Trade Liberalisation and Vertical Integration

Peter Arendorf Bache () and Anders Laugesen ()
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Peter Arendorf Bache: Department of Economics and Business, Aarhus University, Postal: 8210 Aarhus V, Denmark
Anders Laugesen: Department of Economics and Business, Aarhus University, Postal: 8210 Aarhus V, Denmark

Economics Working Papers from Department of Economics and Business Economics, Aarhus University

Abstract: We build a three-country model of international trade in final goods and intermediate inputs and study the relation between different types of trade liberalisation and vertical integration. Firms are heterogeneous with respect to both productivity and factor intensity as observed in data. Final-good producers face decisions on exporting, vertical integration of intermediate-input production, and whether the intermediate-input production should be offshored to a low-wage country. We find that the fractions of final-good producers that pursue either vertical integration, offshoring, or exporting are all increasing when intermediate-input or final-goods trade is liberalised and when the fixed cost of vertical integration is reduced. At the same time, one observes firms that shift away from either vertical integration, offshoring, or exporting. Further, we provide guidance for testing the open-economy property rights theory of the firm using firm-level data. Finally, we notice that our model's sorting pattern is in line with recent evidence when the wage difference across countries is not too big.

Keywords: International Trade; Firm Heterogeneity; Incomplete Contracts; Vertical Integration; Offshoring; Exporting (search for similar items in EconPapers)
JEL-codes: D23 F12 F61 L23 (search for similar items in EconPapers)
Pages: 46
Date: 2013-09-02
New Economics Papers: this item is included in nep-bec, nep-com, nep-eff and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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