Handbook of International Economics

760 Pages·2014·9.329 MB·English

by  Gita Gopinath, Elhanan Helpman and Kenneth Rogoff (Eds.)

Handbook of International
Economics
Handbook of International
Economics
4
VOLUME
Edited by
GITA GOPINATH
Harvard University, Cambridge, MA, USA
National Bureau of Economic Research, Cambridge, MA, USA
ELHANAN HELPMAN
Harvard University, Cambridge, MA, USA
Canadian Institute for Advanced Research
National Bureau of Economic Research, Cambridge, MA, USA
KENNETH ROGOFF
Harvard University, Cambridge, MA, USA
National Bureau of Economic Research, Cambridge, MA, USA
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CONTRIBUTORS
Mark Aguiar
Princeton University, Princeton, NJ, USA
Manuel Amador
Federal Reserve Bank of Minneapolis, Minneapolis, MN, USA
Pol Antràs
Harvard University, Cambridge, MA, USA
National Bureau of Economic Research, Cambridge, MA, USA
Centre for Economic Policy Research, London, UK
Ariel Burstein
University of California, Los Angeles, CA, USA
National Bureau of Economic Research, Cambridge, MA, USA
Arnaud Costinot
Massachusetts Institute of T echnology, Cambridge, MA, USA
National Bureau of Economic Research, Cambridge, MA, USA
Charles Engel
University of Wisconsin, Madison, WI, USA
National Bureau of Economic Research, Cambridge, MA, USA
Gita Gopinath
Harvard University, Cambridge, MA, USA
National Bureau of Economic Research, Cambridge, MA, USA
Pierre-Olivier Gourinchas
University of California, Berkeley, CA, USA
National Bureau of Economic Research, Cambridge, MA, USA
Centre for Economic Policy Research, London, UK
Keith Head
Sauder School of Business, University of British Columbia, Canada
Centre for Economic Policy Research, London, UK
Jonathan Heathcote
Federal Reserve Bank of Minneapolis, Minneapolis, MN, USA
Centre for Economic Policy Research, London, UK
Guido Lorenzoni
Northwestern University, Evanston, IL, USA
National Bureau of Economic Research, Cambridge, MA, USA
ix
x Contributors
Giovanni Maggi
Yale University, New Haven, CT, USA
Graduate School of Economics, Getulio Vargas Foundation, Brasil
National Bureau of Economic Research, Cambridge, MA, USA
Thierry Mayer
Sciences-Po, Paris, France
Centre d'études prospectives et d'informations internationales, France
Centre for Economic Policy Research, London, UK
Marc J. Melitz
Harvard University, Cambridge, MA, USA
National Bureau of Economic Research, Cambridge, MA, USA
Centre for Economic Policy Research, London, UK
Nathan Nunn
Harvard University, Cambridge, MA, USA
National Bureau of Economic Research, Cambridge, MA, USA
Fabrizio Perri
Federal Reserve Bank of Minneapolis, Minneapolis, MN, USA
National Bureau of Economic Research, Cambridge, MA, USA
Centre for Economic Policy Research, London, UK
Stephen J. Redding
Princeton University, Princeton, NJ, USA
National Bureau of Economic Research, Cambridge, MA, USA
Centre for Economic Policy Research, London, UK
Hélène Rey
London Business School, London, UK
National Bureau of Economic Research, Cambridge, MA, USA
Centre for Economic Policy Research, London, UK
Daniel Trefler
University of Toronto, Toronto, ON, Canada
National Bureau of Economic Research, Cambridge, MA, USA
Andrés Rodríguez-Clare
University of California, Berkeley, CA, USA
National Bureau of Economic Research, Cambridge, MA, USA
Stephen R. Yeaple
Pennsylvania State University, University Park, PA, USA
National Bureau of Economic Research, Cambridge, MA, USA
INTRODUCTION TO THE SERIES
The aim of the Handbooks in Economics series is to produce Handbooks for various
branches of economics, each of which is a definitive source, reference, and teaching
supplement for use by professional researchers and advanced graduate students. Each
Handbook provides self-contained surveys of the current state of a branch of economics
in the form of chapters prepared by leading specialists on various aspects of this branch
of economics. These surveys summarize not only received results but also newer devel-
opments, from recent journal articles and discussion papers. Some original material is
also included, but the main goal is to provide comprehensive and accessible surveys. The
Handbooks are intended to provide not only useful reference volumes for professional
collections but also possible supplementary readings for advanced courses for graduate
students in economics.
Kenneth J. Arrow and Michael D. Intriligator
xi
PREFACE*
Almost twenty years have passed since the publication of Volume 3 of the Handbook
of International Economics in 1995. Much has changed since then, both in international
trade and international macroeconomics. The changes are fourfold: (a) new questions
have arisen as the world trade and payment system has evolved; (b) new data sets have
become available; (c) new theoretical models have been designed to address new issues,
but they have also enabled sharper and deeper analyses of older issues; and (d) new
empirical studies have greatly enriched our understanding of the global economy.
