Cash and Investments: Corporate Savings Glut in USA

Cash and Investments: Corporate Savings Glut in USA

 

Profits/Retained Earnings of a firm can be used in number of ways:

  • Capital Investments
  • Debt Repayment
  • Dividends
  • Cash and Short Term Investments
  • Long Term Investments
  • Share Buybacks
  • M&A Investments

Please see three quarterly reports from FACTSET on trends in

  • Dividents
  • Buybacks
  • Cash and Investments

Share buybacks are very common for several years.

Please see my related posts

Why do Firms buyback their Shares? Causes and Consequences.

Low Interest Rates and Business Investments : Update August 2017

Short term Thinking in Investment Decisions of Businesses and Financial Markets

Mergers and Acquisitions – Long Term Trends and Waves

Business Investments and Low Interest Rates

 

From The Corporate Saving Glut in the Aftermath of the Global Financial Crisis

cash

From Why Are Corporations Holding So Much Cash?

cash 2cash3

 

From FACTSET Cash and Investment Quarterly

cash4

Companies are holding on to the large sum of cash.  Rather than capital investments (CAPEX), cash is being used for share buybacks, dividend payouts, mergers and acquisitions, and cash investments (short and long term).

 

From FACTSET Cash and Investment Quarterly

cash5

Key Sources of Research:

 

The Corporate Saving Glut in the Aftermath of the Global Financial Crisis

Joseph W. Gruber
Steven B. Kamin

This Draft: June 2015

https://www.imf.org/external/np/seminars/eng/2015/secularstag/pdf/Gruber.pdf

 

The global corporate saving glut: Long-term evidence

Peter Chen, Loukas Karabarbounis, Brent Neiman

05 April 2017

http://voxeu.org/article/global-corporate-saving-glut

 

 

 

Declining Labor Shares and the Global Rise of Corporate Saving

Loukas Karabarbounis

Brent Neiman

October 2012

http://faculty.chicagobooth.edu/brent.neiman/research/labshare.pdf

 

The Global Rise of Corporate Saving

Peter Chen

Loukas Karabarbounis

Brent Neiman

March 2017

http://faculty.chicagobooth.edu/brent.neiman/research/CKN.pdf

http://www.nber.org/papers/w23133.pdf

 

FACTSET Dividend Quarterly

https://www.factset.com/websitefiles/PDFs/dividend

 

FACTSET Buyback Quarterly

https://www.factset.com/websitefiles/PDFs/buyback

FACTSET Cash and Investment Quarterly

https://www.factset.com/websitefiles/PDFs/cashinvestment

https://insight.factset.com/hubfs/Cash%20and%20Investment%20Quarterly/Cash%20and%20Investment%20Quarterly%20Q3%202016_12.21.16_v2.pdf

 

 

 

Why Are Corporations Holding So Much Cash?

By Juan M. Sanchez and Emircan Yurdagul

2013

 

https://www.stlouisfed.org/~/media/Files/PDFs/publications/pub_assets/pdf/re/2013/a/RE_Jan_2013.pdf

 

 

Why Do Companies Hold Cash?

Gianni La Cava and Callan Windsor

RDP 2016-03

 

https://www.rba.gov.au/publications/rdp/2016/pdf/rdp2016-03.pdf

 

 

MULTINATIONALS AND THE HIGH CASH HOLDINGS PUZZLE

Lee Pinkowitz

René M. Stulz Rohan Williamson

June 2012

 

http://www.nber.org/papers/w18120.pdf?new_window=1

 

 

 

The Determinants and Implications of Corporate Cash Holdings

Tim Opler, Lee Pinkowitz, Rene Stulz, Rohan Williamson

Issued in October 1997

http://www.nber.org/papers/w6234.pdf

 

 

WHY DO U.S. FIRMS HOLD SO MUCH MORE CASH THAN THEY USED TO?

