Learning, Incomplete Contracts and Export Dynamics: Theory and Evidence from French Firms

Headquarters and their specialized component suppliers have a vital interest in establishing long-term collaborations. When formal contracts are not enforceable, such efficiency enhancing cooperation's can be established via informal agreements, but relational contracts have been largely ignored in the literature on the international organization of value chains. In this paper, we develop a dynamic property rights model of global sourcing. A domestic headquarter collaborates with a foreign input supplier and makes two decisions in every period: i) whether to engage in a costly search for a better partner, and ii) whether to make a non-binding offer to overcome hold-up problems. Our key result is that the possibility to switch partners crucially affects the contractual nature of buyer-supplier relationships. In particular, some patient firms do not immediately establish a relational contract, but only when they decide to stop searching and thus launch a long-term collaboration with their supplier. From our model, we develop an instrumental variable estimation strategy that we apply using transaction-level data of fresh Chinese exporters to the US. We obtain empirical evidence in line with the theoretical prediction of a positive causal effect of match durations on relational contracting.

Section: Introductionmentioning

confidence: 86%

Relational contracts and supplier turnover in the global economy

Defever

Fischer

Suedekum

2016

“…8 See, for example, Eaton et al (2008) for Columbian firms, Aeberhardt et al (2009) for French firms, Lawless (2009) for Irish firms, Iacovone and Javorcik (2010) for Mexican firms, and Albornoz et al (2012) for Argentinian firms.…”

Section: The Dynamics Of Export and Fdi Entriesmentioning

confidence: 99%

“…The importance of "export-supporting FDI", i.e. foreign investments in distribution to penetrate export markets, has been emphasized by Aeberhardt et al (2009);Arkolakis (2010) and Krautheim (2013). exports; if profitability exceeds the threshold µ EI = 2F I φ − φ 2 + τ , the exporting firm will find it profitable to invest in a distribution network, paying the fixed cost F I to reduce its variable costs. 49 As in our benchmark model, uncertainty can thus lead to a gradual internationalization process, whereby a firm's export entry precedes its FDI entry: during an initial trial period, the firm uses a local agent to distribute its exports in the foreign market; if it discovers that it can earn large enough profits in that market, it invests in distributionoriented FDI.…”

Section: A3: Distribution-oriented Fdimentioning

confidence: 99%

The internationalization process of firms: From exports to FDI

Conconi

Sapir

Zanardi

2016

149

109

This paper examines firms' choice between serving a foreign market through exports or foreign direct investment (FDI). We begin by unveiling a new empirical regularity: using a unique dataset that allows us to study the dynamics of firms' export and FDI choices in individual destination markets, we show that the overwhelming majority of firms serve a foreign market via exports before establishing affiliates in that market. To explain this pattern, we develop a simple dynamic model of export and FDI choices, in which a firm can only discover its ability to earn profits in a foreign market once it starts serving it. We show that uncertainty can lead to a gradual internationalization process, whereby the firm tests the foreign market via exports, before engaging in FDI. Consistent with the model's predictions, we find that most firms start serving a foreign market through exports; in the first years following export entry, many firms drop out of the foreign market, others survive and expand as exporters, some establish foreign affiliates. We show that a firm's export experience in a foreign market increases its probability of FDI entry; this effect decreases over time and increases with foreign market uncertainty. Our analysis suggests that exports and FDI, although substitutes from a static perspective, may be complements over time, since the knowledge acquired through export experimentation can lead firms to start investing abroad.JEL classifications: F10, D21, F13.

“…5 For example, Bernard et al (2010) and Corcos et al (2013) estimate the effect of product contractibility and countries' institutions on the level of and the choice to engage or not in intra-firm trade. 6 See also Aeberhardt et al (2014), who study related but different empirical implications obtained from a variant of our model. is intuitively similar to ours, they find that imports of more financially-dependent goods from less developed countries are initially constrained but grow relatively fast.…”

Section: Introductionmentioning

confidence: 97%

“…2 In this paper we study how those factors influence the dynamics of trade at the firm level. Relying on the premise that informational frictions create fundamental obstacles to international trade, we argue that strong institutions (at the country level) and export experience (at the firm level) may assuage those constraints, but the effects can be subtle.…”

Section: Introductionmentioning

confidence: 99%

Institutions and export dynamics

Araújo

Mion

Ornelas³

2016

129

We study how contract enforcement and export experience shape firm export dynamics in an environment with incomplete information. We show that exporters start with higher volumes and sell for longer periods in countries with better contracting institutions and when they have prior foreign experience. However, conditional on survival, firm export growth decreases with the quality of the country's institutions. Controlling for timevarying firm unobservables and other factors, we confirm these and other predictions using a panel of Belgian exporting firms from 1995 to 2008. The results highlight the manifold implications of export experience and contracting institutions for firm dynamics in foreign markets.JEL Classification: F10, F12, L14