برون سپاری و گذرگاه درونی

A large share of international trade occurs through intra-firm transactions. We show that this common cross-border organization of the firm has implications for the well-documented incomplete transmission of shocks across such borders. We present new evidence of an inverse relationship between a firm's outsourcing of inputs and its rate of exchange-rate pass-through. We then develop a structural econometric model with final assemblers and upstream parts suppliers to quantify how firms' organization of their activities across national borders affects their pass-through behavior.

In recent years, the trade literature has produced several important new insights into the international organization of production. First, firms that engage in foreign trade are not a random sample of firms operating in the domestic economy but are larger, more productive, and more likely to be multinationals (see Helpman, 2006, for a review). Second, over the half-century of globalization dominated by multinationals (Bordo et al., 1999), trade in intermediate inputs has risen dramatically (Hummels et al., 2001). Third, over the past two decades, spurred by advances in computer-aided manufacturing, outsourcing has expanded both domestically and abroad.1 A natural question, then, is, how do these stylized facts help us better understand some of the pricing puzzles in international macroeconomics, such as the incomplete transmission of exchange-rate shocks to domestic prices? This paper analyzes the extent to which how firms organize their production activities across borders affects their pass-through of exchange-rate shocks to their prices. Although a substantial theoretical and empirical literature has made progress explaining how firms do not fully adjust their import prices following an exchange-rate shock, much less is understood about why. Yet assumptions about the why of this inertia shape economists' policy recommendations on some of the most basic issues in international goods and financial markets. Current research (most notably, Engel, 2002) points to three overarching sources of incomplete pass-through: the importance of local nontraded costs in the total costs of imported goods; markup adjustment by firms along the distribution chain; and the costs of nominal price adjustment.2 Evidence on the relative importance and underlying drivers of these sources remains mixed as the most important variables identified by theory—such as markups, nontraded costs, or vertical contracts—generally remain unobservable in practice, particularly in aggregate data sets. Before macroeconomic models can grapple with the implications of each of these potential sources of incomplete transmission, they need stylized facts from the microeconomic literature about their relative importance and underlying drivers.

This paper shows that the organization of firms has a clear relationship to their pass-through of cost shocks to their prices. Our regression analysis suggests that pass-through is positively related to firms' degree of vertical integration across industries and in the auto industry in particular. Given this stylized fact, we estimate a structural model and use it to assess the extent to which pass-through is related to vertical integration by simulating firms' pass-through behavior in illustrative what-if scenarios. Our findings suggest that a significant portion of incomplete cross-border pass-through may result from successive optimizations by firms along a production chain that spans national borders. One implication of our work is that the overall effect of an exchange-rate shock on a domestic economy will vary in its magnitude and its distribution across domestic firms, foreign firms, and consumers depending on the vertical contract that dominates the economy's import and export sectors. Future research might explore the implications of these findings for exchange-rate pass-through patterns across countries with different industry mixes and thus dominant vertical contracts in their import and export sectors. To give an example, most rich-to-rich country trade is multinational, while most poor-to-rich country trade is outsourced. It is worth exploring further how the dominant form of firm organization in a given country's cross-border transactions affects the transmission of foreign exchange-rate shocks to the domestic economy. It would be particularly interesting to determine how many of the stylized facts about the differing responses of developed and developing economies to external shocks can be attributed to the prevailing type of firm organization in their cross-border transactions.