Table 5.7: Summary statistics - RBB Data
Table 5.8: Summary statistics
Table 5.9: ZIP and OLS results
Table 5.10: Coding scheme. Cooperative events
Description Goldstein Description Goldstein
Agreement Promise
Agree 4.8 Promise 4.7
Agree or accept 3 Promise policy 4.5
Agree to 3 Promise material 5.2
Agree to mediation 3 Promise economic 5.2
Agree to negotiate 3 Promise military 5.2
Agree to 3 Promise 5.2
Collaborate 4.8 Assure 2.8
Consult Promise to mediate 4.7
Consult 1.5 Reward
Discussion 1 Reward 7
Mediate talks 1 Extend economic 7.4
Engage in 1 Extend military 8.3
Travel to meet 1.9 Extend 7.6
Host a meeting 2.8 Rally support 7.6
Endorsement Yield
Endorse 3.5 Yield 1.1
Praise 3.4 Yield to order .6
Empathize 3.4 Yield position .6
Table 5.11: Coding scheme. Non-Cooperative events Description Goldstein Description Goldstein
Accusation Political flight 4
Accuse 2.8 Disclose 4
Criticize or 2.2 Break law 4
Complaint Sanction
Complain 2.4 Sanction 4.5
Informally 2.4 Armed force 7
Formally complain 2.4 Reduce routine 2.2
Denial Reduce or stop aid 5.6
Deny 1 Reduce or stop 5.6
Demand Reduce or stop 5.6
Demand 4.9 Reduce or stop 5.6
Demand information 4.9 Reduce or stop 5.6
Investigate human 4.9 Halt discussions 3.8
Demand policy 4.9 Halt negotiation 3.8
Demand aid 4.9 Halt mediation 3.8
Demand mediation 4.9 Break relations 7
Demand withdrawal 4.9 Strikes and 4.5
Demand ceasefire 4.9 Threat
Demand meeting 4.9 Threaten 6.4
Demand rights 4.9 Non-specific 4.4
Demonstration Sanctions threat 5.8
Demonstrate 6.9 Threaten to halt 5.8
Protest 5.5 Threaten to halt 5.8
Protest 5.2 Threaten to reduce 5.8
Protest procession 5.2 Threaten to 5.8
Protest defacement 5.2 Threaten to reduce 5.8
Protest altruism 6.9 Give ultimatum 6.9
Rejection Other physical 6.4
Chapter 6
Trade Intermediation and the Organization of Exporters 1
6.1 Introduction
The international business literature (e.g., Peng and Ilinitch, 1998) stresses that firms typi-cally require an own sales affiliate or a trade intermediary in the foreign country to become successful exporters. The optimal organizational choice between these two major export modes is an important issue for firms’ internationalization strategies. However, conven-tional trade models assume that exporters sell directly to foreign end-clients.
While that assumption may be an innocuous assumption for many important questions, it is plainly wrong empirically. And it bars a more profound understanding of international trade costs broadly defined, which are estimated to be substantial despite recent progress in transportation and communication technologies.2
In this paper, we suggest a simple theoretical framework in which exporters face a choice of how to export to foreign markets. That is essentially an organizational choice as domes-tic producers can either provide distribution services abroad through an own foreign sales affiliate, or through a specialized firm: a trade intermediary. In our model, due to incom-plete cross-border contracts, intermediation entails a distortion that leads to lower export revenues. This is a disadvantage compared to the use of an own sales affiliate; however, intermediaries make capital investments of producers in the foreign country redundant,
1This Chapter is based on a working paper, see Felbermayr and Jung (2008c). The concept for the paper was developed jointly, theoretical analysis and writing were equally shared, and the empirical analysis was carried out by the author of this thesis.
2For example, Anderson and van Wincoop (2004) report that retail and wholesale distribution costs are
thereby offering savings in fixed distribution costs.
