Physical capital,knowledge capital,and the choice between FDI and outsourcing

Abstract There exist two approaches in the literature concerning the multinational firm’s mode choice for foreign production between an owned subsidiary and a licensing contract. One approach considers environments where the firm transfers primarily knowledge‐based assets and assumes that knowledge is non‐excludable. A more recent approach takes the property‐right view of the firm and assumes that physical capital is fully excludable. This paper combines both forms of capital assets in a single model. There are subtleties, and added structure is needed to establish what ex ante seems a straightforward testable hypothesis: relatively physical‐capital‐intensive firms choose outsourcing while relatively knowledge‐capital‐intensive firms choose FDI.     

International Trade and Income Inequality*

We propose a simple theory that shows a mechanism through which international trade entails wage and job polarization. We consider two countries in which individuals with different abilities work either as knowledge workers, who develop differentiated products, or as production workers, who engage in production. In equilibrium, ex ante symmetric firms attract knowledge workers with different abilities, and this creates firm heterogeneity in product quality. Market integration disproportionately benefits firms that produce high-quality products. This winner-take-all trend of product markets causes a war for talents, which exacerbates income inequality within the countries and leads to labor-market polarization.     

ON THE RELEVANCE AND COMPOSITION OF GIFTS WITHIN THE FIRM: EVIDENCE FROM FIELD EXPERIMENTS*

We investigate the economic relevance and the composition of gifts within a firm where output is contractible. We develop a structural behavioral model that identifies workers’ optimal reaction to monetary gifts received from their employer. We estimate the model using data from two separate field experiments conducted within a tree‐planting firm. We use the estimated structural parameters to generalize beyond the experiment, simulating how workers would react to different gifts on the part of the firm, within different labor market settings. We find that gifts have a role to play within this firm, increasing in importance when the workers’ outside alternatives deteriorate. Profit‐maximizing gifts would increase profits within slack labor markets by up to 10% on average and by up to 17% for certain types of workers.     

IS THE COST OF DEBT CAPITAL HIGHER FOR YOUNGER FIRMS?

Not much is known about the returns to aging (maturing) in the market for small business finance. Using a large panel of closely held micro firms, we document that the cost of debt capital is higher for young firms. The main finding of this paper is that this negative qualitative relation is also obtained when cross‐sectional variation in unobservable creditworthiness of small businesses and within‐firm (i.e., inter‐temporal) variation in their observable creditworthiness are held constant. We control for the former by firm‐specific fixed effects and for the latter by a commercial credit score. We also provide an estimate of the quantitative magnitude of the aging effect, on which both economic theory and earlier empirical research are silent. We find that when a small business ages one year, its cost of debt capital decreases by 1–2 basis points. The effect is neither negligible nor alarmingly large.     

Domestic Effects of Offshoring High‐skilled Jobs: Complementarities in Knowledge Production

We provide evidence on how changes in the use of high‐skilled workers (inventors) in a foreign location affect a firm's domestic use of the same type of worker. We exploit rich data that provide variation in the location of inventors within multinational firms across industries and countries to control for confounding firm–time and industry factors. We find that a 10% increase in the use of foreign inventors leads to a 1.9% increase in the use of domestic inventors. Our results suggest that foreign and domestic inventors are complementary in the production of knowledge.     

Is Tinkering with Institutional Quality a Panacea for Firm Performance? Insights from a Semiparametric Approach to Modeling Firm Performance

There is a large and growing literature on the impact of institutional quality on economic performance and the broad consensus is that “good” institutions facilitate better economic performance. The literature that provides micro‐level support for the policy discourse about institutional quality does not, however, account for significant intra‐country variation in reactions of firms to changes in business environments, even within the same industry, and it generally ignores the possibility that the impact of institutional quality on firm performance may not be neutral. In this paper, we analyze the impact of institutions on firm performance using an approach that enables us to overcome these problems with the stylized approach. Using cross‐country firm‐level data, we demonstrate that not only does the marginal impact of institutional quality vary significantly within countries, but also that the impact is economically significant only at the two extremes of the distribution. We view this as prima facie evidence that policies that tinker with institutional quality on the basis of the popular wisdom about the impact of these institutions on the average firm may not have the desired or expected impact, at least at the micro level.     

SPINOFFS AND THE MARKET FOR IDEAS*

We present a theory of entry through spinoffs where workers generate ideas and possess private information concerning their quality. Because quality is privately observed, adverse selection implies that the market can only offer a price that reflects the average quality of ideas sold. Only workers with good ideas decide to spin off, whereas workers with mediocre ideas sell them. Existing firms pay a price for ideas sold in the market that implies zero expected profits. Hence, firms’ project selection is independent of firm size, which can lead to scale‐independent growth. This mechanism results in invariant firm‐size distributions that resemble the data.     