Thomas W. Bates Kathleen M. Kahle Rene M. Stulz

September 2006

 

http://www.nber.org/papers/w12534.pdf

 

 

Why do firms hold so much cash? A tax-based explanation

C. Fritz Foley, Jay C. Hartzell, Sheridan Titman, and Garry Twite

October 2006

 

http://www.nber.org/papers/w12649.pdf

 

 

It’s Alive! Corporate Cash and Business Investment

Finn Poschmann

 

https://www.cdhowe.org/sites/default/files/attachments/research_papers/mixed/e-brief_181.pdf

 

 

Dead money

There are good reasons for hoarding cash.

John Lorinc

 

http://www.canadianbusiness.com/economy/dead-money/

 

 

IS “DEAD” MONEY ALIVE? A FIRM-LEVEL ANALYSIS OF CANADIAN NON-FINANCIAL LISTED CORPORATIONS CASH HOLDING AND CAPITAL EXPENDITURE BEHAVIOR

2014

IMF

 

https://www.imf.org/external/pubs/ft/scr/2014/cr1428.pdf

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Why do Firms buyback their Shares? Causes and Consequences.

Why do Firms buyback their Shares? Causes and Consequences.

 

From Stock buybacks: From retain-and reinvest to downsize-and-distribute

Since the late 1980s, in the name of “maximizing shareholder value” (MSV), U.S. corporate distributions to shareholders have exploded. Dividends are the traditional mode of providing a stream of income to shareholders who, as the name says, hold on to a company’s stock, thus supporting stock-price stability. In contrast, stock repurchases, in which a company buys back its own shares from the marketplace, thus reducing the number of outstanding shares, provide short-term boosts to a company’s stock price, thus contributing to stock-price volatility. Until the mid-1980s dividends were the overwhelmingly predominant form of distributing cash to shareholders. Since then, however, even with dividends on the rise, stock buybacks have added substantially to distributions to shareholders.

Over the decade 2004-2013, 454 companies in S&P 500 Index in March 2014 that were publicly listed over the ten years did $3.4 trillion in stock buybacks, representing 51 percent of net income. These companies expended an additional 35 percent of net income on dividends.5 And buybacks remain in vogue: According to data compiled by Factset, for the 12-month period ending December 2014, S&P 500 companies spent $565 billion on buybacks, up 18 percent from the previous 12-month period.6

Stock buybacks are an important part of the explanation for both the concentration of income among the richest households and the disappearance of middle-class employment opportunities in the United States over the past three decades.7 Over that period the resource-allocation regime at many, if not most, major U.S. business corporations has transitioned from “retain-and-reinvest” to “downsize-and-distribute.” Under retain-and-reinvest, the corporation retains earnings and reinvests them in the productive capabilities embodied in its labor force. Under downsize-and-distribute, the corporation lays off experienced, and often more expensive, workers, and distributes corporate cash to shareholders.8 My research suggests that, with its downsize-and-distribute resource-allocation regime, the “buyback corporation” is in large part responsible for a national economy characterized by income inequity, employment instability, and diminished innovative capability – or the opposite of what I have called “sustainable prosperity.”9

 

 From Buyback Quarterly – Factset/December 2016

buyback2

 

From Stock buybacks: From retain-and reinvest to downsize-and-distribute

buyback

Profits Without Prosperity

 

Five years after the official end of the Great Recession, corporate profits are high, and the stock market is booming. Yet most Americans are not sharing in the recovery. While the top 0.1% of income recipients—which include most of the highest-ranking corporate executives—reap almost all the income gains, good jobs keep disappearing, and new employment opportunities tend to be insecure and underpaid. Corporate profitability is not translating into widespread economic prosperity.

The allocation of corporate profits to stock buybacks deserves much of the blame. Consider the 449 companies in the S&P 500 index that were publicly listed from 2003 through 2012. During that period those companies used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock, almost all through purchases on the open market. Dividends absorbed an additional 37% of their earnings. That left very little for investments in productive capabilities or higher incomes for employees.