Our paper innovates along three lines: First, we cast the above choice of export modes in a model where producers differ with respect to their competitive advantage and derive a sorting pattern of monopolistic firms over different export modes. Second, as the organi-zational choice of producers is built into a multi-country general equilibrium trade model with trade-cost asymmetries, we are able to derive empirical predictions that take aggregate income and price effects in due account. Third, we use US census data to provide a rough empirical check of our results.
We focus on theendogenous emergenceof trade intermediaries as important institutions in the operation of real-world international business. Trade intermediaries enjoy easier ac-cess to foreign markets due to better local knowledge and the exploitation of economies of scope. However, new advances in the literature on the boundaries of the firm (e.g., Antras and Helpman, 2004) stress the lack of enforceable contracts in international transactions.
The interaction with an intermediary exposes the producer to a hold-up problem. Prices and quantities are determined in a game between producers and intermediaries: the optimal response of the producer is to restrict output for the export market, which drives up con-sumer prices. Hence, contractual imperfections act differently than standard iceberg-type trade costs, as they do not induce loss in transit. The trade-off between fixed-cost savings and lower revenue pins down the producers’ optimal organizational mode of exporting.
Facing a hold-up problem, producers may wish to internalize sales activities by setting up a foreign sales affiliate. Internalization forgoes the fixed-cost savings available with interme-diation, but avoids relationship-specific distortions. We embed this trade-off in a somewhat generalized Melitz (2003) model, where firms differ with respect to the idiosyncratic com-ponents of variable distribution costs or preferences as well as with respect to their labor productivity. We derive an interesting sorting pattern: firms with low distribution costs, strong brand reputation, and high productivity internalize foreign sales activities, while those with medium realizations of those variables prefer to use trade intermediaries. The relevant firm characteristics correlate with firm size, so that the paper predicts selection of firms along their sizes.
Empirical relevance. There is massive systematic and anecdotal evidence on the impor-tance of trade intermediaries. Peng, Zhou and York (2006) find for the U.S. that more than 45% of export sales in 68 out of 97 product categories are handled by export intermediaries (see their Tables 4 and 5 for 1998, pp. 296f).3 Our model also stresses the role of foreign wholesale affiliates. Buch, Kleinert, Lipponer and Toubal (2005) report that about 39%
of all German subsidiaries abroad are active as wholesellers. They make up a substantial share – about 30% – of the total stock of German foreign direct investment (FDI). In the proposed model, to the extent that exports are channeled through sales affiliates, FDI and trade are complements. This may rationalize the finding discussed by Neary (2008) that bilateral FDI stocks seem to decrease with bilateral distance, much as bilateral trade does.
Note that Neary’s observation is in conflict with the standardproximity-concentration view of FDI, where trade and investment are substitutes.
Bernard, Jensen, and Schott (2008) show that about 13% of all U.S. exporters sell to own foreign affiliates (related parties), and that their combined export market share is about 30%. It follows that the average firm exporting to own wholesale affiliates has larger export revenue than the average firm selling through an alternative channel. This pattern is fully consistent with the evidence (e.g., surveyed by Helpman, 2006) that only the largest firms engage in FDI. Business literature (e.g., Ellis, 2000) suggests that exports that are not channeled via intermediaries or an own foreign subsidiary make up only a negligible share of total exports. Those ‘direct’ exports typically stem from unsolicited orders, often through direct contact of a buyer via phone or mail. This is is an opportunity that almost any producer with some international visibility has at some point in time; hence, the number of concerned firms may be fairly large while the role of direct exports for total trade is small.
Bringing the available evidence together, it follows that firms sort according to their size in line with the pattern predicted in this paper.4 To the best of our knowledge, the present paper is the first to theoretically explain this sorting pattern.
Besides the predicted sorting pattern, our framework has additional testable
implica-3Trabold (2002) provides evidence for France.
