Employee spinouts, social networks, and family firms

James E. Rauch*, University of California and National Bureau of Economic Research, USA; and CESifo, Germany

Abstract
Recently collected data show that, within any manufacturing industry, vertically integrated firms tend to have larger, higher productivity plants, account for the bulk of sales, and also sell externally most of the inputs they produce. In a weak contracting environment characteristic of developing countries, vertically integrated firms are vulnerable to employee “spinouts”: managers of input divisions can start their own firms, making customized inputs formerly provided internally subject to hold-up and capturing the profits formerly made from external sales of generic inputs. This vulnerability is shown to lead to inefficiently low entry. Vertically integrated firms can fight back by hiring managers for their input divisions who are members of networks that informally sanction hold-ups or children who keep profits “in the family” even if they spin out. This is shown to predict the association of co-ethnic networks with high rates of entrepreneurship and the prominence of family-owned business groups in developing country manufacturing.

Keywords: employee spinouts, social networks, family firms, vertical integration, entrepreneurship

R&D, offshoring, and slicing along a global production chain

Larry D. Qiu*, University of Hong Kong
Mohan Zhou, Central University of Finance and Economics, China

Abstract
This paper analyzes the decision of a multinational firm from a developed country to slice a production chain and to allocate different tasks in the production chain globally. The process involves a wide range of tasks that varies from very routine jobs to research and development (R&D) intensive work. We find that under certain conditions, a drop in offshoring costs (1) leads to more slicing (an increase in the length of production chain) and more offshoring, (2) stimulates R&D, and (3) raises employment in the developed country.

Keywords: R&D; offshoring; production chain; innovation; task; slicing

Export or merge? Proximity vs. concentration in product space

Marc-Andreas Muendler*, University of California and NBER, USA; CESifo, Germany

Abstract
This paper proposes a proximity-concentration tradeoff in product space as a determinant of horizontal foreign direct investment (FDI). Firms that enter a foreign market by exporting are able to capture consumer surplus by introducing a differentiated product with characteristics that the incumbent cannot match. In relatively globalized product space, in contrast, consumers perceive an entrant’s difference to existing products as less pronounced so a consumer’s virtual distance costs in product space are lower and a merger with an incumbent (horizontal FDI) offers pricing power that allows the entrant to extract consumer rent. Lower physical trade costs of shipping make Bertrand price competition fiercer in differentiated product space and can provide an additional incentive for a merger. A basic product space model with a linear Hotelling setup can therefore explain why FDI has become more frequent in recent periods in the presence of falling trade costs. Cross-border merger and acquisitions data support the model’s prediction that horizontal FDI grows relatively faster than exports in differentiated goods industries, compared to homogeneous goods industries.

Keywords: Horizontal foreign direct investment; trade under imperfect competition;
differentiated product space; monopolization strategies; oligopoly in imperfect
markets

Do consumers discount parallel imports?

Kong-Pin Chen*, Academia Sinica, Taiwan
Hung-pin Lai, National Chung Cheng University, Taiwan
Ya-Ting Yu, National Central University, Taiwan

Abstract
Using data from Taiwan’s Yahoo! auctions of Nikon cameras, this paper investigates whether there exists any difference in transaction results between commodities which are sold by authorized sellers and those which are parallel imports. We find that the parallel imports and the authorized products differ not only in the warranty duration offered by the sellers, but also in the formats in which they are listed, both of which substantially affect trade probability and transaction price. We show that, after taking into account the endogenous choice of listing formats and the characteristics of the sellers and the items, an authorized product has a 7% higher trade probability than that of a parallel import and, if there is a sale, the transaction price as a ratio of the manufacturer’s suggested retail price is 0.093 higher. A small number of less-experienced parallel import sellers, in an attempt to maintain a price comparable to the authorized product, list their items in pure auction with unusually high starting bids. This accounts for the overall lower trade probability for the parallel imports. If we disregard these sellers who adopt pure auction, the authorized product has higher transaction price than, but about the same trade probability as, the parallel import.

Patent protection under endogenous product differentiation

Arijit Mukherjee*, Loughborough University, UK; CESifo, Germany; RCIE, Hong Kong

Abstract
It is generally believed that, if weak patent protection does not affect innovation, it makes consumers and society better off compared to strong patent protection by increasing the intensity of competition. We show that this conclusion may not be valid if the innovator can take other non-production strategies, such as product differentiation, which helps to reduce the intensity of competition. Weak patent protection may reduce consumer surplus and social welfare by inducing product differentiation. We show that the type of product-market competition and the market demand function play important roles in this respect. Hence, there can be an argument for strong patent protection even if it does not affect innovation.

Keywords: patent protection; product differentiation; welfare

Credit constraints, fragmentation, and inter-firm transactions

Sugata Marjit*, Centre for Studies in Social Sciences, Calcutta (CSSSC), India
Lei Yang, The Hong Kong Polytechnic University
Moushakhi Ray, Salesian College, India

Abstract
In this paper, we develop a model to illustrate the effects of credit constraints on changes in organizational form and firm entry. We find net borrowers to have a greater incentive to specialize in producing fragments within the production process when internal finance plays an important role (the specialization effect). Moreover, such credit constraint-induced specialization encourages the entry of new firms (the entry effect). When the entry effect dominates the specialization effect, total output is greater under fragmentation, which is contrary to the conventional wisdom that fragmentation may lead to the double-marginalization problem and reduce output.

Keywords: credit constraints; fragmentation