The buyback wave has gotten so big, in fact, that even shareholders—the presumed beneficiaries of all this corporate largesse—are getting worried. “It concerns us that, in the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies,” Laurence Fink, the chairman and CEO of BlackRock, the world’s largest asset manager, wrote in an open letter to corporate America in March. “Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buybacks.”

Why are such massive resources being devoted to stock repurchases? Corporate executives give several reasons, which I will discuss later. But none of them has close to the explanatory power of this simple truth: Stock-based instruments make up the majority of their pay, and in the short term buybacks drive up stock prices. In 2012 the 500 highest-paid executives named in proxy statements of U.S. public companies received, on average, $30.3 million each; 42% of their compensation came from stock options and 41% from stock awards. By increasing the demand for a company’s shares, open-market buybacks automatically lift its stock price, even if only temporarily, and can enable the company to hit quarterly earnings per share (EPS) targets.

As a result, the very people we rely on to make investments in the productive capabilities that will increase our shared prosperity are instead devoting most of their companies’ profits to uses that will increase their own prosperity—with unsurprising results. Even when adjusted for inflation, the compensation of top U.S. executives has doubled or tripled since the first half of the 1990s, when it was already widely viewed as excessive. Meanwhile, overall U.S. economic performance has faltered.

If the U.S. is to achieve growth that distributes income equitably and provides stable employment, government and business leaders must take steps to bring both stock buybacks and executive pay under control. The nation’s economic health depends on it.

From Value Creation to Value Extraction

For three decades I’ve been studying how the resource allocation decisions of major U.S. corporations influence the relationship between value creation and value extraction, and how that relationship affects the U.S. economy. From the end of World War II until the late 1970s, a retain-and-reinvest approach to resource allocation prevailed at major U.S. corporations. They retained earnings and reinvested them in increasing their capabilities, first and foremost in the employees who helped make firms more competitive. They provided workers with higher incomes and greater job security, thus contributing to equitable, stable economic growth—what I call “sustainable prosperity.”

This pattern began to break down in the late 1970s, giving way to a downsize-and-distribute regime of reducing costs and then distributing the freed-up cash to financial interests, particularly shareholders. By favoring value extraction over value creation, this approach has contributed to employment instability and income inequality.

As documented by the economists Thomas Piketty and Emmanuel Saez, the richest 0.1% of U.S. households collected a record 12.3% of all U.S. income in 2007, surpassing their 11.5% share in 1928, on the eve of the Great Depression. In the financial crisis of 2008–2009, their share fell sharply, but it has since rebounded, hitting 11.3% in 2012.

Since the late 1980s, the largest component of the income of the top 0.1% has been compensation, driven by stock-based pay. Meanwhile, the growth of workers’ wages has been slow and sporadic, except during the internet boom of 1998–2000, the only time in the past 46 years when real wages rose by 2% or more for three years running. Since the late 1970s, average growth in real wages has increasingly lagged productivity growth. (See the exhibit “When Productivity and Wages Parted Ways.”)

When Productivity and Wages Parted Ways

From 1948 to the mid-1970s, increases in productivity and wages went hand in hand. Then a gap opened between the two.

Not coincidentally, U.S. employment relations have undergone a transformation in the past three decades. Mass plant closings eliminated millions of unionized blue-collar jobs. The norm of a white-collar worker’s spending his or her entire career with one company disappeared. And the seismic shift toward offshoring left all members of the U.S. labor force—even those with advanced education and substantial work experience—vulnerable to displacement.

