Competing in Capabilities

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CompetinginCapabilities
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some stories about growth

• All you need is Capital

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some stories about growth

• All you need is Capital
• All you need is Free Trade

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some stories about growth

• All you need is Capital
• All you need is Free Trade
• All you need is Human Capital

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some stories about growth

• All you need is Capital
• All you need is Free Trade
• All you need is Human Capital
• All you need is Good Institutions

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• I want to look at the PROXIMATE causes of
  differences in income per capita

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• I want to look at the PROXIMATE causes of
  differences in income per capita
• not the ultimate causes.

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Globalisation and History

• Three Great Phases
• 1 Late nineteenth century
• 2 The Post-WWII era
• 3 The Current Phase

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History and Theory

• From nineteenth century globalization yo the
  Hecksher-Ohlin model
• The empirical success of Hecksher-Ohlin
• The ORourke-Williamson anaysis

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History and Theory continued

• Balassas evidence
• The Intra-Industry Trade debate
• The rise of the Dixit-Stiglitz-Krugman model

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History and Theory continued

• So whats going on now?

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Quality and Trade the new literature
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Motivation

• 1 Firms concerns
• 2 Empirical patterns in new firm level data sets

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• Key feature
• The consumers choose products offering the best
  u/p
• Implication if ugtv, the market share of a firm
  offering u cannot be eroded to zero by any number
  of firms offering v

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Proposition 1 - given any configuration of
capabilities (c1,u1), (c2,u2) . .
(cn,un) there is a lower bound in (c,u) space
below which a firm cannot achieve positive sales
at equilibrium (ex. Cournot equilibrium)
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Competing in Capabilities
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Fixed /Sunk costs

• Iso-elastic response of quality(beta)
• Isoelastic response of labour productivity
  (gamma)
• Unit variable cost labour cost materials cost

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Proposition 2
Suppose one element in building capability is the
expenditure of fixed outlays (sunk costs) -
Then competition in capability building will
lead to a bound on the number of firms in the
window.
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So whats new?

• The model has been chosen so that prices and
  qualities, and therefore productivity and quality
  enter in a completely symmetric fashion
• The key point is that unit materials cost sets a
  floor to price, thus limiting the degree to which
  changes in wages and productivity can offset
  changes in quality

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Quality vs. productivity

• Once raw materials at international prices are an
  input.
• Wage adjustment can rescue poor productivity
• But not poor quality

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Capability Threshold
uB
WB gtgt0
Quality
WB
0
uB
1/cB
Productivity
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A Digression .

• An extension of the model adds a second parameter
  (horizontal differentiation)
• This can be further generalized to linkages
  between sub-markets
• This extension is important in providing an
  explanation for cross-industry differences in
  market structure

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s Linkages Across Submarkets
ß Effectiveness of Capability Building
The Dixit/Stiglitz/Krugman Line
Perfect Competition
The Hotelling Line
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A Multi-Country Model

• m industries Cobb-Douglas consumers
• r of these are commodity type, many firms
• m-r have n firms in each of countries A,B
• Country C supplies raw material
• Labour supply same in all
• Capability of B firms lt A firms

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Capabilities, Quality and Wages
First r goods qualities 1, Prod. 1/c1
Remaining goods qualities u in A, v in B
(Prod. Differs also)
A third country produces (only) an intermediate
good, a fixed number of units of which enter into
the production of all three final goods
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Modelling Pre-Globalisation

• The aim is to exclude competition in quality
  goods, while allowing A and B to source materials
  from C.
• Two routes
• (i) Partition country C
• (ii) Unify C but inhabitants are
  insensitive to
  quality differences

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Three Phases

• Phase I Impact phaseCapabilities given
• Phase II Transfer phase
• Phase III Re-investment (escalation) phase

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Phase I Impact

• There are three regimes, depending on the size of
  the gap in capability
• Regime I.gap 0
• Regime II..moderate gap
• Regime III.wide gap

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Relative Wages
I
wB
II
wA
III
v
u
1
Relative Quality
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Free Trade
Free Trade
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II
III
III
b (i)
b (ii)
v/u
v/u
Case (a)
Case (b)
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Main substantive argument

• The case for globalisation should rest primarily
  on the transfer and growth of capabilities it
  induces
• A fundamental set of mechanisms are driven by the
  coexistence of high capabilities and low wages
• These mechanisms include, inter alia,
• ---self help driven by new incentives
• ---Transfers via FDI/ Supply chains, etc.