Indice
Traditional economic theories regard trade as an exchange between economic entities with opposing interests. From the Ricardian theory of comparative advantages (according to which the determinant element of international trade is the specialisation of countries in the production of those goods in which they have a comparative advantage measured in terms of lower opportunity cost compared to another and given a certain level of technology taking into account the labour factor only, despite the fact that in absolute terms they have a disadvantage in the production of goods produced in both territories), to the Heckscher and Ohlin theorem (international trade is determined not only by labour productivity but also by a different input of other factors of production), the basic assumption is that the exchange between a selling and a buying company.
In more recent studies, especially since the 1980s, with the realisation that international trade incorporates phenomena that is not included in more traditional theories, the focus has been on the dynamics of the intermediate inputs of trade.
Some research has placed cost-based competitiveness and factor prices[i] at the centre of the analysis. In other cases, the property rights approach[ii]has been adopted, namely, theories that consider the ownership of the means of production, i.e. of investments, as a crucial variable that influences the bargaining between buyers and sellers, tilting the scales in favour of the owner, by taking into account the ex-ante and ex-post negotiation phases on account of the incompleteness of the contracts regulating the exchange.
The basic assumption of exchanges between different firms entails that each of them operates in the market by investing in its own production system for the purposes of to improving factor productivity and, thus, their competitivity. In intra-firm (‘one-contracting party’) exchange, these dynamics are compromised.
International trade studies, therefore, analyse intra-firm trade by not considering as a basic assumption the disruption of the economic fundamentals due to the fact that trade relations between companies of the same group take the form of a one-contracting party apparent exchange.
For instance, one of the most important theories on this subject[iii] proposes an analysis of the vertical specialisation processes of the production of the multinational firm based on the possibility of choosing between the use of an external supplier or, alternatively, its branch (FDI) for the procurement of intermediate inputs. The model considers two levels of bargaining at the ‘parent company’ (pincipal) level: that with the manager of the branch, if he chooses the FDI, and that with the external supplier, i.e. a firm that is not subject to his control. Since the manager is regarded as an employee of the ‘parent company’, the latter can leverage managerial incentives for maximum performance, as well as an increased possibility to monitor its actions, which can occur at best to a very limited extent with an independent firm. In addition, it is noted that in the case of in-house outsourcing, the parent company bears the initial production costs, whereas in the case of outsourcing these costs are borne by the external provider. In summary, the choice of organisational form is affected by contractual constraints, which are regarded as the result of a negotiation with a counterparty, the manager or the outsourcer.
If one uses the one-contracting party economy approach, in cases where the production of inputs is delegated to foreign affiliates, the bargaining power takes a different form and nature than the one envisaged.
To fully understand the importance of this phenomenon, one must always consider the legal extent of the exchange, where the supply of intra-firm intermediate inputs and the supply of intermediate inputs with an independent outsourcer is indeed identical, in the sense that in both cases a commercial trade contract is concluded between a seller and a buyer. However, the content of the respective contracts have structurally different economic and commercial rationales.
When a holding company negotiates with an independent supplier, a bargaining takes place which reflects opposing interests of the seller and the buyer. When the contract is concluded between a parent company and a subsidiary, there is hardly any such opposition.
It follows that the choice of reverting to an external firm or an affiliate depends more on the ability to monitor and manage the ordinary functioning of the activities carried out by the workforce of the foreign subsidiary, an objective that is functional to the accumulation of the added value that an independent entrepreneur generally tries to create for himself with his investments. The productivity of the subsidiaries is a figure that largely depends on the investment choices made earlier by the parent company, i.e. the contractual party.
Nash’s game theory – invoked with regard to ex ante and ex post contractual distortions with the property rights approach – is therefore unable to explain the strategies and balances of intra-firm trade. There is only one player: the corporate group, although it operates through several legal entities. The exchange takes place within the legal sphere, whereas in the real economic sphere there is a single firm that needs to generate higher profits and lower costs as a whole. The true contracting party, i.e. the player, is not another firm, but rather a set of people who have interests in the subsidiary, including the workers and creditors.
The theory of the one-contracting party apparent economy is consistent with the results of some empirical research[iv], according to which the expansion of imports of intermediate inputs from foreign affiliates is higher in host countries with low wages, lower trade costs and where other favourable variables, including more advantageous political conditions, can be exploited.
[i] See Elhanan Helpman and Paul Krugman (Market Structure and Foreign Trade: Increasing Returns, Imperfect Competition and the International Economy, in ‘Journal of International Economics’, 1986, vol. 21, pp. 183-187) which take into account the existence of internal (but also external) economies of scale within the firm participating in international trade, as well as other microeconomic variables such as consumer tastes.
[ii] Theory first expounded by Sanford J. Grossman and Oliver D. Hart (The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration, in ‘J. Political Econ.’, 1986, 94, pp. 691-719), which were joined by contributions from Oliver Hart and John Moore (Property Rights and the Nature of the Firm, in ‘J. Political Econ.’, 1990, 98, pp. 1119- 1158.) and Oliver Hart (Firms, Contracts and Financial Structure, Oxford, Oxford University Press, 1995). More recently, in a critical manner, Oliver Williamson (The Theory of the Firm as Governance Structure: From Choice to Contract, in ‘J. Econ. Perspect.’, 2002, 16, pp. 171-195.). See, the studies of Pol Antràs for a specific focus on intra-firm trade, Firms, Contracts, and Trade Structure, in ‘The Quarterly Journal of Economics’, vol. 118, November 2003, pp. 1375-1418. See also for a summary of the relevant theories, the recent paper by Daniel Müller and Patrick W. Schmitz, Transaction Costs and the Property Rights Approach to the Theory of the Firm, in ‘European Economic Review’, vol. 87, August 2016, pp. 92-107.
[iii] See Gene Grossman and Elhanan Helpman, Managerial Incentives and the International Organization of Production, in ‘Journal of International Economics’, no. 63, 2044, pp. 237-262. On this issue, also see Pol Antràs, Firms, Contracts, and Trade Structure, in ‘The Quarterly Journal of Economics’, MIT Press, vol. 118(4), pp. 1375-1418; Toshiyuki Matsuura and Banri Ito, Intra-firm Trade and Contract Completeness: Evidence from Japanese Affiliate Firms, in ‘Internationalization of Japanese Firms: Evidence from Firm-level Data’, Springer Japan, 2013, pp. 151-169.
[iv] See Gordon H. Hanson, Raymond J. Mataloni, Jr. and Matthew J. Slaughter, Vertical Production Networks in Multinational Firms, in ‘The Review of Economics and Statistics’, 2005, 87(4), pp. 664-678.