To some extent these structural changes could be justified initially as necessary responses to changes in technology and competition. In the early 1980s permanent plant closings were triggered by the inroads superior Japanese manufacturers had made in consumer-durable and capital-goods industries. In the early 1990s one-company careers fell by the wayside in the IT sector because the open-systems architecture of the microelectronics revolution devalued the skills of older employees versed in proprietary technologies. And in the early 2000s the offshoring of more-routine tasks, such as writing unsophisticated software and manning customer call centers, sped up as a capable labor force emerged in low-wage developing economies and communications costs plunged, allowing U.S. companies to focus their domestic employees on higher-value-added work.

These practices chipped away at the loyalty and dampened the spending power of American workers, and often gave away key competitive capabilities of U.S. companies. Attracted by the quick financial gains they produced, many executives ignored the long-term effects and kept pursuing them well past the time they could be justified.

A turning point was the wave of hostile takeovers that swept the country in the 1980s. Corporate raiders often claimed that the complacent leaders of the targeted companies were failing to maximize returns to shareholders. That criticism prompted boards of directors to try to align the interests of management and shareholders by making stock-based pay a much bigger component of executive compensation.

Given incentives to maximize shareholder value and meet Wall Street’s expectations for ever higher quarterly EPS, top executives turned to massive stock repurchases, which helped them “manage” stock prices. The result: Trillions of dollars that could have been spent on innovation and job creation in the U.S. economy over the past three decades have instead been used to buy back shares for what is effectively stock-price manipulation.

Good Buybacks and Bad

Not all buybacks undermine shared prosperity. There are two major types: tender offers and open-market repurchases. With the former, a company contacts shareholders and offers to buy back their shares at a stipulated price by a certain near-term date, and then shareholders who find the price agreeable tender their shares to the company. Tender offers can be a way for executives who have substantial ownership stakes and care about a company’s long-term competitiveness to take advantage of a low stock price and concentrate ownership in their own hands. This can, among other things, free them from Wall Street’s pressure to maximize short-term profits and allow them to invest in the business. Henry Singleton was known for using tender offers in this way at Teledyne in the 1970s, and Warren Buffett for using them at GEICO in the 1980s. (GEICO became wholly owned by Buffett’s holding company, Berkshire Hathaway, in 1996.) As Buffett has noted, this kind of tender offer should be made when the share price is below the intrinsic value of the productive capabilities of the company and the company is profitable enough to repurchase the shares without impeding its real investment plans.

But tender offers constitute only a small portion of modern buybacks. Most are now done on the open market, and my research shows that they often come at the expense of investment in productive capabilities and, consequently, aren’t great for long-term shareholders.

Companies have been allowed to repurchase their shares on the open market with virtually no regulatory limits since 1982, when the SEC instituted Rule 10b-18 of the Securities Exchange Act. Under the rule, a corporation’s board of directors can authorize senior executives to repurchase up to a certain dollar amount of stock over a specified or open-ended period of time, and the company must publicly announce the buyback program. After that, management can buy a large number of the company’s shares on any given business day without fear that the SEC will charge it with stock-price manipulation—provided, among other things, that the amount does not exceed a “safe harbor” of 25% of the previous four weeks’ average daily trading volume. The SEC requires companies to report total quarterly repurchases but not daily ones, meaning that it cannot determine whether a company has breached the 25% limit without a special investigation.

Despite the escalation in buybacks over the past three decades, the SEC has only rarely launched proceedings against a company for using them to manipulate its stock price. And even within the 25% limit, companies can still make huge purchases: Exxon Mobil, by far the biggest stock repurchaser from 2003 to 2012, can buy back about $300 million worth of shares a day, and Apple up to $1.5 billion a day. In essence, Rule 10b-18 legalized stock market manipulation through open-market repurchases.

The rule was a major departure from the agency’s original mandate, laid out in the Securities Exchange Act in 1934. The act was a reaction to a host of unscrupulous activities that had fueled speculation in the Roaring ’20s, leading to the stock market crash of 1929 and the Great Depression. To prevent such shenanigans, the act gave the SEC broad powers to issue rules and regulations.