ON THE REVISITED ILLYRIAN MODEL AND PERVERSITY: THE CASE OF THE LONG-RUN1

The modified theory of the Illyrian firm was developed, in part, to correct a perversity exhibited by the traditional theory of the Illyrian firm — that output rises in response to a fall in output price or a rise in fixed costs. We show that while this revised model has solved the problem for the short-run the problem remains in the long-run, and this long-run perversity may have important policy implications for the short-run as well. We also show that the under-production problem associated with the traditional LMF is mitigated (and perhaps even reversed) in the modified LMF.     

创新的合约选择与企业家精神

该文探讨熊彼特意义上的企业家在科斯一张五常企业理论中存在的合理性.经验上,相对于有形产品,就无形的产品创意进行交易和定价的费用显然要高很多.据此,该文的逻辑大致是:当产品创意的交易费用过高,以至于通过合约出让产品创意的选择受到了限制时,放弃对它进行直接交易和定价,转而对经由产品创意生产出来的有形产品进行交易和定价,就是节省交易费用的一种选择.不过,一旦创新者通过这种间接定价方式实现来自产品创意的收入,那么,理论上它也就成为现代企业理论中熊彼特意义上的创新企业家了.     

A SMOOTH AMBIGUITY MODEL OF THE COMPETITIVE FIRM

This paper examines the optimal production decision of the competitive firm under price uncertainty when the firm's preferences exhibit smooth ambiguity aversion. Ambiguity is modeled by a second‐order probability distribution that captures the firm's uncertainty about which of the subjective beliefs govern the price risk. Ambiguity preferences are modeled by the (second‐order) expectation of a concave transformation of the (first‐order) expected utility of profit conditional on each plausible subjective distribution of the price risk. Within this framework, we derive necessary and sufficient conditions under which the ambiguity‐averse firm optimally produces less in response either to the introduction of ambiguity or to greater ambiguity aversion when ambiguity prevails. In the case that the price risk is binary, we show that ambiguity and greater ambiguity aversion always adversely affect the firm's production decision.     

Increased sorting and wage inequality in the Czech Republic

This paper makes use of a linked employer–employee dataset to examine the evolution of wage inequality in the Czech Republic during 1998–2006. We find evidence of slightly increasing returns to human capital and diminishing gender inequality and document sharp increases in both within‐firm and between‐firm inequality. We investigate several hypotheses to explain these patterns: increased domestic and international competition, decentralized wage bargaining, skill‐biased technological change and a changing educational composition of the workforce. Domestic competition is found to lower within‐firm inequality whereas we find no evidence that increased international trade at the industry level is associated with higher between‐ or within‐firm wage inequality. The key factors driving the observed increase in wage inequality are increased educational sorting and the inflow of foreign firms to the Czech Republic.     

The evolutionary firm and Cournot's Dilemma

Recently, competence/capability has been introduced as a rivaland as a complement to the idea of transaction-costs as thefoundation for a modern theory of the firm. However, while thecompetence-based approach may be inspired by evolutionary economics,it does not, in its current form, provide an evolutionary theoryof the firm. To transform this competence-based approach intoan evolutionary theory, the connection between the firm andVeblen's concept of social knowledge is more fully developed.Once established, the evolutionary theory of the firm is utilisedto bypass Marshall's reconciliation problem and solve Cournot'sDilemma.     

IMMEDIATE SETTLEMENT OR ENDURING A STRIKE: THE CHOICE OF SIGNALS

Some labour contract negotiations involve strikes while most conclude with immediate settlement. This article offers a model of union‐firm negotiation with private information to show that either strikes or immediate settlement will take place in the equilibrium. Different from most signalling literature where the signals are exogenously given, this article endogenizes the choice of signals. We compare two signals, the employment level and the strategic delay. We show that the low‐revenue firm will choose the signal which gives it higher payoff while separating itself from the high‐revenue firm.     

A theory of return‐seeking firms

We introduce a theory of return‐seeking firms to study the differences between this and profit‐maximising models. A return‐seeking objective takes into account the opportunity cost of each additional resource input to a firm's production as being a potential capital input choice in an alternative project. We find that firm supply curves cease to exist in perfectly competitive markets, that supply curves may slope up as well as down, that economies of scale are necessary for any production to occur and that firms always produce on a decreasing portion of their cost curve.     

