Friday, 9 October, 2009 | 09:00 | Defense

Anu Kovaříková Arro: “Essays on the Globalization of Production and International Trade”

Dissertation Committee:
Gérard Roland(chair)
Krešimir Žigić
Andrew Austin
Evžen Kočenda



This dissertation consists of three essays on the globalization of production and international trade. In the economic literature, globalization has traditionally been represented by international trade, foreign direct investment and factor mobility, although more recently it has also come to relate to the fragmentation of production. Specifically, final good firms fragment their production such that they buy the intermediate products from outside producers, giving rise to horizontally specialized supply chains at separate stages of production.

The first chapter entitled "On the Extent of the Market when Markups are Endogenous" examines a setup where firms assemble their final product from a large number of intermediates. I use a model with two factors of production and nonhomothetic technology to challenge the current understanding in the monopolistic competition literature that an increase in market size necessarily implies an overall expansion. First, I propose three threshold rules that establish how a positive impact of increasing market size is sustained when the number of firms in the economy is small. As the number of firms grows beyond these thresholds, increasing market size instead creates trade-offs due to the conflicting impact of capital augmentation. Second, I determine that even when the number of firms is large, if market size grows in fixed factor proportions, the positive effect can be upheld. Third, I show that when two symmetric countries engage in costly trade, then the negative impact of increasing trade costs on total exports is borne by the intensive margin of trade, whereas the extensive margin expands.

The second chapter, "Vertical Specialization and the Inequality of Nations" examines how countries with different labor-capital ratios that have a production sector subject to international increasing returns can produce at different stages of production when they open up to trade. Three main predictions emerge: First, compared to autarky, the number of firms increases in a capital-abundant country and decreases in a labor-abundant country. Second, vertical specialization between countries differing in capital-labor ratios is determined by endowment differences, and the capital-abundant country becomes the net exporter of components, hence vertical specialization ensues. The third and most important result of the paper establishes that vertical specialization under free trade will result in a capital-abundant country accumulating a more than proportionate share of the differentiated goods industry. I also show that the welfare implications of trade are positive, but the expansion of the increasing-returns sector in the capital-abundant country will not, in general, make it gain more from trade.

The third chapter entitled "Standardization versus Specialization in Outsourcing" analyzes a general equilibrium model in which the industrial structure evolves into vertical integration or outsourcing to either specialized or standardized component producers. I show that outsourcing brings specialization efficiencies by reducing costs, whereas the degree of competition and the relative cost of customizing inputs determine whether specialized or standardized input suppliers survive in the equilibrium. Growth in the labor force or opening up to trade supports outsourcing to standardized input providers, since it generates the highest final good output at increasingly lower prices.

Full Text: “Essays on the Globalization of Production and International Trade” by Anu Kovaříková Arro