During the Reagan years, the SEC began to roll back those rules. The commission’s chairman from 1981 to 1987 was John Shad, a former vice chairman of E.F. Hutton and the first Wall Street insider to lead the commission in 50 years. He believed that the deregulation of securities markets would channel savings into economic investments more efficiently and that the isolated cases of fraud and manipulation that might go undetected did not justify onerous disclosure requirements for companies. The SEC’s adoption of Rule 10b-18 reflected that point of view.

Debunking the Justifications for Buybacks

Executives give three main justifications for open-market repurchases. Let’s examine them one by one:

1. Buybacks are investments in our undervalued shares that signal our confidence in the company’s future.

This makes some sense. But the reality is that over the past two decades major U.S. companies have tended to do buybacks in bull markets and cut back on them, often sharply, in bear markets. (See the exhibit “Where Did the Money from Productivity Increases Go?”) They buy high and, if they sell at all, sell low. Research by the Academic-Industry Research Network, a nonprofit I cofounded and lead, shows that companies that do buybacks never resell the shares at higher prices.

Where Did the Money from Productivity Increases Go?

Buybacks—as well as dividends—have skyrocketed in the past 20 years. (Note that these data are for the 251 companies that were in the S&P 500 in January 2013 and were public from 1981 through 2012. Inclusion of firms that went public after 1981, such as Microsoft, Cisco, Amgen, Oracle, and Dell, would make the increase in buybacks even more marked.) Though executives say they repurchase only undervalued stocks, buybacks increased when the stock market boomed, casting doubt on that claim.

Source: Standard & Poor’s Compustat database; the Academic-Industry Research Network.
Note: Mean repurchase and dividend amounts are in 2012 dollars.

 

Once in a while a company that bought high in a boom has been forced to sell low in a bust to alleviate financial distress. GE, for example, spent $3.2 billion on buybacks in the first three quarters of 2008, paying an average price of $31.84 per share. Then, in the last quarter, as the financial crisis brought about losses at GE Capital, the company did a $12 billion stock issue at an average share price of $22.25, in a failed attempt to protect its triple-A credit rating.

In general, when a company buys back shares at what turn out to be high prices, it eventually reduces the value of the stock held by continuing shareholders. “The continuing shareholder is penalized by repurchases above intrinsic value,” Warren Buffett wrote in his 1999 letter to Berkshire Hathaway shareholders. “Buying dollar bills for $1.10 is not good business for those who stick around.”

2. Buybacks are necessary to offset the dilution of earnings per share when employees exercise stock options.

Calculations that I have done for high-tech companies with broad-based stock option programs reveal that the volume of open-market repurchases is generally a multiple of the volume of options that employees exercise. In any case, there’s no logical economic rationale for doing repurchases to offset dilution from the exercise of employee stock options. Options are meant to motivate employees to work harder now to produce higher future returns for the company. Therefore, rather than using corporate cash to boost EPS immediately, executives should be willing to wait for the incentive to work. If the company generates higher earnings, employees can exercise their options at higher stock prices, and the company can allocate the increased earnings to investment in the next round of innovation.

3. Our company is mature and has run out of profitable investment opportunities; therefore, we should return its unneeded cash to shareholders.

Some people used to argue that buybacks were a more tax-efficient means of distributing money to shareholders than dividends. But that has not been the case since 2003, when the tax rates on long-term capital gains and qualified dividends were made the same. Much more important issues remain, however: What is the CEO’s main role and his or her responsibility to shareholders?

Companies that have built up productive capabilities over long periods typically have huge organizational and financial advantages when they enter related markets. One of the chief functions of top executives is to discover new opportunities for those capabilities. When they opt to do large open-market repurchases instead, it raises the question of whether these executives are doing their jobs.