Intermediate good sourcing,wages and inequality: From theory to evidence

This paper examines the consequences of offshoring and outsourcing on domestic wages and wage inequality. I highlight the role of labor market frictions in impacting firms’ outsourcing and offshoring decisions; specifically, how differential costs of matching with workers affect the location of production (onshore or offshore) and how differential costs of assessing worker quality affect the ownership of intermediate production (intra‐firm or inter‐firm). I demonstrate how firm sourcing decisions can depend crucially on the industry skill intensity, which reflects the importance of worker–firm match quality, and as a result, the effect of offshoring on domestic labor depends on occupation and industry characteristics, as well as the ownership regime of trade. Bringing the theory to the data I rely on plausibly exogenous variation in the cost of inter‐ and intra‐firm offshoring to identify the effects of a change in each type of offshoring on domestic wages. I find strong evidence that the effect of offshoring on domestic wages—both on the average and on the wage distribution—is governed by the type of offshoring (inter‐ vs. intra‐firm), the skill intensity of the industry, and the offshorability of the occupation.     

HEDGING AND THE COMPETITIVE FIRM UNDER AMBIGUOUS PRICE AND BACKGROUND RISK

This paper examines the optimal production and hedging decisions of the competitive firm that possesses smooth ambiguity preferences and faces ambiguous price and background risk. The separation theorem holds in that the firm's optimal output level depends neither on the firm's attitude towards ambiguity nor on the incident to the underlying ambiguity. We derive necessary and sufficient conditions under which the full‐hedging theorem holds and thus options are not used. When these conditions are violated, we show that the firm optimally uses options for hedging purposes if ambiguity is introduced to the price and background risk by means of mean‐preserving spreads. We as such show that options play a role as a hedging instrument over and above that of futures.     

What makes a successful export? Evidence from firm‐product‐ level data

Abstract We analyse a very rich and unique panel database that provides information on exports at the firm‐product level. Motivated by the recent theory of multi‐product firms, we investigate what determines the survival of products in the export mix to find that, in export dynamics, characteristics of the product as well as that of the firm matter. In particular, firm productivity as well as product scale and tenure are associated with a higher export survival rate. This suggests, in line with theory, that there are firm‐ as well as firm‐product‐specific competencies that are important for shaping firms’ export mix.     

Regional service clusters and networks. Two approaches to empirical identification and development: the case of logistics in the German port city‐states Hamburg and Bremen

This article discusses two approaches to the identification and measurement of regional clusters and its networks in ‘cross‐sectoral’ services which are not available through official industrial statistics. The first approach is a ‘secondary‐statistical’ one consisting of a firm‐based blending of two separate official statistical data‐sets, industrial and ‘functional’ (that is, the professions practised within firms). Thus, a service ‘cross‐sector’ is identified across manufacturing and service industries. In the matrices resulting, weights are attached in an expert survey to the numbers of employees to aggregate the ‘real’ logistics ‘cross‐sector’. This is applied to the two German port city‐states, Hamburg and Bremen. The second approach is ‘primary‐statistical’, based on a small firms survey which generated data on ‘functional’ supplier relations (the cluster) and on project‐based ‘strategic’ cooperations (the networks within that cluster). This follows a two‐stage model of emerging clusters and ‘its’ networks. This data‐set is combined with the firms’ affiliations to branches, firm size, age and sales growth classes, in order to connect information with the industry statistics. Also, the net densities and centrality structures are calculated. The combined information provides indications of the relevance of the service cluster and its networks as factors of future regional development. The latter approach is applied to the State of Bremen only. Two results appear to be transferable beyond the German cases: first, the two approaches improve the knowledge about policy‐relevant ‘cross‐sectors’, clusters and networks; and second our knowledge about service, namely logistics, clusters and networks (for which port regions are prominent nodes) is improved. Finally, some implications for regional cluster strategies are discussed.     

Intra‐industry Knowledge Spillovers from Foreign Direct Investment in Research and Development: Evidence from China's “Silicon Valley”

This study examines a specific channel of technology diffusion from multinational enterprises to domestic firms in less developed regions: research and development (R&D) activities of multinational enterprises in the host country. Using firm‐level panel data from a Chinese science park, known as China's “Silicon Valley,” we find that the R&D stock of foreign‐owned firms has a positive effect on the productivity of domestic firms in the same industry, while the capital stock of foreign firms has no such effect. These results suggest that foreign firms' knowledge spills over within industries through their R&D activities, but not through their production activities. In addition, we find no evidence of spillovers from domestic firms or firms from Hong Kong, Macao, or Taiwan, suggesting that the size of knowledge spillovers is larger when the technology gap between source and recipient firms is larger.     

Present bias and corporate tax policies

Two major forms of corporate tax policies are dividend and profits taxes. Based on conventional corporate theory, these tax policies distort the firm's investment decisions and decrease firm value. However, this paper shows that under hyperbolically discounted preferences, dividend taxation is capable of boosting firm investment in a value‐enhancing way. The hyperbolically discounted present value can be interpreted as reflecting irrational myopic preferences or, as we demonstrate, reduced‐form implications of corporate agency issues. Both cases result in an underinvestment problem for the firm, but the firm valuation criteria differ. The optimal taxation issue is discussed under a Cobb–Douglas production function setting.