Firms in International Trade

1. Firms in International Trade Fabrice Defever 6th Form Conference 6th Form Conference, June 2010

2. What Economics is about? The Pin factory Adam Smith: The division of labour in pin manufacturing (and the great increase in the quantity of work that results) 6th Form Conference, June 2010

3. What Economics is about? Find ways of organising production to allocated limited resources in the most efficient way. For example, countries should specialized in the production of certain products. 6th Form Conference, June 2010

4. OutlineI. International Trade: From country to firm analysisII. ExportersIII. The Multinational Firms A. The Boundaries of the Multinational Firms B. Fragmentation of the Production Process IV. Everything old is new again –and that’s the problem 6th Form Conference, June 2010

5. I. International Trade: From country to firm analysis 6th Form Conference, June 2010

6. Once upon a time, country specialisation looked pretty good as a description of trade … From Krugman’ Nobel Prize presentation (2008) 6th Form Conference, June 2010

7. Once upon a time, country specialisation looked pretty good as a description of trade … Silver India Great Britain Tea 6th Form Conference, June 2010

8. …but over time it got hard to see much differences between what countries exported and what they imported From Krugman’ Nobel Prize presentation (2008) 6th Form Conference, June 2010

9. …but over time it got hard to see much difference between what countries exported and what they imported • More than 1/2 of world trade is among the developed (industrial) countries. • Leading exporters/importers are the US, Germany and Japan • Only 12% among the developing countries (China is an exception) • Import and export of similar productsaccount for more than 60% of trade. 6th Form Conference, June 2010

10. …but over time it got hard to see much difference between what countries exported and what they imported Varieties of cars (e.g. BMW, Mercedes) France Germany Varieties of cars (e.g. Peugeot, Renault) 6th Form Conference, June 2010

11. From country to firm analysis Paul Krugman built a theory of Monopolistic Competition to explain these empirical facts. • In the consumption side: Consumers consume different varieties of the same product => Each firm produces a different brand/variety. • In the production side: => Each firm has an incentive to produce large quantities. In 2008, Paul Krugman received the Nobel Prize for it. 6th Form Conference, June 2010

12. From country to firm analysis Paul Krugman built a theory of Monopolistic Competition to explain these empirical facts. • In the consumption side: Consumers consume different varieties of the same product => Each firm produces a different brand/variety. • In the production side: => Each firm has an incentive to produce large quantities. As a result, the trade literature now focus on firms instead of countries 6th Form Conference, June 2010

13. I. Exporters 6th Form Conference, June 2010

14. Stylized facts on Exporting firms • Example #1: Nestlé • Nestlé is the world’s biggest food and beverage company • World’s biggest marketer of infant formula, powdered milk, instant coffee, chocolates, soups, and mineral water • Brands include Nescafé, Nesquik, Maggi, Buitoni, Perrier, KitKat, Friskies • It is one of the “most international” firms in the world • (very little sales in Switzerland) 6th Form Conference, June 2010

15. Stylized facts on Exporting firms • Exporters are bigger than non-exporters; • They ship on average 5.6 times more than non-exporters. • Exporters are more productive than non-exporters. • Exporters have a 30% advantage in labor productivity relative to non-exporters. 6th Form Conference, June 2010

16. Stylized facts on Exporting firms • At the firm-level, exporters are in the minority. • In 1992, only 21% of U.S. plants reported exporting anything. • Why do certain firms participate in international trade and others do not? 6th Form Conference, June 2010

17. II. Multinational Firms A. The Boundaries of the Multinational Firms B. Fragmentation of the Production Process 6th Form Conference, June 2010

18. Why Should We Care About Multinational Firms? • Value added of all MNEs was was roughly 25% of world GDP, in 1997 • One-third of the volume of world trade is intra-firm trade • in 1994, 42.7% of total U.S. imports were intra-firm. • About another third of the world trade volume is accounted for by transactions in which MNEs are in one of the two sides of the exchange. 6th Form Conference, June 2010

19. A. The Boundaries of the Multinational Firms 6th Form Conference, June 2010

20. A. The Boundaries of the Multinational Firms • Example #3: Nike • In 1998, Nike controlled over 40% of the $14.7 billion U.S. athletic footwear market. • Yet none of the millions of Nike’s pairs of athletic shoes sold in the U.S. were produced there. • And none of these pairs of shoes were produced in Nike-owned production facility Nike subcontracts 100% of its footwear production to independently owned and operated factories 6th Form Conference, June 2010

21. A. The Boundaries of the Multinational Firms Germany USA Varieties of sport shoes (e.g. Nike) Marketing China 6th Form Conference, June 2010

22. B. Fragmentation of the Production Process 6th Form Conference, June 2010

23. B. Fragmentation of the Production Process 6th Form Conference, June 2010

24. B. Fragmentation of the Production Process Source: EIM , 1997-2002 6th Form Conference, June 2010

25. GEP Strategic Advisory Board, June 2008 Source: EIM , 1997-2002

26. IV. Everything old is new again –and that’s the problem 6th Form Conference, June 2010

27. Everything old is new again –and that’s the problem Conclusion: • Firms have been a powerful force shaping the world economy • Their importance may actually be in decline • But that decline itself is a key to understanding much of what is happening in the world today Conclusion from Krugman’ Nobel Prize presentation (2008) 6th Form Conference, June 2010

28. Questions? 6th Form Conference, June 2010