National Factor Endowment, Sector-specific Intensity, Technological Dependency and Organizational Structure:A Property-right Approach

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1 Assocaton for Informaton Systems AIS Electronc brary (AISe WHICEB 05 Proceedngs Wuhan Internatonal Conference on e-busness Summer Natonal Factor Endowment, Sector-specfc Intensty, Technologcal Dependency and Organzatonal Structure:A Property-rght Approach Yang u Busness School, East Chna Unversty of Poltcal Scence and aw, 060, Shangha, Chna, ddccex@63.com Follow ths and addtonal wors at: Recommended Ctaton u, Yang, "Natonal Factor Endowment, Sector-specfc Intensty, Technologcal Dependency and Organzatonal Structure:A Property-rght Approach" (05. WHICEB 05 Proceedngs Ths materal s brought to you by the Wuhan Internatonal Conference on e-busness at AIS Electronc brary (AISe. It has been accepted for ncluson n WHICEB 05 Proceedngs by an authorzed admnstrator of AIS Electronc brary (AISe. For more nformaton, please contact elbrary@asnet.org.

2 60 The Fourteen Wuhan Intematonal Conference on E-Busness Emergng Operatons & Servces Management Natonal Factor Endowment, Sector-specfc Intensty, Technologcal Dependency and Organzatonal Structure:A Property-rght Approach Yang u Busness School, East Chna Unversty of Poltcal Scence and aw, 060, Shangha, Chna Abstract:Ths document usng property-rght approach analyzes the effect of natonal factor endowment, sector-specfc ntensty of head-quarter servces and the degree of technologcal dependency on the decson of organzatonal structures of fnal-good producers.we hghlght that the technologcal dependency of the fnal-good producer on the suppler s a sgnfcant factor resultng to the heterogenety of frms wthn sectors so as ther organzatonal structures. The concluson s that cost advantage resultng from natonal factor endowment has sgnfcant effect on the decson of organzatonal structure of the fnal-good producer wth hgh degree of technologcal dependency. The sector-specfc ntensty of head-quarter servce has sgnfcant effect on the decson of organzatonal structure of the fnal-good producer wth low degree of technologcal dependency. Keywords:property-rght approach, organzatonal structure, degree of technologcal dependency, ntegraton, outsourcng. INTRODUCTION Snce 980s, globalzaton and ntegraton of world economy has become an rreversble trend resulted from technologcal nnovatons n communcaton and transportaton.and wth the deepenng of nternatonal dvson of labor whch s from nter-ndustry specalzaton to ntra-ndustry specalzaton and then to ntra-product specalzaton, tradtonal theores have undergone a substantal transformaton that heterogeneous frms rather than countres or ndustres have been the center of analyss. Studes on the organzatonal structures and nternatonal strateges of frms are becomng more and more mportant. Tradtonal theores of multnatonal corporatons are vertcal ntegraton (Helpman,984 [] ;Helpman and Krugman, 985 [] and horzontal ntegraton (Marusen,984 [3]. Marusen(00 [4] ncorporates vertcal and horzontal ntegraton nto nowledge-captal model to analyze the nternatonal strateges of frms. Motta and Norman (996 [5], Hanson, Matalon and Slaughter(00 [6], Eholm et al.(007 [7] show that products manufactured by foregn afflates of multnatonal corporatons have been exported to the country whch s nether source country nor host country andhost country s more lely an export-platform. Eholm et al. (007 ntroduce a model wth three countres to study the export-platform ntegraton strategy. They ndcate that varable cost advantage and hgh fxed cost of overseas producton encourage the export-platform nvestment whch explaned the FDI from source country to host country combned wth export from host country to the thrd country.yeaple (003 [8] constructs a complex ntegraton model wthn a north-south framewor and the concluson s that when transportaton cost s low, f endowment dfference between north and south s sgnfcant, frms choose vertcal ntegraton; f endowment dfference s small, frms choose domestc ntegraton. When transportaton cost s moderate and endowment dfference s great, frms choose complex ntegraton. When transportaton cost s hgh, frms choose horzontal ntegraton. Snce the late 990s, lots of emprcal studes challengethe assumpton of tradtonal theores onthe homogeneous frms wthn ndustres. Clerdes et al.(998 [9] usng Columba data, Bernard and Jensen(999 [0], Helpman et al. (004 [] usng U.S. data and Bee-Yan et al. (000 [] usng Tawan data Correspondng author. Emal: ddccex@63.com.

