International Frictions Research Articles

Scale, scope, and the international expansion strategies of multiproduct firms

AbstractA growing literature seeks to understand how the characteristics of firms shape the manner in which they serve foreign markets. We consider an environment in which multiproduct firms can sell their products in multiple countries from multiple locations. We show that there are strong empirical regularities in the expansion strategies of U.S. multinational firms and that simple extensions of standard models do not explain these regularities. We augment these models by introducing a framework in which organizational capital is a scarce input within the firm that has to be allocated to particular products and production locations and show that the standard model, so amended, is consistent with the data. We then use the model to analyze the productivity effect of changes in international frictions both within and across firms.

Non-traded goods, factor market frictions, and international capital flows

The canonical one-sector model over predicts international capital flows by a factor of ten. We show that introducing a non-traded goods sector can reconcile the differences between the theoretical predictions and the observed flows. We analyze the quantitative impact of the non-traded sector using a calibrated model of a small open economy, in which non-traded goods are used in consumption and investment, and need capital and labor to be produced. The model features international frictions directly affecting international borrowing and lending, as well as domestic frictions that limit the scope of inter-sectoral reallocation of capital and labor. We find that: (1) the impact of domestic frictions on the size of international capital flows is similar to the impact of international frictions, and (2) the median elasticity of capital flows with respect to international frictions in the two-sector model with costly inter-sectoral reallocation is about 50-60% lower than that same elasticity in the one-sector model.

Unfree Flow with No Trust: The Implications of Geoeconomics and Geopolitics for Data and Digital Trade

The recognition that the modern economy is increasingly driven by data and on-line commerce has led to a number of initiatives to establish a global data governance regime that promises “data free flow with trust” or DFFT, and an associated open e-commerce regime. Since then, notwithstanding progress in formulating proposals to build the trust that is the key to enabling free flow, international frictions have pushed in the opposite direction and today’s reality is closer to unfree flow with no trust than it is to DFFT. The issues go beyond the technical and legal frameworks required to build trust at the level of private participants in the digital economy – the household/consumer and corporations. They extend to the geoeconomics and geopolitics of the knowledge-based and data-driven economy that emerge from the contest for the rising economic rents that this economy generates and the parallel contest for leadership/dominance of the new general purpose and dual-use technologies built on the nexus of big data/machine learning/artificial intelligence. This note discusses how data and digital trade policies are shaped by the new geoeconomics and geopolitics and how these are in fact endogenous to the technological conditions of the age.

Intra-national trade costs: Assaying regional frictions

The effects of intra-regional, inter-regional and international frictions on the trade flows of Canada’s provinces are disentangled by gravity model techniques. Unexplained Trade Barriers (UTBs) are the difference between inter-provincial trade barriers inferred from pair fixed effects and from bilateral distance and contiguity. The estimates reveal large intra-national trade costs and UTBs that vary significantly across Canada’s provinces. Decomposition of UTBs into relative border effects and a systematic residual UTB is based on a novel Cobb–Douglas aggregator of intra-provincial and pure inter-provincial trade costs. Variation of both components across provinces is big.

Clearinghouse-Five: Determinants of Voluntary Clearing in European Derivatives Markets

Central clearing is a major part of the policy response to the financial crisis of 2008, aiming to reign in counterparty credit risk in derivatives markets. I perform an empirical study of the incentives for voluntary central clearing of OTC derivative contracts in Europe. Central clearing acts as insurance against counterparty credit risk related to derivative contracts, and is legally mandated for a specific subset of standardized derivative contracts, with a significant portion of the other contracts eligible for voluntary clearing. I show that there exist significant economies of scale in central clearing, in terms of both the size of each contract, and the scale of total clearing activity. I also show that maturity of the contract and international frictions affect voluntary clearing of different types of derivative contracts in different ways, linked to the conventional maturity and payout structures of various types of contracts. Finally, I show that significant amount of clearing happens only for credit and interest rate derivatives, while equity, foreign exchange, and commodity derivatives are rarely centrally cleared. The results validate theoretical literature, and guide future modeling of derivative markets.

Achievements and Challenges for the Development of China's Foreign Trade after the WTO Accession -- Analysis from the Perspective of Sustainable Development

Remarkable achievements have been made on foreign trade since China’s entry into the WTO 14 years ago. However, China’s foreign trade is facing huge amounts of challenges in the meantime. For instances, from the perspective of trade sustainability, the way of extensive growth is causing increasing pressure on natural resources and environment; international trade frictions or disputes are also frequently happening; the export products are of low technology content and less competitive in the global markets. As the “Decision of the Central Committee of the Communist Party of China on Some Major Issues Concerning Comprehensively Deepening the Reform” puts, China intends to construct a new system of the open economy (NSOE). The strategic arrangement of the NSOE points out a right path for the development of China’s foreign economic relations in the new era. Meanwhile, it also puts forward new requirements of sustainable development to China’s foreign trade.