A related issue is the notion that the CEO’s main obligation is to shareholders. It’s based on a misconception of the shareholders’ role in the modern corporation. The philosophical justification for giving them all excess corporate profits is that they are best positioned to allocate resources because they have the most interest in ensuring that capital generates the highest returns. This proposition is central to the “maximizing shareholder value” (MSV) arguments espoused over the years, most notably by Michael C. Jensen. The MSV school also posits that companies’ so-called free cash flow should be distributed to shareholders because only they make investments without a guaranteed return—and hence bear risk.

Why Money for Reinvestment Has Dried Up

Since the early 1980s, when restrictions on open-market buybacks were greatly eased, distributions to shareholders have absorbed a huge portion of net income, leaving much less for reinvestment in companies.

Note: Data are for the 251 companies that were in the S&P 500 Index in January 2013 and were publicly listed from 1981 through 2012. If the companies that went public after 1981, such as Microsoft, Cisco, Amgen, Oracle, and Dell, were included, repurchases as a percentage of net income would be even higher.

But the MSV school ignores other participants in the economy who bear risk by investing without a guaranteed return. Taxpayers take on such risk through government agencies that invest in infrastructure and knowledge creation. And workers take it on by investing in the development of their capabilities at the firms that employ them. As risk bearers, taxpayers, whose dollars support business enterprises, and workers, whose efforts generate productivity improvements, have claims on profits that are at least as strong as the shareholders’.

The irony of MSV is that public-company shareholders typically never invest in the value-creating capabilities of the company at all. Rather, they invest in outstanding shares in the hope that the stock price will rise. And a prime way in which corporate executives fuel that hope is by doing buybacks to manipulate the market. The only money that Apple ever raised from public shareholders was $97 million at its IPO in 1980. Yet in recent years, hedge fund activists such as David Einhorn and Carl Icahn—who played absolutely no role in the company’s success over the decades—have purchased large amounts of Apple stock and then pressured the company to announce some of the largest buyback programs in history.

The past decade’s huge increase in repurchases, in addition to high levels of dividends, have come at a time when U.S. industrial companies face new competitive challenges. This raises questions about how much of corporate cash flow is really “free” to be distributed to shareholders. Many academics—for example, Gary P. Pisano and Willy C. Shih of Harvard Business School, in their 2009 HBR article “Restoring American Competitiveness” and their book Producing Prosperity—have warned that if U.S. companies don’t start investing much more in research and manufacturing capabilities, they cannot expect to remain competitive in a range of advanced technology industries.

Retained earnings have always been the foundation for investments in innovation. Executives who subscribe to MSV are thus copping out of their responsibility to invest broadly and deeply in the productive capabilities their organizations need to continually innovate. MSV as commonly understood is a theory of value extraction, not value creation.

Executives Are Serving Their Own Interests

As I noted earlier, there is a simple, much more plausible explanation for the increase in open-market repurchases: the rise of stock-based pay. Combined with pressure from Wall Street, stock-based incentives make senior executives extremely motivated to do buybacks on a colossal and systemic scale.

Consider the 10 largest repurchasers, which spent a combined $859 billion on buybacks, an amount equal to 68% of their combined net income, from 2003 through 2012. (See the exhibit “The Top 10 Stock Repurchasers.”) During the same decade, their CEOs received, on average, a total of $168 million each in compensation. On average, 34% of their compensation was in the form of stock options and 24% in stock awards. At these companies the next four highest-paid senior executives each received, on average, $77 million in compensation during the 10 years—27% of it in stock options and 29% in stock awards. Yet since 2003 only three of the 10 largest repurchasers—Exxon Mobil, IBM, and Procter & Gamble—have outperformed the S&P 500 Index.

The Top 10 Stock Repurchasers 2003–2012

At most of the leading U.S. companies below, distributions to shareholders were well in excess of net income. These distributions came at great cost to innovation, employment, and—in cases such as oil refining and pharmaceuticals—customers who had to pay higher prices for products.

