6 th form conference, june 20101 firms in international trade fabrice defever 6 th form conference
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6th Form Conference, June 2010 1
Firms in International Trade
Fabrice Defever6th Form Conference
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What Economics is about?
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The Pin factory
Adam Smith:The division of labour in pin manufacturing (and the great increase in the quantity of work that results)
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What Economics is about?
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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.
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Outline
I. International Trade: From country to firm analysis
II. Exporters
III. 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
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I. International Trade: From country to firm analysis
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Once upon a time, country specialisation looked pretty good as a description of trade …
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From Krugman’ Nobel Prize presentation (2008)
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Once upon a time, country specialisation looked pretty good as a description of trade …
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Great Britain India
Tea
Silver
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…but over time it got hard to see much differences between what countries exported and what they imported
From Krugman’ Nobel Prize presentation (2008)
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…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 products account for more than 60% of trade.
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…but over time it got hard to see much difference between what countries exported and what they imported
Germany France
Varieties of cars(e.g. Peugeot, Renault)
Varieties of cars(e.g. BMW, Mercedes)
In 2008, Paul Krugman received the Nobel Prize for it.
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From country to firm analysisPaul 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.
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As a result, the trade literature now focus on firms instead of countries
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From country to firm analysisPaul 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.
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I. Exporters
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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)
Stylized facts on Exporting firms
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.
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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?
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II. Multinational Firms
A. The Boundaries of the Multinational Firms
B. Fragmentation of the Production Process
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Why Should We Care About Multinational Firms?
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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.
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A. The Boundaries of the Multinational Firms
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A. The Boundaries of the Multinational Firms
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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
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A. The Boundaries of the Multinational Firms
USAGermany
Varieties of sport shoes(e.g. Nike)Marketing
China
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B. Fragmentation of the Production Process
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B. Fragmentation of the Production Process
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B. Fragmentation of the Production Process
Source: EIM , 1997-2002
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GEP Strategic Advisory Board, June 2008 Source: EIM , 1997-2002
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IV. Everything old is new again –and that’s the problem
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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
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Everything old is new again –and that’s the problem
Conclusion from Krugman’ Nobel Prize presentation (2008)
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Questions?
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