We provide the first worldwide overview of the patterns of hierarchical differentiation across Business Groups (BGs), highlighting the coexistence of different hierarchical shapes. We show how the different shapes can arise as optimal hierarchical structures in a knowledge-based model of BGs when subsidiaries' operations involve problem-solving under parents' supervision. The optimal choice of hierarchical structure is driven by production efficiency and two dimensions of problem-solving: efficiency related to supervising knowledge creation and handling associated communication across subsidiaries. We check the consistency of the model's predictions with the empirical patterns. The model successfully passes the consistency test (JEL D23, L23, F23, L25, G34)

We explore the role of global value chains (GVCs) in the design of preferential trade agreements (PTAs). We propose a theory that focuses on firms involved in GVC activities to identify the main actors pushing for deep trade integration. To address the critical issue of endogeneity of GVC trade flows for trade policy, our identification strategy exploits a transportation shock: the sharp increase in the maximum size of container ships, which more than quadrupled between 1995 and 2017. The key variation in our instrument hinges on the fact that only deep-water ports can accommodate these new larger ships. Armed with this instrument, we find that GVC trade increases the probability of forming deep PTAs that include provisions regulating both trade-related policies and domestic regulatory regimes. GVC trade is a driver of deep preferential trade liberalization.

We show that short-term liquidity can be a source of competitive advantage by enabling firms to invest in intangible assets. Our analysis leverages a French reform that capped payment delays in trade credit contracts, which generated quasi-experimental variation in corporate liquidity across manufacturing firms. Higher liquidity led to significantly greater investment in intangibles, which, in turn, raised markups and market shares. These results suggest a strategic role for liquidity in shaping firm performance, indicating that initial financial conditions can have lasting effects on productivity and market structure.

We take the global financial crisis (GFC), as an example of major crises, to study the trends of intangible investment, the link between industrial performance and intangible assets, and the differences of financing of intangible versus tangible assets during crises. We find an upward trend in investment intensities (investment-to-value added) for several kinds of intangible assets in almost all advanced EU countries, and in almost all sectors based on industry-level data. This trend started well before the GFC and the crisis had little impact on it, in contrast to tangible investment intensities, which declined a lot. Then we explore the potential role that intangible assets may play in weathering the negative effects of major crises using industry-level data. One of the main results about industrial performance is that pre-crisis R&D investment is robustly associated with economic resilience during the GFC, and higher productivity growth in the aftermath. Finally, we investigate how a financial turmoil may affect the financing of different assets. We combine insights from a macro (industry-level) and a micro (firm-level) approach to shed light on the importance of financial shocks in intangible investment. We find differences from tangible investment, mainly that tangibles are more sensitive to demand shocks, while intangible investment is more vulnerable to financial shocks. For the latter, our main explanation is that tight credit conditions create a trade-off between tangible and intangible investment financing.

Productivity varies widely between industries and countries, but even more so across individual firms within the same sectors. The challenge for governments is to strike the right balance between policies designed to increase overall productivity and policies designed to promote the reallocation of resources towards firms that could use them more effectively. The aim of this book is to provide the empirical evidence necessary in order to strike this policy balance. The authors do so by using a micro-aggregated dataset for 20 EU economies produced by CompNet, the Competitiveness Research Network, established some 10 years ago among major European institutions and a number of EU productivity boards, National Central Banks, National Statistical institutes, as well as academic Institutions. They call for pan-EU initiatives involving statistical offices and scholars to achieve a truly complete EU market for firm-level information on which to build solidly founded economic policies.

No AccessPolicy Research Working Papers4 May 2021Global Value Chains and Deep IntegrationAuthors/Editors: Leonardo Baccini, Matteo Fiorini, Bernard Hoekman, Carlo Altomonte, Italo ColantoneLeonardo Baccini, Matteo Fiorini, Bernard Hoekman, Carlo Altomonte, Italo Colantonehttps://doi.org/10.1596/1813-9450-9598SectionsAboutView ChaptersPDF (0.6 MB) ToolsAdd to favoritesDownload CitationsTrack Citations ShareFacebookTwitterLinked In Abstract: How does trade affect the design of preferential trade agreements (PTAs)? What is the role of global value chains (GVCs)? The authors answer these questions by empirically investigating the causal impact of gross and value-added trade on the depth of PTAs. To solve the critical issue of endogeneity of trade flows for trade policy, the identification strategy exploits a recent transportation shock: the sharp increase in the maximum size of container ships, which has more than tripled between 1995 and 2007. The key variation in our instrument hinges on the fact that only deep-water ports can accommodate new larger ships. The strategy is flexible enough to generate excludable instruments for different value-added components of exports. This allows us to assess how the design (depth) of PTAs is affected not only by gross exports but more specifically by GVC-trade as captured by indicators of trade in domestic and foreign value added. The authors find that trade occurring through GVCs increases the probability of forming deep PTAs, i.e., agreements that include provisions that go beyond the coverage of the WTO. These GVC-trade effects are larger than those of gross exports, which include flows that are unrelated to GVCs. The results indicate that GVCs are one important driver of deep preferential liberalization. Previous bookNext book FiguresreferencesRecommendeddetails View Published: March 2021 Copyright & Permissions Related TopicsInternational Economics & Trade KeywordsDEEP TRADE AGREEMENTGLOBAL VALUE CHAINDEEP INTEGRATIONREGIONAL INTEGRATIONINTERNATIONAL TRADEPREFERENTIAL TRADE AGREEMENTSTRADE POLICY PDF DownloadLoading ...