3 The Fourteen Wuhan Intematonal Conference on E-Busness Emergng Operatons & Servces Management 603 among others, have uncovered stylzed facts that exporters are n the mnorty wthn so-called exportng ndustres, and they are more productve and larger.mayer and Ottavano (007 [3] estmate that exporters exhbt a 3% hgher labor productvty than non-exporters n France. Meltz(003 [4] ntroduces a monopolstc competton model wth heterogeneous frms whch has been a footstone of studes.grossman et al. (006 [5] extend the model of Yeaple(003 by ncorporatng heterogeneous frms. The concluson s that frms wth low productvty choose domestc ntegraton. Frms wth hgh productvty,when transportaton cost s low wll choose to produce nputs and fnal goods n south and when transportaton cost s hgh they wll choose to produce nputs n south and assembled fnal goods n three countres separately. The strateges of frms wth moderate productvty depend on fxed cost of overseas producton and maret sze. Theores of ntegraton strateges focus on the decson of producton locatonabout ntermedate nputs and fnal goods.more recently, frms are no longer only dstrbutng producton stages to dfferent locatons, and they also acqure nputs from unafflated companes.outsourcng s becomng a prevalng organzatonal structure.mcaren (000 [6] and Grossman and Helpman (00 [7] hghlght that thcness of the maret s an mportant factor affectng decsons of frms to outsource.they ndcate that there s a trade-off faced by a frm between hgher fxed costs of ntegraton producton and searchng costs for the approprate suppler.and the probablty that a frm matches successfully s postve correlated wth degree of maret thcness. Grossman and Helpman (003, 005 [8.9] stress that the qualty of the nsttutons affects the organzatonalstructure of frm because of the ncomplete contract between the fnal-good producer and the suppler. Antràs(003,005 [0,] ndcates that the choce between ntegraton and outsourcng depends on the factor ntensty of sectors. Antràs and Helpman(004 [] consder there s a trade-off between hold-up problem related cost and the fxed cost of producton. And based on the assumpton of hgher fxed cost under ntegraton, they conclude that n component ntensve sectors, outsourcng prevals over vertcal ntegraton, whle n headquarter ntensve sectors, vertcal ntegraton and outsourcng can coexst and specfc strategy of a frm depends on ts productvty.antràs (005consders that organzatonal structure and locaton of producton depend on the product cycles. More specfcally, component ntensty of fnal good s ncreasng as the standardzaton of ntermedate nputs. Therefore, the organzatonal structure of frm s changng consequently. Ths document usng property-rght approach analyzes the optmal organzatonal structures of fnal-good producer. We extends Antràs and Helpman(004 by ntroducng a new frm-specfc factor whch s the degree of technologcal dependency of fnal-good producers on ntermedate supplers.. SETUP A MODE There are two countres: home (H and foregn (F, sharng dentcal preference of representatve consumer, whch s gven by a C.E.S. utlty functon: J / ( y d U μ log ( j Where μ j s the rato of expendture on fnal goods n sector j to total natonal ncome j j E, ( H, F, j μ j. yj sa fnal varety n sector j. ( 0 < < denotes elastcty of substtuton across fnal varetes. When maxmzng ( subject to the budget constrant μ j E pj yj, consumer demand for a partcular varety s /( j Aj pj y where A ( μ E / P j j j s real total expendture n fnalvaretes of sector j n country.there are two agents engaged n producton: a fnal-good producer Zj located n H who

