The Global and Local Organization of Production

Project Information

GLOBALPROD

Grant agreement ID: 715147

DOI

10.3030/715147

Project closed

EC signature date 25 November 2016

Start date 1 January 2017

End date 31 December 2021

Funded under

• EXCELLENT SCIENCE - European Research Council (ERC)

Total cost

€ 1 476 948,00

EU contribution

€ 1 476 948,00

Coordinated by

UNIVERSITETET I OSLO
Norway

Periodic Reporting for period 4 - GLOBALPROD (The Global and Local Organization of Production)

Reporting period: 2021-07-01 to 2021-12-31

Summary of the context and overall objectives of the project

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 promote economic growth. New theory and methods are needed, where firm-to-firm connections are endogenously formed in response to economic integration. I confront theory with data and analyze to what extent integration facilitates new buyer-supplier relationships and growth.

- Due to data limitations, we have a limited understanding of how the emergence of value chains affect the relative demand for skilled labor and relative wages. Until now, researchers have had limited knowledge about the skill composition of buying and supplying firms. GLOBALPROD provides a rich analysis of the characteristics of firms that match, as well as the consequences of that matching process for labor market outcomes.

Among the research findings are the following:
- Economic integration causes creation of new buyer-seller links and significant improvements in firm performance.
- Selling to new customers is much more important than increasing sales to old customers in explaining firm size. Firms’ capability to obtain customers, rather than their efficiency, are key to understanding firms’ success.
- High-skilled firms tend to match with other high-skilled firms, i.e. there is positive assortative matching in skills among firms.

Work performed from the beginning of the project to the end of the period covered by the report and main results achieved so far

In the following, I briefly describe the results from four of the main GLOBALPROD papers, as well as their exploitation and dissemination.

Bernard et al (forthcoming) develops a new model for firm-to-firm trade that is broadly consistent with stylized facts from the Belgian firm-to-firm data. In the model, firms search for and sell to downstream buyers and buy inputs from upstream suppliers. Firms vary in their productivity and relationship capability. Higher productivity results in more matches and larger market shares among customers. Higher relationship capability results in more customers and higher sales. Estimated model parameters suggest that productivity and relationship capability are strongly negatively correlated. A counterfactual exercise shows that the real wage gains from improving relationship capability are substantial, and much larger in our model compared to canonical models of one-dimensional heterogeneity.

Gumpert et al (2020) studies the life-cycle dynamics of exporters and multinational enterprises (MNEs). Using rich firm-level data, we document a comprehensive set of facts on entry, exit, and growth of new exporters and new MNEs. Guided by these facts, we build a model based on the standard proximity-concentration trade-off extended to incorporate time-varying firm productivity and sunk costs of MNE entry. The calibrated version of the model goes far in matching cross-sectional and dynamic moments of the data on exporters and MNEs. We show that including the choice to become an MNE affects the predicted export dynamics after trade liberalization. The different dynamics in a model with and without MNEs hinge on the right truncation of fast-growing exporters induced by the inclusion of the MNE choice.

Bernard et al (2019) examines the importance of buyer-supplier relationships for firm performance. We develop a model in which firms outsource tasks and search for suppliers. Lower search and outsourcing costs lead firms to search more and find better suppliers, which in turn drives down marginal costs. We test the theory by exploiting the opening of a high-speed train line in Japan, which lowered the cost of passenger travel but left shipping costs unchanged. Using an exhaustive data set on firms’ buyer-seller linkages, we find significant improvements in firm performance as well as creation of buyer-seller links, consistent with the model.

Bernard et al (2018) develops a multicountry model of international trade that provides a simple microfoundation for buyer-seller relationships in trade. We explore a rich data set that identifies buyers and sellers in trade and establish a set of basic facts that guide the development of the theoretical model. We use predictions of the model to examine the role of buyer heterogeneity in a market for firm-level adjustments to trade shocks, as well as to quantitatively evaluate how firms’ marginal costs depend on access to suppliers in foreign markets.

These projects have been presented at various research conferences and workshops, including the NBER Summer Institute and multiple CEPR conferences. I have also presented the research at invited staff seminars at top universities, including Dartmouth College, Princeton University, Yale University, Sciences Po, and more. I have also written several articles for VoxEU.org based on this research, which targets a larger audience of economists working in the public sector, private sector, academia and media.


References
Andrew Bernard, Emmanuel Dhyne, Glenn Magerman, Kalina Manova, Andreas Moxnes. Forthcoming. “The Origins of Firm Heterogeneity: A Production Network Approach.” Journal of Political Economy.

Andrew Bernard, Andreas Moxnes, Karen Helene Ulltveit-Moe. 2018. “Two-Sided Heterogeneity and Trade.” Review of Economics and Statistics.

Andrew Bernard, Andreas Moxnes, Yukiko Saito. 2019. “Production Networks, Geography, and Firm Performance.” Journal of Political Economy.

Anna Gumpert, Haishi Harry Li, Andreas Moxnes, Natalia Ramondo and Felix Tintelnot. 2020.
“The Life-Cycle Dynamics of Exporters and Multinational Firms”. Journal of International Economics.

Progress beyond the state of the art and expected potential impact (including the socio-economic impact and the wider societal implications of the project so far)

Compared to the state-of-the-art, the new firm-to-firm model and quantitative framework (Bernard et al, forthcoming) have significantly enhanced our current understanding of the microfoundations of value chains. In particular, the project enhances our understanding of firm growth, and in particular that both productivity and the relationship-specific capabilities of firms are needed in order to understand the firm size distribution.

The study on the life-cycle dynamic of exporters and multinational enterprises (Gumpert et al, 2020) goes beyond the state of the art by a) documenting new stylized facts on firm growth and b) by modeling the decision to become a multinational enterprise (MNE) in a dynamic economic framework. Understanding the dynamics of exports and multinational sales is crucial to assess the impact of economic integration on firm growth.

Bernard et al (2019) and Bernard et al (2018) develop novel theoretical frameworks for analyzing the matching process between firms. Both papers also provide completely new evidence on how exogenous shocks affect the matching process and how this translates into economic changes at the firm and aggregate level.

Photo from Globalprod event in June 2017