Firms in
International Trade
Fabrice Defever
6th Form Conference
6th Form Conference, June 2010
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What Economics is about?
The Pin factory
Adam Smith:
The division of labour in pin manufacturing
(and the great increase in the quantity of work that results)
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What Economics is about?
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.
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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
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I. International Trade: From country to
firm analysis
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Once upon a time, country specialisation looked
pretty good as a description of trade …
From Krugman’ Nobel Prize
presentation (2008)
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Once upon a time, country specialisation looked
pretty good as a description of trade …
Silver
India
Great Britain
Tea
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…but over time it got hard to see much differences
between what countries exported and what they
imported
From Krugman’ Nobel Prize
presentation (2008)
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…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.
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…but over time it got hard to see much difference
between what countries exported and what they
imported
Varieties of cars
(e.g. BMW, Mercedes)
France
Germany
Varieties of cars
(e.g. Peugeot, Renault)
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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.
In 2008, Paul Krugman received the Nobel Prize for it.
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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.
As a result, the trade literature now focus on firms instead of countries
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I. Exporters
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Stylized facts on Exporting firms
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)
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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.
6th 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?
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II. Multinational Firms
A. The Boundaries of the Multinational Firms
B. Fragmentation of the Production Process
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Why Should We Care About
Multinational Firms?

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.
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A. The Boundaries of the Multinational Firms
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A. The Boundaries of the Multinational Firms
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
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A. The Boundaries of the Multinational Firms
Germany
USA
Marketing
Varieties of
sport shoes
(e.g. Nike)
China
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B. Fragmentation of the Production Process
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B. Fragmentation of the Production Process
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B. Fragmentation of the Production Process
Source: EIM , 1997-2002
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GEP Strategic Advisory Board, June 2008
Source: EIM , 1997-2002
IV. Everything old is new again –and that’s
the problem
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Everything old is new again –and that’s the
problem
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
Conclusion from Krugman’ Nobel Prize presentation (2008)
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Questions?
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