4 604 The Fourteen Wuhan Intematonal Conference on E-Busness Emergng Operatons & Servces Management supples the head-quarter servce ntensve nput h j and produces the fnal good y j and an ntermedate suppler M j wth expertse located n H or F who supples the customzed component ntensve nput m j. Producton functon of the fnal good s y / ρ ρ ρ ( j θ j λj h j + λj m j ( Where θj s productvty of fnal-good producer Z j. λj s the ntensty of head-quarter servce n fnal varetes n sector j. ρj s the elastcty of substtuton between h j and m j, and t represents the degree of technologcal dependency of Zj on M j ( ρ <. The larger ρj s, the lower the degree of technologcal dependency of Zj on M j. We assume that unt of producton h j or m j needs unt local combned factor and unt prce of combned factors n home country s, whle ts prce n foregn countrysω ( 0 < ω. Snce from now on we dscuss a partcular sector, we drop the ndex j from all the varables. The fnal-good producer Z acqures m by two organzatonal structures whch are ntegraton (V and outsourcng (O. Followng Grossman and Hart (986 contracts are ncomplete n the sense that only contractble ex ante are the allocaton of resdual rghts and a lump sum transfers between two partes. The ex post barganng s modeled as a Nash Barganng game n whch the fnal-good producer obtans a fracton ( < < of the ex post gans from the relatonshp. Followng the property rghts approach, we assume that ex post barganng taes place both under outsourcng and under ntegraton. The dstrbuton of surplus s senstve to the organzatonal structures. In the case of ntegraton organzaton, M s a dvson of Z. If negotaton fals, Z can fre M and seze m.the outsde opton of M s zero. Z can get φy of fnal-goods, by frng M and hs outsde opton s φ R,where R py representng the total revenue. In equlbrum the revenue of Z s φ V ( φ R R R + and revenue of M s ( ( φ R ( R V. Whle n the case of outsourcng organzaton, M s ndependent suppler and has the resdual rght of control over m. A falure to reach an agreement on the dstrbuton of the surplus leaves both partes wth no ncome. In equlbrumthe O revenue of Z s R R and the revenue of O R R, M s ( ( V O where >.It s easy to show that the maxmum proft of Z n equlbrum s π Z ( A ρ Θ λ ( + ρ Φ ρ ( + Φ ( + K f fe (3

5 The Fourteen Wuhan Intematonal Conference on E-Busness Emergng Operatons & Servces Management 605 Where ( Θ θ ρ /( ρ /(, ρ λ H F Φ, W,W ω f fz + fm. W λ 3. THE OPTIMA ORGANIZATIONASTRUCTURES There are two nds of organzatonal structures: ntegraton and outsourcng. The fnal-good producer wll choose the optmal organzatonal structure whch can brng hm hgher expected proft. So t s straghtforward to show that the optmal ownershp structure s the soluton to dervatve the proft of Z wth : π Z ρ ρ ( λ A ρ Θ ( + Φ ( + Φ Φ (4 ( ρ ( ( ( The relatonshp between the proft of Z and depends on the expresson n the square bracets of (4, whch s a quadratc functon of Φ ( Φ 0 and n (0, + there s a unque soluton ( ( ( ( Φ0 + + [ ( ] ( ρ ( ρ showng as fgure. When Φ > Φ0,we have π / < 0, Z whch means the proft of Z s negatve correlatve wth l π z. In ths case, the proft under outsourcng organzaton s hgher. When Φ < Φ0,we have π / > 0,whch means the proft of Z Z s postve correlatve wth. In ths case, choosng Fgure. Relatonshp between Φ0 π z l l Φ and ntegraton organzaton wll brng hgher proft. The relatonshp between Φ and Φ 0 depends on the degree of technologcal dependency ρ, the ntensty of head-quarter nputs λ and relatve factor cost ω. 3. The optmal organzatonal structure n head-quarter ntensve sectors We denote ln( Φ / Φ0 G. In head-quarter ntensve sectors, G s negatve correlatve wth ρ, and ts When λ j > λh, λh ( ( ( W,e s the base of natural logarthm. + e

