Firm Heterogeneity, Trade and FDI: Bridging international economics and international business

Despite their shared historical roots, international economics (IE) and international business (IB) have developed as two distinct fields of study. While economists directed their efforts at formalizing the workings of international trade and investment at the macroeconomic level, business scholars attempted to open the black box of the (multinational) enterprise, relying more on conceptual narratives than mathematical tools.

With the advent of new trade theory (Helpman and Krugman, 1987), the firm was re-introduced as the object of interest in international economics. The recent advancement of the heterogeneous firm in formal models of (“new new”) international trade (Melitz, 2003) has further spawned an unprecedented amount of theoretical and empirical microeconomic research in international economics (Greenaway and Kneller, 2007). Hence, after fifty years of co-existence, the potential for spillovers between IE and IB has increased significantly.

The purpose of this special issue is to explore ways in which empirical research in IE and IB can inform and reinforce each other. In many cases, mutual unawareness of existing themes, models, methodologies and jargon, makes effective integration of both streams difficult. In an era of globalization with such a crucial role for multinationals, and the need for scholars to explain contemporary global developments, a more effective model of knowledge development is key. We believe that increased understanding in and of both IE and IB will advance our knowledge of firm-level trade and investment behavior beyond the levels that can be achieved if these streams keep developing in relative isolation.

This special issue seeks to integrate insights from IB and IE. A number of (non-exhaustive) illustrative examples of topics where IE and IB either share unexploited overlap and synergies, or could benefit from each other’s conceptual and methodological insights are the following:

- The sources of firm heterogeneity. Most international economists limit their theoretical and empirical conceptualization of firm heterogeneity to differences in (labour or total factor) productivity. IB scholars on the other hand have provided more diverse sources of firm heterogeneity, for example in theories of strategy and economic organization based on firm-specific resources (e.g. Hennart, 2009). (How) can these alternative sources of firm heterogeneity be incorporated in microeconometric models of international trade and investment, and what are their implications for trade and investment performance?

- Behavioural theories of internationalization. Already in the 1970s, IB scholars recognized that firms tend to follow specific paths of internationalization which tend to defy rational cost and benefit calculations. In particular, cumulative learning experience and psychic distance between home and host countries are important explanatory factors in this regard. More recently, economists have also started to document and model similar strategies of sequential exporting. What can the established IB literature (e.g. Johanson and Vahlne, 2009) in this field add to the new developments in IE?

- The impact of the liability of foreignness. Ever since the inception of their field, IB scholars have put the liability of foreignness at the center of theories on trade and Foreign Direct Investment (e.g. Hymer, 1976; Zaheer & Mozakovski, 1997). This liability bears resemblance to the notion of fixed export and investment costs in IE heterogeneous firms models, which empirically have been related to the extensive (rather than the intensive) margin of trade and investment (e.g. Helpman et al., 2008). Such a distinction is rarely made in IB studies. (How) can the different notions underlying the liability of foreignness be incorporated more systematically in studies on the extensive and intensive margins of trade?

- Firm heterogeneity and the impact of FDI. IB scholars have traditionally been more concerned with the determinants and organization of FDI, whereas IE scholars have worried more about the impact of FDI via spillovers or wages (Meyer, 2004). It seems natural to assume that FDI which is differently motivated or organized will also yield different impacts on the host-country environment. Can these two literatures be linked to lead to more nuanced and richer empirical predictions on the contingencies of the impact of FDI?

- Global value chain fragmentation. Both IE and IB scholars agree on the increased relevance of offshoring and outsourcing. Whereas IB scholars have used survey based evidence suggesting a move from manufacturing to increased offshoring of knowledge-based activities (blue collar to white collar offshoring), IE scholars refer to a similar phenomenon as increased trade in tasks (Grossman and Rossi-Hansberg, 2008). One crucial issue concerns the relation between the two observations; how does the trade in tasks discussion relate to the offshoring discussion in IB? What overall picture emerges when putting the two observations together?


Planning and submission procedure

The deadline for submission is August 31, 2012. Submissions can be sent to Roger Smeets (r.smeets@uva.nl).

References:
Greenaway, D. and Kneller, R. 2007. Firm heterogeneity, exporting, and Foreign Direct Investment. The Economic Journal 117(517): F134-F161.

Grossman, G.M. and Rossi-Hansberg, E. 2008. Trading tasks: A simple theory of offshoring. American Economic Review 98(5): 1978-1997.

Helpman, E. and Krugman, P.R. 1987. Market Structure and Foreign Trade. MIT Press, Cambridge, MA.

Helpman, E., Melitz, M. and Rubinstein, Y. 2008. Estimating trade flows: Trading partners and trading volumes. Quarterly Journal of Economics 123(2): 441-487.

Hennart, J.F. 2009. Down with MNE centric theories! Market entry and expansion as the bundling of MNE and local assets, Journal of International Business Studies 40(9): 1432-1454.

Hymer, S.H. 1976. The international operations of national firms: A study of foreign direct investment. MIT Press, Cambridge, MA.

Johanson, J. and Vahlne, J.E. 2009. The Uppsala internationalization process model revisited: From liability of foreignness to liability of outsidership, Journal of International Business Studies 40(9): 1411-1431.

Melitz, M. 2003. The impact of trade on intra-industry reallocations and aggregate industry productivity. Econometrica 71(6): 1695-1725.

Meyer, K.E. 2004. Perspectives on multinational enterprises in emerging economies. Journal of International Business Studies 35(4): 259-276.

Zaheer, S., and Mosakowski, E. 1997. The dynamics of the liability of foreignness: a global study of survival in financial services, Strategic Management Journal 18(6): 439-464.