6 th Form Conference, June Firms in International Trade Fabrice Defever 6 th Form Conference

2 What Economics is about? 6 th Form Conference, June 2010 The Pin factory Adam Smith: The division of labour in pin manufacturing (and the great increase in the quantity of work that results)

3 What Economics is about? 6 th Form Conference, June 2010 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.

4 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 6 th Form Conference, June 2010

5 I. International Trade: From country to firm analysis 6 th Form Conference, June 2010

6 Once upon a time, country specialisation looked pretty good as a description of trade … 6 th Form Conference, June 2010 From Krugman’ Nobel Prize presentation (2008)

7 Once upon a time, country specialisation looked pretty good as a description of trade … 6 th Form Conference, June 2010 Great Britain India Tea Silver

86 th Form Conference, June 2010 …but over time it got hard to see much differences between what countries exported and what they imported From Krugman’ Nobel Prize presentation (2008)

96 th Form Conference, June 2010 …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.

106 th Form Conference, June 2010 …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. 11 From country to firm analysis Paul 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. 6 th Form Conference, June 2010

As a result, the trade literature now focus on firms instead of countries 12 From country to firm analysis Paul 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. 6 th Form Conference, June 2010

13 I. Exporters 6 th Form Conference, June 2010

146 th Form Conference, June 2010 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

 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. 6 th Form Conference, June 2010

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? 6 th Form Conference, June 2010

17 II. Multinational Firms A. The Boundaries of the Multinational Firms B. Fragmentation of the Production Process 6 th Form Conference, June 2010

18 Why Should We Care About Multinational Firms? 6 th Form Conference, June 2010  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.

19 A. The Boundaries of the Multinational Firms 6 th Form Conference, June 2010

20 A. The Boundaries of the Multinational Firms 6 th Form Conference, June 2010 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

216 th Form Conference, June 2010 A. The Boundaries of the Multinational Firms USA Germany Varieties of sport shoes (e.g. Nike) Marketing China

22 B. Fragmentation of the Production Process 6 th Form Conference, June 2010

236 th Form Conference, June 2010 B. Fragmentation of the Production Process

24 B. Fragmentation of the Production Process Source: EIM, th Form Conference, June 2010

GEP Strategic Advisory Board, June 2008 Source: EIM,

26 IV. Everything old is new again –and that’s the problem 6 th Form Conference, June 2010

27 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 6 th Form Conference, June 2010 Everything old is new again –and that’s the problem Conclusion from Krugman’ Nobel Prize presentation (2008)

28 Questions? 6 th Form Conference, June 2010