Sources: Standard & Poor’s Compustat database; Standard & Poor’s Execucomp database; the Academic-Industry Research Network.
Note: The percentages of stock-based pay include gains realized from exercising stock options for all years plus, for 2003–2005, the fair value of restricted stock grants or, for 2006–2012, gains realized on vesting of stock awards. Rounding to the nearest billion may affect total distributions and percentages of net income. *Steven Ballmer, Microsoft’s CEO from January 2000 to February 2014, did not receive any stock-based pay. He does, however, own about 4% of Microsoft’s shares, valued at more than $13 billion.

Reforming the System

Buybacks have become an unhealthy corporate obsession. Shifting corporations back to a retain-and-reinvest regime that promotes stable and equitable growth will take bold action. Here are three proposals:

Put an end to open-market buybacks.

In a 2003 update to Rule 10b-18, the SEC explained: “It is not appropriate for the safe harbor to be available when the issuer has a heightened incentive to manipulate its share price.” In practice, though, the stock-based pay of the executives who decide to do repurchases provides just this “heightened incentive.” To correct this glaring problem, the SEC should rescind the safe harbor.

A good first step toward that goal would be an extensive SEC study of the possible damage that open-market repurchases have done to capital formation, industrial corporations, and the U.S. economy over the past three decades. For example, during that period the amount of stock taken out of the market has exceeded the amount issued in almost every year; from 2004 through 2013 this net withdrawal averaged $316 billion a year. In aggregate, the stock market is not functioning as a source of funds for corporate investment. As I’ve already noted, retained earnings have always provided the base for such investment. I believe that the practice of tying executive compensation to stock price is undermining the formation of physical and human capital.

Rein in stock-based pay.

Many studies have shown that large companies tend to use the same set of consultants to benchmark executive compensation, and that each consultant recommends that the client pay its CEO well above average. As a result, compensation inevitably ratchets up over time. The studies also show that even declines in stock price increase executive pay: When a company’s stock price falls, the board stuffs even more options and stock awards into top executives’ packages, claiming that it must ensure that they won’t jump ship and will do whatever is necessary to get the stock price back up.

In 1991 the SEC began allowing top executives to keep the gains from immediately selling stock acquired from options. Previously, they had to hold the stock for six months or give up any “short-swing” gains. That decision has only served to reinforce top executives’ overriding personal interest in boosting stock prices. And because corporations aren’t required to disclose daily buyback activity, it gives executives the opportunity to trade, undetected, on inside information about when buybacks are being done. At the very least, the SEC should stop allowing executives to sell stock immediately after options are exercised. Such a rule could help launch a much-needed discussion of meaningful reform that goes beyond the 2010 Dodd-Frank Act’s “Say on Pay”—an ineffectual law that gives shareholders the right to make nonbinding recommendations to the board on compensation issues.

But overall the use of stock-based pay should be severely limited. Incentive compensation should be subject to performance criteria that reflect investment in innovative capabilities, not stock performance.

Transform the boards that determine executive compensation.

Boards are currently dominated by other CEOs, who have a strong bias toward ratifying higher pay packages for their peers. When approving enormous distributions to shareholders and stock-based pay for top executives, these directors believe they’re acting in the interests of shareholders.

That’s a big part of the problem. The vast majority of shareholders are simply investors in outstanding shares who can easily sell their stock when they want to lock in gains or minimize losses. As I argued earlier, the people who truly invest in the productive capabilities of corporations are taxpayers and workers. Taxpayers have an interest in whether a corporation that uses government investments can generate profits that allow it to pay taxes, which constitute the taxpayers’ returns on those investments. Workers have an interest in whether the company will be able to generate profits with which it can provide pay increases and stable career opportunities.

It’s time for the U.S. corporate governance system to enter the 21st century: Taxpayers and workers should have seats on boards. Their representatives would have the insights and incentives to ensure that executives allocate resources to investments in capabilities most likely to generate innovations and value.

