Scandinavian Working Papers in Economics

Research Papers in Economics,
Stockholm University, Department of Economics

No 2011:10: Institution-Driven Comparative Advantage, Complex Goods and Organizational Choice

Shon Ferguson () and Sara Formai ()
Additional contact information
Shon Ferguson: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden
Sara Formai: Stockholm School of Economics, Postal: Department of Economics, Stockholm School of Economics, P.O. Box 6501, 11383 Stockholm, Sweden

Abstract: The theory of the rm suggests that firms can respond to poor contract enforcement by vertically integrating their production process. The purpose of this paper is to examine whether firms' integration opportunities affect the way institutions determine international trade patterns. We find that vertical integration lessens the impact of a country's ability to enforce contracts on the comparative advantage of complex goods. We also find that countries with good financial institutions export disproportionately more in sectors that produce complex goods and that have a high propensity for vertical integration. In doing so we use a new outcome-based measure of vertical integration propensity and we employ several empirical strategies: cross section, panel and event study analysis. Our results confirm the role of institutions as source of comparative advantage and suggest that this depends not only on the technological characteristics of the goods produced but also on the way firms are able to organize the production process.

Keywords: International Trade; Comparative Advantage; Contract Enforcement; Financial Institutions; Vertical Integration

JEL-codes: D23; F10; F14; G20; G34; L22; L23

40 pages, March 21, 2011

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