to increasing drug development costs. To cope with rocketing development costs, companies engage in Research and Development (R&D) cooperations. We study the impact of R&D cooperations on firms' research activities and drugs offered on the market. Using a comprehensive dataset, we find that R&D cooperations formed at the early stage of the drug development process increase the number of R&D projects and the number of drugs offered on the market. Late stage R&D cooperations, formed among larger firms in technology and product markets, increase firms' research activities, but reduce the number of drugs launched on the product market. Results suggest that large firms cooperating in the late research stage re‐optimize their R&D pipelines and eliminate similarly aligned research projects.     

Strategic R&D investment,competitive toughness and growth

We show, within a single industry, the possibility that R&D‐investment is non‐monotonically related to competitive toughness: increasing when competition is soft and decreasing when competition is tough. This possibility results from the combination of a Schumpeterian markup squeezing effect discouraging innovation, and a concentration effect spurring innovators. It is obtained in a sectoral model where the number of innovators is random and where non‐successful investors may remain productive. The result is extended to a multisectoral stochastic endogenous growth model with overlapping generations of consumers and firms, the number of which is endogenously determined in the capital market.     

ASYMMETRIC PRICE TRANSMISSION AND MARKET CONCENTRATION: AN INVESTIGATION INTO FOUR SOUTH AFRICAN AGRO-FOOD INDUSTRIES

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Import competition from and offshoring to low-income countries: Implications for employment and wages at U.S. domestic manufacturers

Using confidential linked firm-level trade transactions and census data between 1997 and 2012, we provide new evidence on how American firms without foreign affiliates adjust employment and wages as they adapt to import competition from low-income countries. We provide stylized facts on the input sourcing strategies of these domestic firms, contrasting them with multinationals operating in the same industry. We then investigate how changes in firm input purchases from low-income countries as well as domestic market import penetration from these sources are correlated with changes in employment and wages at surviving domestic firms. Greater offshoring by domestic firms from low-income countries correlates with larger declines in manufacturing employment and in the average production workers’ wage. Given the negative association, however, the estimated magnitudes are small, even for a narrow measure of offshoring that includes only intermediate goods. Import penetration of U.S. markets from these sources is associated with relatively larger changes in employment for arm’s length importing firms, but has no significant correlation with employment changes at firms that do not trade. Given differences in the degree of both offshoring and import penetration, we find substantial variation across industries in the magnitude of changes associated with low-income country imports.     

FOREIGN NETWORKS AND EXPORTS: RESULTS FROM INDONESIAN PANEL DATA

Most firms and plants in developing countries produce only for the domestic market and few are able to export. One plausible hypothesis is that foreign networks decrease export costs and that plants with large amounts of such networks will be relatively likely to start exporting. We focus on two types of foreign networks: foreign ownership and imports of intermediate products. Our results suggest that plants in Indonesian manufacturing with any foreign ownership are substantially more likely to start exporting than wholly domestically owned plants. The results remain robust to alternative model specifications and after controlling for other plant characteristics. There is no effect on exports of imports of intermediate products.     

Global Production Network and the Upgrading of China＇s Integrated Circuit Industry

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Local Content Requirements, Vertical Cooperation, and Foreign Direct Investment

Local content requirements (LCRs) have been observed empirically to 1) protect vertically integrated domestic industries and 2) induce inward foreign direct investment (FDI) in intermediate goods production. We examine the effects of an LCR in the context of potential FDI in upstream manufacturing by a foreign multinational and potential vertical cooperation between a host country's upstream and downstream producers. In case of vertical cooperation domestic producers have an incentive to set the price of the intermediate strategically to discourage FDI. Vertical cooperation is found to enhance the rent-shifting effect of the LCR, whereas the FDI response increases price competition and reduces domestic profits. In both cases, manufacturing efficiency and foreign welfare decrease, suggesting the need for multilateral agreement in the WTO to curb the continuing but disguised use of LCRs in industrialized countries.     

The Effects of Norms on Investor Reactions to Derivative Use

Prior research indicates that a firm's use of derivatives to manage business risks is viewed favorably by investors. However, these studies do not consider a potentially key factor in this setting—namely, the typical behavior (or norms) regarding derivatives by other firms in the industry or the firm itself. In this paper, we report the results of multiple experiments that test whether norms are influential in affecting investors’ evaluations of firms’ derivatives choices. Our results show that the generally favorable reactions to derivative use actually reverse and become unfavorable when firms’ derivative decisions are inconsistent with industry or firm norms. Somewhat surprisingly, though, we find that industry and firm norms are not viewed similarly by investors. These results expand our understanding of how investors respond to firm's derivative use decisions and demonstrate the role of norms as factors that influence investors’ judgments in financial reporting settings. Our results have implications for firm managers making decisions about derivative use.     

Quality and Quantity Competition in a Multiproduct Duopoly

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