Institution-driven comparative advantage and organizational choice

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThe theory of the firm suggests that firms can respond to poor contract enforcement by vertically integrating their production process. The purpose of this paper is to examine whether firms' integration opportunities affect the way contract enforcement institutions determine international trade patterns. We find that the benefits of judicial quality for the exports of contract-intense goods are more muted in industries that have a greater propensity towards vertical integration arrangements with input suppliers. We show that our results are not driven by primitive industry characteristics. Our results confirm the role of judicial quality as source of comparative advantage and suggest that this depends not only on the technological characteristics of the goods produced but also on the way firms are able to organize the production process. JEL Classification Codes: D23, F10, F14, L22, L23.

Trade Policy Along the Global Value Chain a Rationale for the Existence of Deep Trade Agreements

“…To capture the quality of judicial institutions, we rely on survey information regarding the perceived corruption of the judicial system from the Varieties of Democracy Institute (see Pemstein et al, 2022). In an extension, we consider as an alternative the rule of law index from the Worldwide Governance Indicators (Kaufmann et al, 2010), which has been used for explaining the level and structure of bilateral trade flows in previous research (see Levchenko, 2007;Nunn, 2007;Ferguson and Formai, 2013). Beyond that, we also control for the share of preferential duty lines on inputs granted by the importer country to capture in a simple way the degree of bilateral integration prior to the formation of a TA, thereby acknowledging the qualification of our first hypothesis (see above).…”

“…In Models 8 and 9, we consider alternative measures for the quality of (judicial) institutions. In Model 8, we rely on the rules of law index from the World Governance Indicators, which has been used by previous research as a proxy for the quality of judicial institutions in general and contract enforcement as well as the security of property rights in particular (see Levchenko, 2007;Nunn, 2007;Ferguson and Formai, 2013). Compared to our preferred measure, this variable has lower coverage of countries as well as time periods.…”

“…Two seminal contributions in this respect are Levchenko (2007) and Nunn (2007), who show that introducing incomplete contracts into an international trade model generates a distinct source of comparative advantage between countries with differing institutional settings. Ferguson and Formai (2013) argue that institutional quality is a less important factor of fostering exports in industries with stronger vertical integration. Stefanadis (2010) takes a different perspective and analyzes the effect of trade openness on endogenous adjustments in institutional quality.…”

A New Motivation for Sustainable Trade Between Countries with Different Regulatory Qualities

“…If institutions are of better quality, there will be a higher possibility of contracts being enforced. Ferguson and Formai [17] also state that "Institutional quality contributes to a country's comparative advantage in the same way as the more traditional sources such as factor endowments and technology." De Groot et al [18] found that institutional quality and the quality of governance have a significant, positive, and substantial impact on bilateral trade.…”