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Abstract:
In many globalized industries, the recent wave of vertical outsourcing seems to have co-evolved with increased horizontal consolidation in the component sector. To account for this phenomenon, I build an industry-equilibrium model in which the boundaries of the firm are endogenous in both the horizontal and vertical dimensions of international production. The concept of modularity is subsequently incorporated into the model. The model not only links the co-evolution to modularity, but also predicts the emergence of de facto input standardization during this process.

Product modularity, vertical outsourcing, horizontal consolidation, standardization

Abstract:
This paper studies the growth and determinants of information technology (IT) trade in the Asia-Pacific region. We argue that the rise of IT trade must be understood within the context of increasing vertical fragmentation of production processes that has occurred over the past two decades. To evaluate this empirically, we estimate a set of pooled bilateral IT export equations for eight Asian countries, the U.S. and the E.U., where FDI inflows are introduced as a proxy for fragmentation. We apply a panel cointegration approach that allows for heterogeneity in short-run dynamics and in fixed effects. Consistent with production fragmentation, we find that the evolution of IT trade can be explained in part by traditional income and relative price effects but also by FDI inflow.

Fragmentation, information technology, FDI and trade, trade elasticities, panel data