The chapters in this handbook review, illuminate, and interpret these developments
in a systematic way, making this material—which is technical at times—accessible to
professional economists and graduate students alike. Trade is covered in the first six
chapters, and international macroeconomics is covered in the subsequent six chapters.
1. INTERNATIONAL TRADE
Neoclassical analysis of foreign trade focused on comparative advantage at the sectoral
level, be it due to variation in productivity or factor endowments. Firms as suppliers of
unique brands of differentiated products and monopolistic competition were integrated
into trade theory in the 1980s (see Krugman 1995 for a review). Yet as much as these
improvements have been important, they focused on sectoral outcomes by treating
firms within industries as symmetric entities. Given the aim of that research, which was
to expand the neoclassical framework to accommodate intraindustry trade and large
volumes of trade between similar countries, the symmetry assumption was a reasonable
simplification. Except that it proved to be inadequate for interpreting evidence that
emerged in the 1990s concerning the participation of firms in foreign trade, as new firm-
level data sets became available. In these data, exporting firms differ systematically from
nonexporters. Scholars responded with the development of new models in which firms
are heterogeneous, and these models guided empirical studies with the new rich data sets.
Melitz and Redding review these developments in Chapter 1. After describing the
patterns of firm heterogeneity in the data, they develop an integrated multisector ana-
lytical framework for discussing many issues that have been analyzed in the recent lit-
erature. In the data, exporters differ from nonexporters in a number of dimensions; e.g.,
exporters are bigger and more productive than nonexporters and they pay higher wages.
*We thank the National Science Foundation for financial support.
xiii
xiv Preface
Studies of trade liberalization show that it leads to substantial reallocation within indus-
tries; low-productivity firms exit while market shares are reallocated to more productive
firms, and especially to exporters. In addition, firms and product margins are important
determinants of trade flows, because variation in the number of products explains a large
fraction of the variation in trade volumes. These are some of the findings that motivated
the original theoretical analysis that Melitz and Redding review in this chapter.
The analytical framework consists of sectors that have the features developed in
Melitz (2003), as well as a homogeneous good sector (although the latter is shut down
in some applications). Firms enter an industry in anticipation of a productivity draw.
After the entry cost is sunk and a firm’s productivity revealed, the firm has to decide
whether to stay in the industry or exit. If it stays, it has to decide whether to serve only
the domestic market or also export. There is a fixed cost of operation and a fixed cost of
exporting, as well as variable trade costs. In the now familiar manner, firms choose among
these strategies based on productivity: the least productive firms exit, the most productive
become exporters, and intermediate-productivity firms serve only the domestic market.
Although these results are not new, the exposition is new and intuitive, making the
analysis accessible to many readers. This useful feature characterizes the entire chapter.
It is especially helpful in the discussion of within-sectoral reallocations in response to
declining trade costs and the home market effect.
Melitz and Redding also explain how these models have guided estimation of
trade flows and quantitative analysis. Some of these issues are discussed in more detail
in Chapter 3 on gravity equations and in Chapter 4 on trade theory with numbers.
They also discuss the integration of factor proportions into the multisector framework
and some of its consequences, such as the relationship between factor endowments and
endogenous sectoral productivity levels.
Up to this point preferences for variety were assumed to be of the constant-
elasticity-of-substitution type, resulting in constant markups in percentage terms. In
Section 8, Melitz and Redding replace those preferences with a generalized quadratic
system that yields linear demand functions with an intercept that depends on sectoral
conditions. Under these circumstances markups vary across firms and they respond
to demand and supply shocks. Since trade is costly, international markets are not fully
integrated and market size impacts markups and average sectoral productivity levels. As
a result, productivity is higher and markups are lower in larger economies.
In this case multilateral trade liberalization leads to exit of low-productivity firms
and market share reallocation toward more productive firms, including exporters, but in
addition it reduces markups. The result is that prices are lower because of both higher
productivity and lower markups.
Section 9 then examines endogenous firm-specific productivity levels, by allowing
firms to engage in innovation or technology adoption that augments their productivity
draws. Choice of product scope for multiproduct firms is also considered, which provides
Preface xv
another endogenous source of productivity variation across firms. In a dynamic context
this generates a complementarity between exports and productivity-enhancing invest-
ments, because the payoff to productivity improvements is higher for exporting firms.
A number of empirical studies have shown that key predictions of these models are
consistent with the data. As a rule, exporters invest more than nonexporters in new
technologies. And in the face of trade liberalization, multiproduct firms shed their worst
products while nonexporters who switch to exporting invest the most in technology
upgrading.