6 606 The Fourteen Wuhan Intematonal Conference on E-Busness Emergng Operatons & Servces Management maxmum and mnmum are ( G ρ ln W and G ( If [( ] W - / W max mn ρ respectvely. <, then G < 0.n ths case, ntegraton s a preferable organzatonalstructure. If [( ] / - > and when the degree of technologal dependency of Z s hgh( ρ (- ρ,, then G > 0 and outsourcng s a preferable organzatonal structure. Whle the degree of techologcal dependency s ρ, then G < 0 and ntegraton s a preferable organzatonal structure. low( ( ρ, We can conclude that n head-quarter ntensve sectors, when acqurng component nputs from the foregn country wth sgnfcant cost advantage, the degree of technologcal dependency has no effect on the decson of organzatonal structure of fnal-good producer. In ths case, ntegraton s preferable organzatonal structure. When acqurng component nputs from home or foregn country wth nsgnfcant cost advantage, the fnal-good producer wth hgh degree of technologcal dependency wll choose outsourcng organzaton, whle fnal-good producer wth low degree of technologcal dependency wll choose ntegraton organzaton. 3. The optmal organzatonal structure n component ntensve sectors In component ntensve sectors, G s postve correlatve wth G ( ρ 和 G ( max mn ln W ρ, and ts maxmum and mnmum are ρ respectvely. If [( ] W - / when the degree of technologcal dependency s hgh( ρ (- ρ, <, and 3, then G < 0 and ntegraton s a preferable organzatonal structure, whle when the degree of technologal dependency s low( ρ ( ρ,, G and outsourcng s a preferable organzatonal structure. If [( ] W - / then > 0 >, then G > 0. In ths case, outsourcng s a preferable organzatonal structure. We can conclude that n component ntensve sectors, when acqurng component nputsfrom the foregn country wth sgnfcant cost advantage, the fnal-good producer wth hgh degree of technologcal dependency wll choose ntegraton structure whle the fnal-good producer wth low technologcal dependency wll choose outsourcng structure. When the fnal-good producer acqures componentnputsform home or the foregn country wth nsgnfcant cost advantage, the degree of technologcal dependency has no effect on hs ρ s the soluton of G ( ρ, λ λ - λ ρ - W,where ρ ρ ( ( ( ( (, λ { λ λ ( λh, } - ρ When λ j < λ, and W λ +. ρ s the soluton of, ρ λ G where λ { λ λ ( 0, } λ. - ρ.

7 The Fourteen Wuhan Intematonal Conference on E-Busness Emergng Operatons & Servces Management 607 organzatonal decson, and outsourcng s a preferable organzatonal structure. 3.3 The optmal organzatonal structure n sectors wth moderate ntensty of head-quarter servce ρ s shown n fgur. If [( ] W - / In these sectors, the relatonshp between G and < and when G max ρ < 0,correspendng to case, then G < 0,n ths case, ntegraton s preferable organzatonal strructure.whle when G max ρ > 0 correspendng to case, f ρ (,ρ 3 and ρ ( ρ 4,, then G < 0 and ntegraton s preferable organzatonal structure, f ρ ( ρ3,ρ 4,then G > 0, outsourcng s preferable organzatonal strructure. If [( ] W > - / correspendng to case 3, f ρ (,ρ 5, then G > 0, outsourcng s preferable organzatonal strructure, and f ρ ( ρ 5, then G < 0 and ntegraton s preferable organzatonal structure. ρ ρ ρ Case ρ Case G ( ρ Case 3 ρ 3 ln W G ρ 4 ρ 5 ( - mn ρ ρ ρ Fgure. The sectors wth moderate ntensty of head-quarter servce We conclude that when acqurng component nputsfrom the foregn country wth sgnfcant cost advantage, fnal-good producer n the sectors wth hgher ntensty of head-quarter servce( λ M < λ < λh wll choose ntegraton organzaton, and fnal-good producer n the sectors wth lower ntensty of head-quarter servce ( λ < λ < λm, wth hgh or low degree of technologcal dependency wll choose ntegraton, whle fnal-good producer wth moderat degree of tech dependency wll choose outsourcng. When acqurng componentnputsform home or the foregn country wth nsgnfcant cost advantage, fnal-good producer wth hgher degree of tech dependency wll choose outsourcng organzaton, and wth lower degree of tech dependency wll choose ntegraton. We ncorporate the three parts analyss above nto table. If the cost advantage n foregn country s nsgnfcant, the locaton of producton of customzed component does not affect the decson of organzatonal structures of the fnal-good producer. In head-quarter ntensve sector, the fnal-good producer wth hgh degree of tech dependencywll choose outsourcng whle the fnal-good producer wth low degree of tech dependency wll choose ntegraton. In component ntensve sectors, fnal-good producer wll choose outsourcng when he acqures customzed component ether from home or from the foregn country. If the cost advantage of λ ρ + G max ρ ln ln + ln λ ρ ρ W ρ negatve correlatve wth λ, where ρ meet the condton ( ( ( [ ( ] ( ( - ln + ln ρ s ( ( λ ( ( + λ W ( ( + [ ( ] ρ. 0

