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Report

Teaser, summary, work performed and final results

Periodic Reporting for period 2 - GLOBALPROD (The Global and Local Organization of Production)

Teaser

Summary

A defining feature of the global economy is the gradual fragmentation of production across firms and borders, a phenomenon that has been termed outsourcing or global value chains.

State-of-the-art empirical economic analysis on value chains has mostly been limited to the study of aggregate data because there is limited data on actual firm-to-firm linkages in the global economy. Even less is currently known about which products are typically outsourced, and which workers are affected.

This project brings together four unique firm-to-firm datasets on local and global value chains that pushes the research frontier forward in two main directions:

- Previous research has shown that economic integration encourages growth. Due to data limitations, however, we know little about the origins of growth, and to what extent the emergence of value chains can explain the growth response. New theory is needed, where firm-to-firm connections are endogenously formed in response to economic integration. I confront theory with data and directly test whether integration facilitates new buyer-supplier relationships and growth.

- Previous research has found that economic integration has large negative effects on wages for low-skill workers. But again, due to data limitations, it is unclear to what extent value chains are responsible for this. Simply put, the impact of outsourcing on wages will depend on which workers are displaced by outsourcing. Until now, researchers have not been able to observe which workers, along with their occupations and skills, who are employed in both the supplying and outsourcing firm. For the first time, this information will be available, allowing for a rich analysis of labor market effects for different skill groups.

GLOBALPROD informs policymakers about how wages for different types of skills change in response to globalization, but also how economic integration can promote efficiency and competitiveness.

Work performed

During the period covered in this report four main publications have been registered. All of them are focus on the relationship between trade costs, value chains and economic growth. This topic is particularly relevant given the increased uncertainty about trade costs and tariffs in the global marketplace.

The first publication provides a conceptual framework for analyzing firm-to-firm trade within or across countries, summarizes that current state of knowledge and points to future challenges in this area of research.

The second publication provides new stylized facts about firm-to-firm trade, such as documenting the relationship between a firmâ€™s number of customers and suppliers and its sales, as well as the sorting pattern between firms in a production network. The publication develops a new model for firm-to-firm trade that is broadly consistent with those stylized facts. A key ingredient of the model is a relationship fixed cost that limits the number of downstream connections that a firm is willing to engage in. Relationship fixed costs introduce a sorting pattern between firms that is broadly consistent with the empirical evidence. An important finding of this research is that size/productivity heterogeneity among customers, e.g. in a destination market, matters for the impact of shocks (e.g., tariffs) on sales and export flows.

The third publication tests to what extent major infrastructure improvements, which makes it easier to communicate face-to-face, lead to reorganization of the supply chain, e.g. that firms find better and/or more suppliers. Furthermore, it investigates whether this leads to changes in measured productivity and firm-level growth. The empirical results indicate that face-to-face interaction induces firms to search, and find, more and better suppliers, consistent with the hypothesis and that this boosts firmsâ€™ sales and productivity.

The fourth publication analyzes the impact on lower trade costs on the formation of global value chains and its welfare impact on developed and developing countries. A novel theoretical insight is that lower trade frictions lead to developing countries joining value chains. This leads to wage increases in developed countries but may decrease wages in those developing countries that are already part of the network.

Final results

The four publications have produced new fundamental insights.
Compared to the state-of-the-art, the new firm-to-firm stylized facts and model frameworks have significantly enhanced our current understanding of the microfoundations of value chains. The new empirical methodologies have shed light on how face-to-face communication is important for facilitating firm-to-firm links and firm growth.

Understanding the causes and consequences of value chains is crucial to assess the impact of trade frictions, such as tariffs, on both firm outcomes and individualâ€™s wages and purchasing power. The output of the project is expected to have speak directly to these questions.