On Some Effects of International Fragmentation of Production on Comparative Advantages,Trade Flows and the Income of Countries

In traditional trade models, whether based on technological differences or on relative factor endowments, merchandise composition and directions of trade are derived from closed‐economy conditions. But nowadays one of the basic assumptions of traditional trade models, i.e. that production processes are integrated within just one country, is being increasingly violated as previously integrated productive activities are segmented and spread over an international network of production sites: as a result, an increasingly large share of trade flows is made up of intermediate and unfinished goods being transferred from one country to another in order to be processed. In this paper we submit that such new configuration of production processes has important effects on at least three dimensions of economic research. First, we show that international disintegration of production processes leads to a lessening of the power of comparative advantages when it comes to explaining both merchandise composition and directions of trade, while it is the concept of absolute advantage to become increasingly relevant; second, we show that empirical measures of revealed comparative advantages are inherently misleading if they do not account for differences in the stage‐of‐processing of traded goods; third, we estimate a simple model of aggregate demand accounting for international trade in intermediates: results of estimation lend support to our prior that participation of a country in the process of international fragmentation of production plays a specific and significant role in determining its year‐over‐year change in GDP.     

Foreign direct investment in the banking sector: the case of Italian banks in the '90s

The present paper addresses the issue of the determinants of the growth of multinational banks upon foreign markets at a micro individual level. Theories and approaches suggested so far about globalisation of the banking sector basically relate banks' international growth to the theory of the multinational enterprise. Accordingly, this paper relies on the eclectic paradigm, which views the foreign direct investment decision to be a combination of ownership, internalisation and location advantages. Empirical evidence is provided through an econometric model based on count data techniques, with reference to the Italian case in the decade 1989–1999. Results show that the availability of resources and international experience already gathered by the parent banks have positive effects on their decision to undertake direct investments abroad. Multinational banks are also proved to grow internationally in order to internalise their pre-existing bank–client relationships, and to locate their foreign units where they can exploit positive externalities related to the presence of important international financial centres.     

The Value of Federal Sponsorship: The Case of Freddie Mac

The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 attempts to limit the risk borne by the taxpayer due to federal sponsorship of the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal National Mortgage Association by: (1) controlling their range of activities; (2) requiring a level of capital sufficient to absorb substantial losses; and (3) providing a mechanism for closure if capital is insufficient. This article estimates the impact of the capital standards on the value to the FHLMC of federal sponsorship. Although FHLMC's level of capital exceeds requirements, the federal government still bears a nontrivial portion of the FHLMC's risk.