Review for Dec 27 class 經濟四 B07303059 呂姵茵

One of the ways to study economic events like trade policy is quantitative
evaluations. There are several steps for this study. First, we have to build a
theoretical model and derive the equations. Second, finding data that can help
estimate the variables of the model. Finally, we can perform counterfactual exercises
and report the result.
Next, we learn about vertical specialization, which has some features. For
example, a good is produced in several sequential stages, multiple countries perform
value-added in these stages, and use of imported goods to produce goods that are
exported. While traditional studies suggest that the main reason of growth of world
trade, there isn’t enough evidence to support it because world trade grew faster
even in 1980s and 1990s than in 1960s and 1970s, but the tariff fell more in 1960s
and 1970s. However, recent studies suggest that vertical specialization may be able
to explain the growth of world trade after it’s included in the model.
Finally, we learn about foreign direct investment (FDI). There are several
elements of FDI, including multinational firm: an enterprise that controls and
manages production establishments located in at least two countries, sending
country (or source country) of FDI: the country where the headquarter is located,
destination country (or host country) of FDI: the country where the foreign affiliate is
located, parents: entities located in one country (the source country) that control
productive facilities, and affiliates, which are located in other countries (host
countries). Meanwhile, FDI is different from foreign portfolio investment. Greenfield
FDI is the headquarter firm creates a new foreign plant, while cross-border mergers
and acquisitions (M&A) is the headquarter firm acquiring an existing foreign plant.
Horizontal FDI is foreign investment in the same industry as the domestic industry to
sell in the foreign market, and vertical FDI is foreign investment in a supplier industry
to source inputs. Developed countries, capital-intensive and R&D-intensive industries
have more FDI, while countries that are far away each other have less FDI. If trade
costs are high, horizontal FDI is better than exporting. If plant-level economies of
scale are high, exporting is better than horizontal FDI. Theory with heterogeneous
firms suggests that horizontal FDI, compared to exporting, entails lower marginal
cost but higher fixed cost, so high-productivity firms choose horizontal FDI. Regarding
foreign sourcing, Theory with homogeneous firms suggests that headquarter services
locate in the capital abundant country and manufacturing locate in the labor
abundant country if the countries’ endowment differences are large. Meanwhile,
theory with heterogeneous firms suggests that foreign sourcing, compared to
domestic sourcing, entails lower marginal cost but higher fixed cost, so high-
productivity firms choose foreign sourcing.