Hierarchical differentiation is a cornerstone of the organizing process. In this paper, we do three things. First, exploiting a newly assembled dataset, we provide the first worldwide overview of the patterns of hierarchical differentiation across Business Groups (BGs), highlighting the coexistence of different hierarchical shapes. Second, we show how the different shapes can arise as optimal hierarchical structures in a knowledge-based model of BGs when subsidiaries' operations involve ubiquitous problem solving under parents' supervision. Three primitive characteristics of a BG determine its optimal choice of hierarchical structure: production efficiency and two dimensions of problem solving efficiency related to supervising knowledge creation and handling associated communication across subsidiaries. Third, we check the consistency of the model's predictions with the empirical patterns for Europe, the US, and the world. The model successfully passes the consistency test.

We leverage on important findings in social psychology to build a behavioral theory of protest vote. An individual develops a feeling of resentment if she loses income over time while richer people do not, or if she does not gain as others do, i.e. when her relative deprivation increases. In line with the Intergroup Emotions Theory, this feeling is amplified if the individual identifies with a community experiencing the same feeling. Such a negative collective emotion, which we define as aggrievement, fuels the desire to take revenge against traditional parties and the richer elite, a common trait of populist rhetoric. The theory predicts higher support for the protest party when individuals identify more strongly with their local community and when a higher share of community members are aggrieved. We test this theory using longitudinal data on British households and exploiting the emergence of the UK Independence Party (UKIP) in Great Britain in the 2010 and 2015 national elections. Empirical findings robustly support theoretical predictions. The psychological mechanism postulated by our theory survives the controls for alternative non-behavioral mechanisms (e.g. information sharing or political activism in local communities).

We revisit the relationship between trade and growth taking into account the recent expansion of global value chains (GVCs). We develop a new instrument for trade based on gravity estimations. Our instrument exploits a recent transportation shock: the sharp increase in the maximum size of container ships, which has more than tripled between 1995 and 2007. This shock has an asymmetric impact on different bilateral trade flows, based on the ex-ante presence of deep-water ports across countries, since these are the only ports that can accommodate the new larger ships. Our empirical set-up allows us to obtain instrumental variables not only for gross trade flows, but also for the different value added components of exports, for which we run separate gravity estimations based on WIOD data. We find that trade has a positive effect on GDP per capita, both in levels and in growth terms. Evidence at the country and industry level suggests that the effect works through both productivity improvements and capital deepening. We show that the effect of exports on income is crucially moderated by differences in their value added composition. In particular, we find evidence of stronger export effects on growth for countries that upgrade their positioning or improve their participation to GVCs more than others over time.

We propose a new theory of business groups as knowledge-based hierarchies that arise when contractual incompleteness may lead to dissipation of firms’specific knowledge. The theory predicts that a parent firm choosing to organize its activities as a business group rather than as a single integrated entity is more likely to emerge in good institutional environments. When this happens, a ‘hierarchical’business group with several layers of subsidiaries controlled by the parent is more likely to appear than a ‘flat’one with fewer layers if the firm has better production possibilities (which require more challeging problem solving), faces lower communication costs between hierarchical layers, and incurs a lower skill premium in hiring good managers. We provide empirical support for these theoretical predictions exploiting the unique features of a dataset in which we observe the ownership structures (number of subsidiaries, countries and industries in which subsidiaries operate, and the subsidiaries’ positions at different hierarchical layers) of 178,190 business groups incorporated in OECD countries and controlling more than 1,150,000 (domestic and foreign) subsidiaries worldwide in the year 2010. JEL classification: D23; L23; F23; L25; G34

We incorporate heterogeneous financial frictions in a setting of monopolistically competitive firms with endogenous markups. Before producing, firms must pledge collateral to obtain a bank loan, needed to cover part of production costs. Firms differ both in productivity and in their cost of raising collateral. Firm-specic financial frictions, together with productivity, therefore figure in the equilibrium expressions of prices and markups. We validate our theoretical results on a representative sample of European manufacturing firms surveyed during the financial crisis. Guided by our model we retrieve from balance-sheet data firm-specic measures of access to finance, total factor productivity and markups, and then use these variables to estimate our equilibrium equations structurally. Consistent with our model, we show how heterogeneity in access to finance explains part of the dispersion of prices and markups, even after controlling for firms' productivity and size. In the aggregate industry equilibrium, the amount of collateral required by banks significantly affects the cost pass-through to prices.