Preference shocks, international frictions, and international business cycles

Replicating the degree of cross-country comovements of macroeconomic aggregates, dynamics of prices and quantities of international trade, and the behavior of consumption and labor remains an important challenge in international business cycle literature. This paper incorporates preference shocks into a standard two-country model in which there exist international frictions, such as costs of transportation and restrictions to international asset trade. Country-specific preference shocks that generate fluctuations in each country's consumption and labor solve the puzzles, except for the discrepancy between theory and data regarding international trade variables. The presence or absence of international frictions plays a limited role in solving the puzzles.

Business Cycles in an Emerging Economy with Financial Frictions: The Case of Korea

This paper investigates sources of business cycles in Korea to shed some lights on the effects of economic crisis and the role of financial frictions. For this purpose, it sets up a canonical international real business cycle model augmented by international financial market frictions as in Garcia-Cicco, Pancrazi, and Uribe (2010). The paper applies Watson's (1993) measure of fit to evaluate the role of financial market frictions over Korean business cycles. It finds that the financial frictions have played a limited role in the economic fluctuations in Korea before and after the 1997 financial crisis.

State-led Catching up Strategies and Inherited Conflicts in Developing the ICT Industry: Behind the US–East Asia Semiconductor Disputes

Moving from labour to some capital and knowledge intensive sectors, East Asian countries have actively pursued strategic industrial policies and successfully promoted targeted sectors. However, their growth in high tech sectors challenged the US leadership and the World Trade Organization (WTO)-supported neo-liberal development “wisdom”. Tensions over trade and technology issues eventually exploded into fierce policy conflicts. This study explores the role of the state in a single information and communication technology (ICT) sector, the semiconductor industry, over the course of its evolution in Japan, Korea, Taiwan and China. It is hoped to tackle the issues surrounding the conflicts between the Western economic orthodoxy and East Asian development policies through explaining the ICT development pathway of these countries. The finding shows that the international frictions in both ICT trade and technology were inevitable and reflect the divergence of development visions held by latecomers and developed countries.

International Frictions and Optimal Monetary Policy Cooperation: Analytical Solutions

This paper analyzes the implications of price-setting and incomplete financial markets for optimal monetary cooperation. The main objective is to provide the basic intuitions concerning the role of the main international frictions on optimal policy within a simple Dynamic Stochastic General Equilibrium model. We concentrate on a symmetric two-country DSGE with home bias, incomplete financial markets internationally and imperfect competition together with nominal price rigidities in which the export prices can be denominated either in the producer currency (PCP) or in the consumer currency (LCP). In addition, the model can account both for efficient and inefficient shocks. Our main results are derived in polar cases with efficient steady state and for which the design of the optimal policy is specifically illustrative and can be expressed in terms of targeting rules. In particular, the paper gives some new insights on the optimal exchange rate regime given the structure of shocks and the exchange rate pass-through, as well as on the optimal stabilization of CPI and PPI inflation. We also put into perspective the implication of financial autarky on the optimal management of international spillovers. JEL Classification: E5, F4

The implications of global climatic changes for international security

Global climatic changes caused by growing concentrations of atmospheric trace gases have the potential to alter international relationships, economics, behavior, and security. While there is debate about the extent to which environmental problems alone can lead to conflict, it is widely acknowledged that resource constraints can act as roots leading to economic pressures and tensions, or as triggers to conflict when other pressures and tensions exist between states. Recent widespread attention to the issue of global environmental problems, particularly climatic change, is leading to a re-examination and expansion of the traditional narrow definition of “international security”. This paper discusses likely paths to international frictions and tensions and the responses that might be most appropriate to minimize the adverse consequences of climatic change for international security.

Dynamics among Business Practice, Aesthetics, Science, Politics and Religion

The interrelations among seemingly unrelated aspects of human activities such as business practice, aesthetics, science, politics and religion can be understood by means of analysis of epistemological meta-types called "mindscapes" This relational understanding is needed for dealing with today's urgent problems of international planning frictions, multi-cultural management frictions, and disorientation and incorrect actions in the changing international economic environment The transition from the classificational thinking to the relational and contextual thinking requires new mindscapes