4Available firm-level data usually does not provide information on the mode of serving a foreign market (‘directly’, through an intermediary, or via an own affiliate). Hence, direct evidence for the proposed sorting pattern is (currently) still impossible to obtain.
tions. Thanks to the general equilibrium nature of our model, we can derive structural relationships that can be tested econometrically in a consistent way. First, the prevalence of sales through trade intermediaries relative to sales through own affiliates does neither depend on geographical distance between two countries nor on their respective market sizes.
Second, relative prevalence decreases in the strength of contractual imperfections (which may be good/sector-specific) but it increases in the (country-specific) risk of expropriation in the foreign country. Third, relative prevalence increases as firms become more homo-geneous in terms of their underlying characteristics (productivity, quality, tradability of goods). Fourth, when systematic trade costs go up, both the stock (and flow of) wholesale FDI between two countries and the volume of bilateral trade (in both modes) fall. Hence, in this scenario, trade and FDI appear as complements. Using the ratio of related-party over non-related-party trade reported by the US Census at the industry level as a proxy for the relative prevalence of intermediation we find support in favor of our hypotheses.
Related literature. Our work is related to at least three important strands of literature.
First, as in Grossman and Helpman (2002) or Antras and Helpman (2004, 2008) we allow for incomplete contracts to affect the boundaries of firms.5 Bernard, Jensen, Redding, and Schott (2008) provide empirical evidence that products’ revealed contractability plays a role in explaining the intra-firm share of imports.6 We set up a theoretical model to reproduce the set of stylized facts discussed above, and assume that contractual imperfections arise when legal entities of two different countries (a producer and the foreign trade interme-diary) interact, but that the relation between wholesale agents and retailers is free from frictions. There is an interesting literature that analyzes falling trade costs trade when producers and retailers interact strategically (see, e.g., Raff and Schmitt, 2005 or 2006).
We abstract on strategic issues and rather focus on the endogenous emergence of trade intermediaries, the sorting of producers across export modes and the role of contractual frictions as determinants of trade costs.
Second, a growing number of papers model the distribution to foreign markets in more
5Whereas their focus is on a sourcing decision which involves the location of input production, we analyze the pattern of sourcing distribution services.
6The paper is marked “Preliminary”.
detail. Rauch (1999) or Krautheim (2007a) analyze the role of networks; Arkolakis (2008) models exporters’ marketing decisions on foreign markets. However, while Spulber (1996) provides a detailed discussion of the importance of intermediation,7 trade economists have not paid much attention to this issue. There are, however, exceptions. Feenstra and Hanson (2004) study the role of Hong-Kong as a center of trade intermediation. Rauch and Watson (2003) model the emergence of network intermediation in international trade. More related to our approach, Schr¨oder, Trabold and Tr¨ubswetter (2005) discuss trade intermediation in a simple two-country monopolistic competition model of international trade. However, in their partial equilibrium model, firms are identical, and there is no endogenous choice of export mode.
Third, a number of recent papers discusses the endogenous sorting of firms into differ-ent modes of serving foreign markets. In Helpman, Melitz, and Yeaple (2004) [henceforth:
HMY] firms either produce locally and export to a foreign market, or they engage in hori-zontal FDI and produce abroad. Krautheim (2007b) develops an interesting generalization of that model, allowing firms to use an additional mode of selling to the foreign market, namely viaexport supporting FDI. His model allows to address the facts discussed by Neary (2008), but does not address trade intermediation. More importantly, he exogenously im-poses the cost structure that drives his result, whereas in the present paper variable revenue from exporting via intermediaries is determined endogenously.
Structure of the paper. The remainder of the paper is organized as follows. Section 7.3 introduces the model and solves the game between the trade intermediary and the producer.
Section 6.3 derives the key propositions of the paper: it shows how firms sort into different export modes according to their attributes and derives predictions on the relative prevalence of either export modes and the trade-FDI relationship in general equilibrium. Section 6.4 provides tentative empirical evidence, and Section 7.6 concludes. Proofs of our results, intermediate steps of calculations, and a number of tables are contained in the Appendix.
7Various models of intermediation are presented in Spulber (1999).