A Tale of Two Property Rights: Knowledge, Physical Assets, and Multinational Firm Boundaries. PDF, Revise and Resubmit at Journal of International Economics
The theory of multinational firm boundaries has been shaped by two major paradigms: an earlier one, emphasizing the role of integration in preventing the dissipation of knowledge, and a more recent one, stressing the role of firm boundaries in mitigating underinvestments into relationship-specific assets in the face of contractual incompleteness. This paper develops a novel model encompassing both approaches in a unifying framework. The model predicts that the attractiveness of integration increases in the importance of the parent firm’s knowledge capital and decreases in the importance of the affiliate’s physical capital in a joint production process. Furthermore, the effects of knowledge and physical capital intensity on firm boundaries are predicted to vary systematically depending on intellectual and physical property rights protection in the affiliate’s country. I test these hypotheses using unique panel data on more than 100,000 firm pairs worldwide. In line with the model’s predictions, I find that the ownership share in a given affiliate increases in the parent firm’s knowledge intensity and decreases in the physical capital intensity of the affiliate. These findings are robust to controlling for unobserved heterogeneity across firm pairs and provide strong support for the unifying theory of multinational firm boundaries.
Contractual frictions are widely known to shape firm boundaries. But do better contracting institutions, which reduce these frictions, induce firms to be more or less deeply integrated? This paper provides a large-scale investigation of this question using a unique micro dataset of ownership shares across half a million firm pairs worldwide. We uncover strong evidence that better contracting institutions in subsidiaries’ countries favor deeper integration, particularly in relationship-specific industries. We formally show that these findings can be explained by a generalized Property-Rights Theory of the firm featuring partial ownership, while they are at odds with the canonical Transaction-Cost Theory.
Cultural Distance, Firm Boundaries, and Global Sourcing (with Yuriy Gorodnichenko and Gerard Roland). PDF, featured in VoxEU
Casual observation suggests that cultural differences play an important role in business transactions, yet systematic evidence on this relationship is scarce. This paper provides a novel empirical investigation of the effect of cultural distance on multinational firms' decisions to integrate their cooperation partners into firm boundaries, rather than transact with independent companies at arm's-length. To guide our empirical analysis, we develop a simple theoretical model which suggests that (i) cultural distance between contracting parties decreases the relative attractiveness of integration, and (ii) this effect is mitigated in more capital-intensive industries. We test these predictions using extensive product-, industry-, and firm-level data. We find a robust negative effect of cultural distance on the relative attractiveness of integration. In line with our theoretical predictions, we also find that the effect of cultural distance on firm boundaries is less pronounced in more capital-intensive industries.
Time is On My Side: Relational Contracts and Aggregate Welfare (with Michael Pflüger). PDF, accepted for publication in Oxford Economic Papers
This paper develops a simple general equilibrium model which establishes a link between the patience of economic agents and the well-being of nations. We show that firms in long-term oriented countries can mitigate hold-up inefficiencies by engaging with their suppliers in relational contracting – informal agreements sustained by the value of future relationships. Our model predicts that countries with a higher level of patience will exhibit greater economic well-being and higher total factor productivity. Moreover, long-term oriented countries are predicted to have a higher prevalence of vertically integrated firms. We provide supportive empirical evidence for all theoretical predictions.
This paper provides a county-level investigation of the root causes of gun violence in the U.S. To guide our empirical analysis, we develop a simple theoretical model which suggests that firearm-related offenses in a given county increase with the number of illegal guns and decrease with social capital and police intensity. Using detailed panel data from the Federal Bureau of Investigation for the period 1986-2014, we find empirical evidence for the causal effects of illegal guns, social capital, and police intensity consistent with our theoretical predictions. Based on our analysis, we derive a range of policy recommendations.
We develop a theoretical framework to explain firms’ offshoring decisions in the presence of uncertainty. This model highlights the role of labor market institutions in shaping a firm’s ability to effectively react upon future shocks, yielding a sharp prediction of the prevalence of offshoring in a given industry: The propensity of firms to source intermediate inputs from foreign rather than domestic suppliers decreases in a foreign country’s labor market rigidity, and this effect is particularly pronounced in industries with higher volatility. Combining industry-level data on the U.S. offshoring intensity with measures of labor market rigidity and industry volatility, we find empirical evidence strongly supportive of the model’s predictions.
Relational Contracts and Global Sourcing, 2016. Journal of International Economics 101, 123-147.
Relational contracts – informal agreements sustained by the value of future relationships – are integral parts of global production processes. This paper develops a repeated-game model of global sourcing in which final good producers decide whether to engage with their suppliers in relational contracting and whether to integrate a supplier into a firm’s boundaries or deal with the latter at arm’s-length. The model predicts that the relative prevalence of vertical integration increases in the long-term orientation of the headquarters’ and suppliers’ managers. It further suggests that the share of a foreign subsidiary owned by a final good producer increases in the headquarters’ long-term orientation. Combining industry-level data from the U.S. Census Bureau’s Related Party Trade database with measures for long-term orientation from Hofstede et al. (2010) and the World Management Survey, I find empirical evidence supportive of the positive link between the long-term orientation of cooperation parties and the relative prevalence of vertical integration. Using information on managerial composition of firms and ownership stakes from the Bureau van Dijk’s Orbis database, I find that firms led by long-term oriented managers own higher shares of their foreign subsidiaries.
Formal and Informal Contracting in Global Sourcing, 2018 In Kohler, W., Yalcin E. (eds.): Developments in Global Sourcing. Cambridge, MIT Press.
This paper introduces relational contracts into a standard framework of global sourcing with partial contractibility to study the joint impact of formal and informal contracting institutions on a multinational firm’s make-or-buy decision. The model suggests that both formal contractibility and relational contracting affect a firm’s internalization decision, yet not necessarily in the same direction. The likelihood of vertical integration increases in the prevalence of relational contracting and in the contractibility of suppliers’ inputs but decreases in the contractibility of headquarters’ activities. Combining data from the U.S. Census Bureau’s Related Party Trade database with proxies for formal and informal contracting, I find empirical evidence supportive of this model’s predictions.