Global Production Sharing: Patterns,

Determinants and Macroeconomic

implications

Discussant

Rajan Krishna Panta

Arndt-Corden Department of Economics

Crawford School of Public Policy

4 November, 2013

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Introduction

• Global production sharing- a part of globalization. The shift

from in-house production to outsourcing is a key element of

the new economy (manufacturers without factories)

• Growth in international outsourcing as reflected in the

expansion of intermediate input trade

• Important implications with regard to the traditional concept of

comparative advantage, trade patterns, wages, and

employment (Baldone et al., 2007; Molnar et al., 2007).

Countries can no longer be thought of as producers of a

particular final product, and hence appear to be specialized in

the given commodity.

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Overview of the paper

• Survey of the theories on international trade and global

production sharing

• Extension of the Jones and Kirezkowski (1990) methodology incorporating other determinants of global production sharing

• Gravity model framework of the determinants of global production sharing

Issues for consideration (theory)

Recent theories and research focus on

1) role of business groups and social networks (e.g. Rauch

(2001)), networks and informational barriers (e.g. Rauch and

Casella (2002))

2) Endogenous outsourcing (vertical integration versus

outsourcing),

3) Global vs domestic outsourcing (Grossman & Helpman,2002)

4) Submodularity and supermodularity

5) Trade and allocation of diverse talents (Grossman & Maggi,

2000)

6) Incomplete information and imperfect contracts (Antras 2002)

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Issues for consideration (estimation)

• Measurement of degree of fragmentation

• Indices based on horizontal and vertical intra-industry trade such

as network trade index, Grubel-Lloyd (G-L) and Hummels index.

Including these indices as dependent variable.

• Lot of independent variables are either zero or missing. For eg.

Out of total observations, only 1/3 of humanitarian aid values

• Dealing with zero values

- Ad-hoc solution method : though log(0) is undefined

log(0+0.00001) is not. For small x, log(x+0.00001)= logx

- Poisson model

- Heckman sample selection model

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Issues for consideration (estimation)

• Endogeneity

- which are the endogenous variables and what are

the instruments

- Reporting of first stage regressions

• Random effects or fixed effects

- RE assumes that the distribution of the unobserved

heterogeneous component is distributed as a random variable

i.e. there are specific factors in a country that affect trade but

are not related with GDP, distance or other factors included

as repressors.

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Empirical estimation (gravity model)

• In recent years, gravity has become a complex business

• Multilateral trade resistance (Anderson and Van Wincoop,

2002), bilateral trade depends not only on trade costs

between regions themselves (‘bilateral resistance’) but also

on trade costs with all locations (‘multilateral resistance’),

solution to the ‘home bias’ trade puzzle by McCallum (1995)

• Generalized gravity equation (HMR ,2008)

• Dynamic panel (?)

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