8 608 The Fourteen Wuhan Intematonal Conference on E-Busness Emergng Operatons & Servces Management producton n foregn country s sgnfcant, the locaton of producton ofcustomzed components affects thedecson of organzatonal structure of fnal-good producer wth hgh degree of tech dependency. When he acqures components from home, he wll choose outsourcng, and when he acqures components from foregn country, he wll choose ntegraton. Sector-specfc ntensty of head-quarter servce has sgnfcant effect on the decson of fnal-good producer wth low degree of tech dependency on organzatonal structure. Table. Cost advantage, ntensty of head-quarter servce, degree of tech dependency and the organzatonal structures Cost advantage of locaton acqurng m Intensty of head-quarter servce Degree of tech dependency Organzatonalstructures Home or foregn country wth nsgnfcant cost advantage( [( ] W > / The foregn country wth sgnfcant cost advantage ( [( ] W / < Head-quarter ntensve sectors Hgh degree outsourcng ow degree ntegraton Component ntensve sectors outsourcng Head-quarter ntensve sectors ntegraton Component ntensve sectors Hgh degree ntegraton ow degree outsourcng Sectors wth moderate ntensty Hgh degree ntegraton Moderate degree ow degree outsourcng ntegraton 4. CONCUSIONS Ths document usng property-rght approach analyzes the optmal organzatonal structure of fnal-good producer. We show that cost advantage resultng from natonal factor endowment, sector-specfc ntensty of head-quarter servce and the degree of technologcal dependency of fnal-good producer on the component suppler affect the decson of fnal-good producer on the organzatonal structure.dfferent from the new-new trade theory, we consder the technologcal dependency of fnal-good producer on the suppler s a sgnfcant factor resultng to the heterogenety of frms wthn ndustres so as ther organzatonal structure. We conclude that n head-quarter ntensve sectors, when fnal-good producer acqures component nputs from foregn country wth sgnfcant cost advantage, the degree of technologcal dependency has no effect on theorganzatonal structures of fnal good producer. In ths case, ntegraton s preferable organzatonal structure. When acqurng component nputs from home or foregn country wth nsgnfcant cost advantage, the fnal-good producer wth hgh degree of technologcal dependency wll choose outsourcng organzaton, whle fnal-good producer wth low degree of technologcal dependency wll choose ntegraton organzaton. In component ntensve sectors, when acqurng component nput from foregn country wth sgnfcant cost advantage, the fnal-good producer wth hgh degree of technologcal dependency wll choose ntegraton structure whle the fnal-good producer wth low technologcal dependency wll choose outsourcng structure. When the fnal-good producer acqures component nput form home or foregn country wth nsgnfcant cost advantage, the degree of technologcal dependency has no effect on hs organzatonal decson. By comparng the analyss above, forthermore, we conclude that cost advantage resultng from natonal factor endowment has sgnfcant effect on the decson of fnal-good producer wth hgh degree of tech dependency on organzatonal structure. The sector-specfc ntensty of head-quarter servce has sgnfcant effect on the decson of fnal-good producer wth low degree of tech dependency on organzatonal structure.

