Organization and Trade

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The nature of international trade has been changing. Historically, trade has consisted largely of an exchange of raw materials and finished goods. But now, "international production sharing is becoming more the norm. Improvements in technology have made possible the division of the production process into an ever finer set of activities, so that specialized components and business services can be produced in various locations before being combined into a final product. Meanwhile, falling trade barriers, declining communication and transportation costs, and improvements in the legal conditions in many countries have made the internationalization of economic activity increasingly viable. Indeed, the process of international production sharing may well be the essential feature of modern "globalization." Globalization encompasses a variety of organizational arrangements, including the outsourcing of various components and business services in arms-length relations, the establishment of foreign subsidiaries to undertake activities such as assembly and marketing, the entry into long-term and possibly exclusive licensing agreements, and the establishment of joint ventures for production and marketing. In this project, the principal investigators are developing theoretical models of foreign investment and trade that incorporate decisions about organizational form. They are studying firms' choices about whether to obtain a component or service by self-provision or subcontracting together with their choices about where might be the best place to source or manufacture components. As the project progresses, the authors also will consider hybrid organizational forms, such as "relational contracts" (self-enforcing long-term agreements) and joint ventures (where decision-making authority may reside with one party or the other depending on the contingencies that arise). After developing their new models of trade and foreign investment, the authors will use them to address important policy issues, such as whether international production sharing has contributed to the adverse trends in income distribution in the United States and Europe and whether globalization hinders the ability of governments to regulate industry. Further, they will investigate whether the internationalization of economic activity necessitates greater intergovernmental cooperation in the WTO (or elsewhere) in non-traditional areas such as standards and regulation.