Finally, Melitz and Redding review the recent literature on the impact of trade on
wage inequity in the presence of labor market frictions. Unlike the neoclassical writ-
ings that discussed wage inequality across workers with different characteristics, such as
differences in human capital, the new literature emphasizes residual wage inequality—
wage inequality between workers with similar characteristics—that has become a large
contributor to the inequality of earnings. Firm heterogeneity plays an important role in
this relationship, both theoretically and empirically, because firms with varying attributes
within sectors pay different wages to workers with similar characteristics.
In Chapter 2, Antràs and Yeaple review the evolution of ideas about the role of mul-
tinational firms in the world’s trading system. Much has happened on this front since
the publication of the previous volume of the Handbook of International Economics. On
the theoretical side the internalization decision has been afforded new foundations and
within-industry firm heterogeneity has been extended to cover multinationals. On the
empirical side new hypotheses emanating from the novel theory have been examined
with rich new data sets.
Antràs and Yeaple first review some stylized facts about the operation of multina-
tional corporations. Some of these are similar to stylized facts about trade flows; e.g.,
foreign direct investment (FDI) is concentrated within the group of rich countries and
it exhibits large two-way flows (intraindustry FDI). There are, however, substantial dif-
ferences across sectors; e.g., multinationals operate primarily in capital-intensive and
R&D-intensive sectors. Within sectors, both the parents of multinationals and their
affiliates tend to be larger, more productive, more R&D intensive, and more export
oriented than nonmultinational corporations. And moreover, parents tend to specialize
in R&D while affiliates tend to sell goods primarily in the host countries.
After presenting this evidence, Antràs and Yeaple develop a simple analytical frame-
work of trade with monopolistic competition that includes multinational corporations
(MNCs), but no within-industry heterogeneity. They apply it to horizontal FDI, driven
by the proximity-concentration tradeoff. In this view a firm can serve a foreign market
via export or subsidiary sales. The former entails variable trade costs—such as tariffs or
freight—that are saved by the latter mode of operation, while FDI entails fixed costs of
acquiring and operating a production unit in the foreign country, which are saved by
exporting. The evidence, based on U.S. data, supports this tradeoff: export relative to
xvi Preface
subsidiary sales is lower in sectors with high variable trade costs and higher in sectors
with high plant-level fixed costs.
Following this discussion, the theory is extended to include heterogeneous firms.
Now the most productive firms become multinational corporations while the least
productive (that remain in the industry) serve only the domestic market. Firms with
intermediate productivity levels serve foreign markets via export sales. This sorting pat-
tern holds in several data sets. The model also predicts a proximity-concentration trad-
eoff, and it adds to it an impact of the degree of sectoral heterogeneity. That is, export
relative to subsidiary sales is expected to be smaller in sectors with more productivity
dispersion.
Vertical FDI is next examined. In this case firms choose to fragment their produc-
tion process, locate some activities—such as R&D or design—in the headquarters and
therefore in the home country, and other activities—such as production of intermediate
inputs or assembly—in host countries of subsidiaries. Since this motive for FDI is pri-
marily driven by cost considerations, differences in factor prices play a key role in these
decisions. But firm heterogeneity is also important, and the models predict, consistent
with the data, that within sectors more productive firms source their inputs from for-
eign countries. In the U.S. data, imports of inputs from foreign subsidiaries are highly
concentrated among a small number of very large multinationals, and these subsidiaries
are located in a small number of countries that include Canada, Mexico, and Ireland.
There is, however, substantial variation across sectors and countries in export relative to
subsidiary sales. In particular, U.S. firms export less relative to subsidiary sales in skill-
intensive sectors to countries that are skill abundant.
Next, Antràs and Yeaple provide a detailed discussion of theories of the boundaries
of firms, including their implications for multinational corporations. These include the
transaction costs and property rights approaches to firms’ boundaries. In addition to
clearly explaining the insights from this literature, they develop several generalizations
of key results. Here too firm heterogeneity plays center stage as do new features such as
the role of incomplete contracts, the degree of contractibility of various activities, and
the varying ability to contract in different countries. As in previous models, offshoring
is concentrated among high-productivity firms, and the most productive among them
engage in foreign direct investment. In addition, the property rights model predicts
more integration in headquarter-intensive sectors, leading to larger shares of intrafirm
trade, and subtle differences between the impact of better contractibility of headquar-
ter and nonheadquarter activities. The latter predictions contrast with predictions of
the transactions cost approach to boundaries of the firm, which are the same for all
improvements in contractibility. A review of the evidence suggests that it is in line with
several implications of the property rights approach.
We have chosen to devote an entire chapter to the use of gravity equations for the
estimation of trade flows. Although these equations have been widely used for empirical