We extend a framework of monopolistically competitive firms heterogeneous in productivity and with endogenous markups (as in Melitz and Ottaviano, 2008) to incorporate the presence of financial frictions. Before producing, firms need to obtain a loan necessary to cover part of production costs, for which they have to pledge collateral in the form of tangible assets. In addition to productivity, firms are also heterogeneous in their financial capability: some firms have access to collateral at lower costs. As a result, financial capability and collateral requirements enter together with productivity in the expression of the equilibrium firm-level markup. At the aggregate level, the model shows that tighter credit constraints in the form of higher collateral requirements mitigate the pro-competitive effect of trade. We validate our theoretical results capitalizing on a representative sample of manufacturing firms surveyed across a subset of European countries during the financial crisis. Guided by theory, we estimate for each firm financial capability, TFP and markups. We then employ those estimates to structurally retrieve from the model a firm-specific measure of collateral requirements (a proxy of credit constraint), and test our main propositions.

One of the most important lessons learned during the 2008-09 financial crisis was that the informational toolbox on which policymakers base their decisions about competitiveness became outdated in terms of both data sources and data analysis. The toolbox is particularly outdated when it comes to tapping the potential of micro data for the analysis of competitiveness – a serious problem given that it is firms, rather than countries that compete on global markets.

We introduce asymmetric product differentiation in a model characterized by a linear demand system, endogenous markups and heterogeneous firms (as in Melitz‐Ottaviano [2008]). In particular, a single industry is divided into a number of market segments, each characterized by a different degree of horizontal product differentiation. Such a setup allows us to explain, within a single theoretical framework, the non‐linear relations between firm productivity, size and exporting behavior that have been documented by the empirical literature. The theoretical results are tested empirically by examining the performance of French wine producers operating in market segments characterized by different levels of horizontal product differentiation. Such segments are identified using the official classification of French wines based upon the controlled denomination of origin, i.e., the Appellation d'Origine Contrôlée (AOC) system.

We present new survey evidence on pricing behavior for more than 14,000 European firms, and study its macroeconomic implications. Among firms that are price setters, roughly 75% respond that their prices are set as a markup on total costs, a business practice termed "full cost pricing". Only 25% set prices as markups over variable or marginal costs. Moreover, using industry data for the U.S., we find that the correlation between changes in output prices and changes in variable input prices is significantly lower when fixed costs are likely to be more important.Since our results are similar to the findings in the classic and controversial paper of Hall and Hitch (1939) and subsequent survey evidence, we believe it worth studying the implications of full cost pricing for macroeconomics. We first propose a problem for the firm where full cost pricing can arise as optimizing behavior. We embed this problem, featuring an occasionally binding constraint, into a simple general equilibrium model. We show that when the model is hit by a shock that makes the constraint binding, the response of endogenous variables is amplified significantly more than it would be under the unconstrained regime. (C) 2015 Elsevier B.V. All rights reserved.

We investigate the effects of import penetration on the estimated price–cost margins of more than 28,000 firms operating in the Italian manufacturing sector. In the period considered (1998–2003), we find on average broad evidence of pro-competitive gains from trade. However, when performing the same analysis at a more detailed industry level, we find substantial heterogeneity in the responses: in some industries the increased exposure to international trade is associated with higher, rather than lower, markups, while in others the relationship is not significant. In particular, the industries in which we find a positive impact of import penetration on markups exhibit, on average, a larger variation in the composition of their product-mix.

This paper adds new empirical evidence on the mutual relationships between credit constraints, total factor productivity, Research and Development (R&D) investments and exporting, by jointly considering them in a simultaneous equation framework. Our empirical analysis focuses on a large sample of manufacturing firms from France, Germany, Italy and Spain. Our results confirm the well-known mutual positive correlation among exporting, R&D and firm's productivity. They also show the existence of a mutual relationship between exporting, productivity and credit constraints: exporters and high productivity firms are less likely to be credit constrained, while better access to credit is associated with larger productivity and a higher probability of exporting. By contrast, we find no significant relation between investing in R&D and the probability to be credit constrained, conditional on exporting. This suggests that efficiency-improving strategies, mediated by the existence of credit constraints, are at the core of firm growth achieved through exporting and innovation.