When your contract manufacturer becomes your competitor

PC maker Lenovo started out as a distributor of equipment made by IBM and other companies; now it has formed a joint venture with IBM and will eventually affix its own logo to its computers. Shanghai Automotive Industry Corporation (SAIC) started out manufacturing vehicles for Volkswagen and GM; now it's preparing to sell its own cars in China, Europe, and North America. Lenovo and SAIC represent a host of formerly anonymous makers of brand-name products that are breaking out of their defined roles and pushing the brands themselves aside. In this article, the authors explore the double-edged relationships original equipment manufacturers (OEMs) forge with their contract manufacturers (CMs). On the one hand, an OEM can reduce its labor costs, free up capital, and improve worker productivity by outsourcing all the manufacturing of a product. The company can then concentrate on value-adding activities--research and development, product design, and marketing, for instance. On the other hand, an OEM that retains a contract manufacturer may find itself immersed in a melodrama replete with promiscuity (the ambitious CM pursues liaisons with other OEMs), infidelity (the OEM's retailers and distributors shift their business to the upstart CM), and betrayal (the brazen CM transmits the OEM's intellectual property to the OEM's rivals or keeps it for itself when the contract is up). OEMs cannot simply terminate their outsourcing arrangements--they need contract manufacturers in order to keep specializing, adding value, and staying competitive. But OEMs can manage these relationships so that they don't become weak or the CMs too strong. Doing so requires modesty about revealing trade secrets; caution about whom one consorts with; and a judicious degree of intimacy, loyalty, and generosity toward partners and customers.     

Valuing the implicit guarantee of the Federal National Mortgage Association

The paper analyzes the guarantee of the Federal National Mortgage Association (FNMA). Rather than try to price the guarantee, we used time-series estimates of its value from Kane and Foster to infer the behavior of FNMA in exploiting the guarantee. The results are consistent with a model that predicts that FNMA does not take as much risk as it might. Rather, it trades off risk and return, but it does increase risk and exploit the guarantee when it gets in trouble (as it did in 1981).We have received helpful research assistance from Peter Carr and Bruno Gerard.     

Emerging economies in the 2000s: Real decoupling and financial recoupling

The paper documents an intriguing development in the emerging world in the 2000s: a decoupling from the business cycle of advanced countries, combined with the strengthening of the co-movements in the main emerging market assets that predates the synchronized selloff during the crisis. In addition, the paper tests the hypothesis that financial globalization, to the extent that it creates a common, global investor base for EM, could lead to a tighter asset correlation despite the weaker economic ties. While an examination of the impact of alternative financial globalization proxies yield no conclusive result, a closer look at global emerging market equity and bond funds show that the latter indeed foster financial recoupling during downturns, reflecting the fact that they trade near their respective benchmarks and respond to withdrawals by liquidating holdings across the board.     

Optimal investment and production decisions and the value of the firm

We explore the effects of uncertainty on a firm that can respond by modifying its investment or production schedule (or both simultaneously) to variations in output price. Investment may increase capacity and/or reduce costs. We consider a firm with finite resources.Our model uses option theory instead of the more traditional net present value framework. One of the early papers using this approach is Brennan and Schwartz (1985) in which an investment project to extract a finite natural resource is valued. In that paper, the value of the firm is a function of two state variables, the finite resource to be extracted (output to be produced in the future) and the commodity spot price. In order to maximize firm value, the manager can respond by modifying one control variable, the production level. In our model we handle instead three state variables (spot price, resources, accumulated investment) and two control variables (production rate and investment rate), and solve numerically.We obtain both the value and the optimal policy of a firm that has investment projects that increase capacity and/or reduce costs and illustrate optimal policies as resources and available investments decrease over the life of the firm. Firms may start by only investing, then invest and produce, to end only producing.We thank Scott Wo, the referee and the editor for their comments and suggestions. Cortázar and Lowener acknowledge the financial support from FONDECYT and FONDER.     

Does Economic Growth Really Benefit the Poor? Income Distribution Dynamics and Pro-poor Growth in Indonesia

We explore the nexus between poverty, inequality, and economic growth in Indonesia between 2002 and 2012, using several pro-poor growth concepts and indices to determine whether growth in this period benefited the poor. Our regression-based decompositions of poverty into growth and redistribution components suggest that around 40% of inequality in total household expenditure in Indonesia was due to variations in expenditure by education characteristics that persisted after controlling for other factors. We find that economic growth in this period benefited households at the top of the expenditure distribution, and that a ‘trickle down’ effect saw the poor receive proportionately fewer benefits than the non-poor. If reducing poverty is one of the Indonesian government's principal objectives, then policies designed to spur growth must take into account the possible impacts of growth on inequality.     

Proposition of a framework for interpretation of complex problems and initiatives focused on sustainability： The food, energy and biofuel crisis

The world faces a double crisis： the food crisis and energy crisis. The agribusiness is at the center of this societal dilemma, involving aspects from the volumes of production and productivity up to the way to produce them. Furthermore, there is a discussion about the need for establishing a trade-off between production of food and energy. A central aspect regarding the way of production is on how existing resources to be used and, especially, when its degradation occurs. These discussions indicate the need for interpretation and for proposition of solutions, under a complex perspective, for this double crisis. Accordingly, this paper proposes a framework for the interpretation of complex problems and for initiatives focused on sustainability that was applied to the context of food, energy and biofuel crisis. The theoretical background comprises two theories. The first is the complexity theory, which enabled the proposition of a system to understand the reality, distinguishing and combining the several existing realities without losing the global notion; The second is the sustainability theory, which enabled the systematization of stages for the planning of more sustainable actions to operate in that context; Lastly, it was possible to infer desirable characteristics that other theories could also be included, aiming to propose solutions that are more appropriated for this specific context.     

Do Sovereign Defaults Hurt Exporters?

This paper uses a difference-in-difference methodology similar to the one originally proposed by Rajan and Zingales to test whether sovereign defaults hurt the more export-oriented industries disproportionately, and it finds strong support for this hypothesis. However, contrary to the findings of previous studies, our estimates suggest that the effect of defaults is short-lived.     

Speed under sail during the early industrial revolution (c. 1750–1830)

This article measures technological progress in oceanic shipping directly by using a large database of daily log entries from British, Dutch, and Spanish ships to estimate daily sailing speed in different wind conditions from 1750 to 1850. Against the consensus among economic (but not maritime) historians that the technology of sailing ships was fairly static during this time, we find that average sailing speeds of British East India Company and Navy ships in moderate to strong winds rose considerably after the 1770s. Driving this progress was the introduction of coppering in the 1780s, but subsequent rises are probably due to a continuous evolution of sails and rigging, and improved hulls that allowed a greater area of sail to be set safely in a given wind. By contrast, the speeds of Dutch and Spanish vessels were stagnant. Using separate data on the crossing times of Atlantic mail packets, we find gradual progress from the 1750s, followed by marked improvements when American packets appeared in the 1820s.