Federico J. Díez

The Asymmetric Effects of Tariffs on Intra-Firm Trade and Offshoring Decisions

This paper studies the effects of tariffs on intra-firm trade. Building on the Antras and Helpman (2004) North–South theoretical framework, I show that higher Northern tariffs reduce the incentives for outsourcing and offshoring, while higher Southern tariffs have the opposite effects. I also show that increased offshoring and outsourcing imply a decrease in the ratio of Northern intra-firm imports to total imports, an empirically testable prediction. Using a highly disaggregated dataset of U.S. (the North) imports and relevant U.S. and foreign tariffs, I find robust evidence to support the models predictions.

Entrepreneurship and Occupational Choice in the Global Economy

This paper studies the effects of trade costs and foreign competition on entrepreneurship. We begin by pointing out a previously unknown fact: the higher the trade costs, the smaller the fraction of entrepreneurs. This fact holds across countries and across industries within the United States. We develop a model where heterogeneous agents select themselves into being either employees or self-employed entrepreneurs in the spirit of \citet{lucas:78}. This, in turn, translates into intra-industry firm heterogeneity as in \citet{melitz:03}. Self-employed agents (firms) can also decide to enter into the export markets, subject to fixed and variable trade costs. The model delivers three basic predictions: (i) domestic self-employment increases with the trade costs of exporting from a foreign country to the home country, (ii) domestic self-employment increases with the trade costs of exporting to the foreign country, (iii) higher levels of self-employment are associated with a lower fraction of exporting firms. Our empirical work on inter-industry data for the United States corroborates these predictions of the model.

Core competencies, matching and the structure of foreign direct investment

We develop a matching model of foreign direct investment to study how multinational firms choose between greenfield investment, acquisitions and joint ownership. Firms must invest in a continuum of tasks to bring a product to market. Each firm possesses a core competency in the task space, but the firms are otherwise identical. For acquisitions and joint ownership, a multinational enterprise (MNE) must match with a local partner that may provide complementary expertise within the task space. However, under joint ownership, investment in tasks is shared by multiple owners and, hence, is subject to a holdup problem that varies with contract intensity. In equilibrium, ex ante identical multinationals enter the local matching market, and, ex post, three different types of heterogeneous firms arise. Specifically, the worst matches are forgone and the MNEs invest greenfield; the middle matches operate under joint ownership; and the best matches integrate via full acquisition. We link the firmlevel model to crosscountry and industry predictions and find that a greater share of full acquisitions occur between more proximate markets, in hosts with greater revenue potential and within contractintensive industries. Using data on partial and full acquisitions across industries and countries, we find robust support for these predictions.

Dominant Currency Paradigm: A New Model for Small Open Economies

Most trade is invoiced in very few currencies. Despite this, the Mundell-Fleming benchmark and its variants focus on pricing in the producer’s currency or in local currency. We model instead a ‘dominant currency paradigm’ for small open economies characterized by three features: pricing in a dominant currency; pricing complementarities, and imported input use in production. Under this paradigm: (a) the terms-of-trade is stable; (b) dominant currency exchange rate pass-through into export and import prices is high regardless of destination or origin of goods; (c) exchange rate pass-through of non-dominant currencies is small; (d) expenditure switching occurs mostly via imports, driven by the dollar exchange rate while exports respond weakly, if at all; (e) strengthening of the dominant currency relative to non-dominant ones can negatively impact global trade; (f) optimal monetary policy targets deviations from the law of one price arising from dominant currency fluctuations, in addition to the inflation and output gap. Using data from Colombia we document strong support for the dominant currency paradigm.

Firms in International Trade

Firms play a critical role in the global economy. In this paper, we survey the behavior of firms in the international economy, both in theory and in the data. We first summarize the key empirical facts that motivate the study of firms in trade. Then, we detail recent theoretical developments on the micro-foundations of firm behavior in an international context, focusing on how firms select into exporting, and how firms respond to international shocks. Finally, we turn to a “real world,” empirically focused view of exporting, beginning with the growth dynamics of firms expanding to global markets, and then addressing the critical financing decisions firms make when engaging in international commerce. We conclude with directions for future research.