Department of Economics and Business Economics

Trade Liberalisation and Vertical Integration

Research output: Working paperResearch

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  • wp13_14

    Submitted manuscript, 709 KB, PDF document

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.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages46
Publication statusPublished - 2 Sep 2013

    Research areas

  • International Trade, Firm Heterogeneity, Incomplete Contracts, Vertical Integration, Offshoring, Exporting

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