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Firms and Markets in Global Economies

Lecture 1: Notes
2015-2016
Introduction
A birds eye view of globalization:
Globalization: a large share of the population can access goods
made available by long distance trade.
The Roman peasants living in the Po river plane ate off tableware
from Naples
The Fall of the Roman Empire: the end of trade? East, West and
Islam
The Age of discoveries:

Source: Helpman Elhanan. 2010. Understanding Global Trade (p.


6).

But a hundred years earlier:


Between 1403-1430, Chinas trade routes link the Far East to
Malindi and the Red Sea
20/9/1414The first giraffe in town
A typical Zheng Hues expeditions: 370 ships and 30.000 men.
The aim: new markets for the Chinese manufactured goods.

The Golden Age of Globalization

Source: Helpman Elhanan. 2010. Understanding Global Trade (p.


7).
1870-1913: drastic reduction in maritime transport costs due to
innovation
1913-onwards: the IWW and after that, brakes on liberalitation
and competition.
After the II WW: an unprecedented expansion of long distance
trade, accelerating in the 90s (Trade as a percentage of GDP).
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2007: the financial crisis hits


The order of magnitude:
Baltic Dry Index (BDI) falls by 90% btw June and October 2008;
in 2009 it is down to of its peak value.

Source: Eaton, Jonathan, Samuel. Kortum, Brent Neiman and


John Romalis. 2011. Trade and the Global Recession. NBER
Working Paper 16666, January (p.30).

How we explain the surge in trade in the 90?


Mind: the forces at work then are at work also nowdays.
1) The widespread adoption of ICT:
From 2 millions in 1994 to 2 billions internet users in 2010;
The fall in download time
Consequences: improves in market efficiency;
2) Liberalization of trade and fall in transport costs:
NAFTA (1994)
Mercosur (1991-1994)
China and the WTO (2001)
European Enlargement.
3) The fall of the Soviet Union and the opening up of East and Far
East markets; pro-competitive government coalitions in the West
(shift to the right)

The main consequence:


the disintegration of production processes across borders
It shows up in statistics:
In 2000:
50% of US imports were intra-firm trade
33% of US exports were toward affiliates
The labour statistics tell the same story (eg, diagnostic imagining)
Who are the Zue Hang of our time?

For the sake of brevity, consider Europe


Mayer, T. and Ottaviano, G. (2008) The Happy Few: The
internationalisation of European firms. Intereconomics: 135-148
10% of exporting firms account for80% of exports
Firms exporting more than 10 products in more than 10
countries accounts for 75% of exports
Exporting firms are larger, more productive, pay higher
wages and makes more profits than non-exporting firms in
the same industry
The same holds true for investing firms.
The LEGO in the 60 and in 2015..
In the world of 3D printing, trading relationships are ever more
customized/taylor made.

Production is contract-intensive.
But contracts are notoriously difficult to write and to enforce:
a) State contingency: not of this world!
b) Choice of law (the court may reject)
c) Are local courts fair to foreigners?
d) The enforcement of remedies
Tentative solutions:
United Nations Convention on Contracts for the International
Sale of Goods: not all countries have signed it.
International Arbitration: competent but not cheap!
Heterogeneity: how long does it take to clear a bounced
check? 39 days in Netherlands; 645 days in Italy.
Reputation?
See: Greif, A. (1993). Contract enforceability and
economic institutions in early trade: The
maghribi traders' coalition. American Economic
Review, 83: 525-548.
.

How do firms deal with contract incompleteness?


Contracts incompletess shapes organizational and location
choices:
Outsourcing vs. Vertical Integration
Off-shoring vs. Domestic Production
We will study how firms behave on international markets under
the assumption of contract incompleteness:
we will consider exporting and investing firms
we will discuss the implications of imperfections on capital
markets
we will study policy implications
Our road map

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Reading material (to be updated):


Antras, P. (2015) Global Production: Firms, Contracts, and Trade
Structure. Princeton Univsersity Press.
Helpmann, E. (2011) Understanding Global Trade.
University Press

Harvard

Helpman, E. (2006). Trade, FDI; and the Organization of Firms.


Journal of the Economic Literature: 589-630.
The website
http://elearning.unimib.it/
Area economico statistica
Corso di laurea magistrale
International Economics..
How to study
Assessment

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