9 The Fourteen Wuhan Intematonal Conference on E-Busness Emergng Operatons & Servces Management 609 ACKNOWEDGEMENT Ths research was supported by the Scentfc Research Foundaton of East Chna Unversty of Poltcal Scence and aw. REFERENCES [] Helpman E. (984, A Smple Theory of Internatonal Trade wth Multnatonal Corporatons.Journal of Poltcal Economy,9: [] [] Helpman E, Krugman P R.(985, Maret Structure and Foregn Trade: Increasng Returns, Imperfect Competton, and the Internatonal Economy. Cambrdge MIT Press. [3] Marusen J R(984. Multnatonals, Mult-Plant Economes, and the Gans from Trade. Journal of Internatonal Economcs. 6: [4] Marusen J R.(00, Multnatonal Frms and the Theory of Internatonal Trade, MIT Press. [5] Motta M, Norman G.(996. Does Economc Integraton Cause Foregn Drect Investment?, Internatonal Economc Revew. 37: [6] Hanson G H, Matalon R J, Slaughter M J (00. Expanson Strateges of U.S. Multnatonal Frms, BEA Worng Papers 000. [7] Eholm K, Forsld R, Marusen J R.(007, Export-Platform Foregn Drect Investment. Journal of the European Economc Assocaton,5: [8] Yeaple, S.(003, The Complex Integraton Strateges of Multnatonals and Cross Country Dependences n the Structure of Foregn Drect Investment. Journal of Internatonal Economcs. 60: [9] Clerdes S K, ach S, Tybout J R.,(998 Is earnng By Exportng Important? Mcro-Dynamc Evdence from Colomba, Mexco, and Morocco. Quarterly Journal of Economcs, 3: [0] Bernard A B, Jensen B J.(999. Exceptonal exporter performance: cause, effect, or both?.journal of Internatonal Economcs, 47: -5. [] Helpman E, Meltz J M, Yeaple S R.(004, Export versus FDI wth Heterogeneous Frms. Amercan Economc Revew, 94: [] Aw,B.Y.,Chung S., and Murnane, R.J.(00 Productvty and Turnover n the Export Maret: Mcro-level Evdence from the Republc of Korea and Tawan, World Ban Economc Revew. 4(: [3] Mayer,T and Ottavano, G.I.P.(007 The Happy Few: The nternatonalzaton of European frms Bruegel-CEPREFIM007 Report, Brussels: Brueghel Blueprnt. [4] Meltz M.(003, The Impact of Trade on Intra-Industry Reallocatons and Aggregate Industry Productvty, Econometrca, 7: [5] Grossman G, Helpman E.(00, Integraton versus Outsourcng n Industry Equlbrum. Quarterly Journal of Economcs,7: [6] Mcaren J.(000, Globalzaton and Vertcal Structure Amercan Economc Revew, 90: [7] Grossman G, Helpman E.(00, Integraton versus Outsourcng n Industry Equlbrum. Quarterly Journal of Economcs,7: [8] Grossman G, HelpmanE(003. Outsourcng versus FDI n Industry Equlbrum. Journal of the European Economc Assocaton, : [9] Grossman G, Helpman E.(005. Outsourcng n a Global Economy. Revew of Economc Studes, 7: [0] Antrs, P. (003 frms contracts and trade structure the quarterly journal of economcs 8, 4: [] Antras, P, (005 ncomplete contracts and the product cycle Amercan economc revew 95, 4: [] Antras, P., and Helpman(004 Global sourcng Journal of Poltcal Economy, 3: