Globalization, Ownership Structures and Productivity Dispersion

• Date: 01 February 2014
• Author: Jin‐tae Hwang,Sung‐min Kim
• DOI: http://doi.org/10.1111/rode.12075
• Published date: 01 February 2014

Globalization, Ownership Structures and

Productivity Dispersion

Sung-min Kim and Jin-tae Hwang*

Abstract

We investigate the heterogeneous effects of productivity dispersion on firms’ organizational choices,

depending upon sectoral characteristics. Using trade data on imports from non-related parties (outsourc-

ing) and related parties (integration) in the South, we show that productivity dispersion would increase

imports from the South with outsourcing in the low headquarter intensity sector, along with an increasing

fraction of the intra-firm imports in the high headquarter intensity sector, which is consistent with the pre-

dictions from the theory. Considering the bounded nature of a share of the intra-firm imports, a quasi-

maximum likelihood estimation was used.

1. Introduction

In The Wealth of Nations, Adam Smith describes the division of labor with an

example of the production process in a pin factory. Focusing on only a narrow range

of tasks, each worker can perform his job efficiently and achieve improvements in

productivity and dexterity fully. In the late eighteenth-century England, however,

transportation for intermediate inputs and communication for delivering instructions

over long distances were very slow and costly. As a consequence, geographic concen-

tration is the most important factor, a sine qua non, in production by specialization,

and only completely finished goods are exchanged and traded by producers to con-

sumers (Grossman and Rossi-Hansberg, 2012).

In the following two centuries, these trends of agglomeration in the production and

trade of finished products were continued. Recent technological changes and trade

liberalization, however, have eliminated the limitations on division of labor by reduc-

ing transaction and communication costs, and thereby the growth of productivity by

specialization and production fragmentations became possible with an expansion in

market size. That is, as the transportation of partially produced goods and intermedi-

ate goods grew much faster and communications, much easier than before, the previ-

ous concentrated production in one place are now spread out to make full use of

factor costs and expertise differences across places. Therefore, the international disin-

tegration of production process and specialization across borders has become the

current main features of the international economy.

Much has been written about these rising trends in international production

fragmentation (Feenstra and Hanson, 1996; Feenstra, 1998; Antras and Helpman,

2004; Batra and Beladi, 2010; Goswami, 2011; Beladi et al., 2011; Grossman and

Rossi-Hansberg, 2012). The Boeing 787 Dreamliner, as introduced in Grossman

and Rossi-Hansberg (2012), is a good example. The 787 Dreamliner is produced by 50

* Hwang: Department of Financial Policy, Korea Insurance Research Institute, 35-4, Yoido-dong,

Youngdeungpo-gu, Seoul 150-600, Korea. Tel: +82-2-3775-9024; Fax: +82-2-3775-9104; E-mail: jt0813

@kiri.or.kr or jt0813@gmail.com. Kim:Korea University, 145, Anam-ro, Seongbuk-gu, Seoul 136-701, Korea.

Review of Development Economics, 18(1), 152–161, 2014

DOI:10.1111/rode.12075

© 2014 John Wiley & Sons Ltd