توسعه مالی و چرخه محصول

I develop a model to study how financial institution differences across countries affect the offshoring decision of Northern firms and whether a product cycle arises when the only comparative advantage of Northern suppliers is their access to better financial institutions. A Northern final-good producer needs to buy an intermediate input from a supplier to complete production. She can find this supplier either in the low-wage but financially underdeveloped South or in the high-wage and financially developed North. I show that financial institution differences affect the optimal contract offered to the supplier and are enough to generate a product cycle. The final-good producer faces a trade-off between low wages and contracting distortions. When the good is new, she finds it optimal to keep production in the North, at the cost of a higher wage but with the benefit of a less distorted contract. However, as the good becomes more standardized, the importance of the supplier increases and the cost of not shifting production to the South and take advantage of the lower wage offsets the contractual distortions that the underdeveloped Southern financial institutions create. The most salient empirical prediction is that the more R&D-intensive an industry is, the larger is the effect of financial development on offshoring. These results also hold when wages are endogenized. In the empirical section, the prediction is tested and confirmed using disaggregated trade data.

Goods can either be entirely produced inside a country or production can be fragmented across countries. In a seminal paper, Vernon (1966) argues that these two production strategies reflect different stages in the natural cycle of goods. In this product cycle, goods are created and initially produced in rich countries until they become more standardized and their assembly is shifted to lower-cost countries. In practice, this product cycle could arise because of Southern imitation, technology transfer, foreign direct investment, and so on. In this paper I focus on offshoring of production. A product cycle takes place because Northern firms prefer to buy intermediate inputs from Southern suppliers to complete the production of their final good. There exists a vast empirical literature that documents the increasing importance of offshoring of intermediate goods (see for example, Hummels et al., 2001 or Yeats, 2001). Financial development is a key determinant of firm behavior. It affects not only the size of the investment that financially constrained firms can undertake but also which type of contracts are written and how revenues and expenditures are shared ex-ante and ex-post.1 Even though there exists a widespread agreement about the importance of financial institutions and it is well known that financial development is heterogeneous across countries, the idea that financial institution differences could be a driving force of the product cycle has been largely ignored in the literature. In this paper I fill this gap by developing a simple model of offshoring in which the only comparative advantage of Northern suppliers is their access to better financial markets.

The trade literature has provided us with several explanations of the product cycle but the role of financial institutions has been largely ignored. I showed that financial institution differences are enough to generate a product cycle in which the production of new goods is kept in the (financially developed) North and it is shifted to the (financially underdeveloped) South when the good becomes more standardized. The intuition is that the final-good producer faces a trade-off between low wages and contractual distortions. When the good is new, intermediate inputs are not very important and the final-good producer finds it optimal to keep production in the North, at the cost of a higher wage but with the benefit of a less distorted contract. In contrast, when the good becomes more standardized and the importance of intermediate inputs increases, production is shifted to the South because the low Southern wage compensates the contractual distortions that less developed financial institutions create.