Courage in Washington

After the Harvard Law School dean Erwin Griswold published “Are Stock Options Getting out of Hand?” in this magazine in 1960, Senator Albert Gore launched a campaign that persuaded Congress to whittle away special tax advantages for executive stock options. After the Tax Reform Act of 1976, the compensation expert Graef Crystal declared that stock options that qualified for the capital-gains tax rate, “once the most popular of all executive compensation devices…have been given the last rites by Congress.” It also happens that during the 1970s the share of all U.S. income that the top 0.1% of households got was at its lowest point in the past century.

The members of the U.S. Congress should show the courage and independence of their predecessors and go beyond “Say on Pay” to do something about excessive executive compensation. In addition, Congress should fix a broken tax regime that frequently rewards value extractors as if they were value creators and ignores the critical role of government investment in the infrastructure and knowledge that are so crucial to the competitiveness of U.S. business.

Instead, what we have now are corporations that lobby—often successfully—for federal subsidies for research, development, and exploration, while devoting far greater resources to stock buybacks. Here are three examples of such hypocrisy:

Alternative energy.

Exxon Mobil, while receiving about $600 million a year in U.S. government subsidies for oil exploration (according to the Center for American Progress), spends about $21 billion a year on buybacks. It spends virtually no money on alternative energy research.

Meanwhile, through the American Energy Innovation Council, top executives of Microsoft, GE, and other companies have lobbied the U.S. government to triple its investment in alternative energy research and subsidies, to $16 billion a year. Yet these companies had plenty of funds they could have invested in alternative energy on their own. Over the past decade Microsoft and GE, combined, have spent about that amount annually on buybacks.

Nanotechnology.

Intel executives have long lobbied the U.S. government to increase spending on nanotechnology research. In 2005, Intel’s then-CEO, Craig R. Barrett, argued that “it will take a massive, coordinated U.S. research effort involving academia, industry, and state and federal governments to ensure that America continues to be the world leader in information technology.” Yet from 2001, when the U.S. government launched the National Nanotechnology Initiative (NNI), through 2013 Intel’s expenditures on buybacks were almost four times the total NNI budget.

Pharmaceutical drugs.

In response to complaints that U.S. drug prices are at least twice those in any other country, Pfizer and other U.S. pharmaceutical companies have argued that the profits from these high prices—enabled by a generous intellectual-property regime and lax price regulation—permit more R&D to be done in the United States than elsewhere. Yet from 2003 through 2012, Pfizer funneled an amount equal to 71% of its profits into buybacks, and an amount equal to 75% of its profits into dividends. In other words, it spent more on buybacks and dividends than it earned and tapped its capital reserves to help fund them. The reality is, Americans pay high drug prices so that major pharmaceutical companies can boost their stock prices and pad executive pay.Given the importance of the stock market and corporations to the economy and society, U.S. regulators must step in to check the behavior of those who are unable or unwilling to control themselves. “The mission of the U.S. Securities and Exchange Commission,” the SEC’s website explains, “is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” Yet, as we have seen, in its rulings on and monitoring of stock buybacks and executive pay over three decades, the SEC has taken a course of action contrary to those objectives. It has enabled the wealthiest 0.1% of society, including top executives, to capture the lion’s share of the gains of U.S. productivity growth while the vast majority of Americans have been left behind. Rule 10b-18, in particular, has facilitated a rigged stock market that, by permitting the massive distribution of corporate cash to shareholders, has undermined capital formation, including human capital formation.

The corporate resource allocation process is America’s source of economic security or insecurity, as the case may be. If Americans want an economy in which corporate profits result in shared prosperity, the buyback and executive compensation binges will have to end. As with any addiction, there will be withdrawal pains. But the best executives may actually get satisfaction out of being paid a reasonable salary for allocating resources in ways that sustain the enterprise, provide higher standards of living to the workers who make it succeed, and generate tax revenues for the governments that provide it with crucial inputs.

A version of this article appeared in the September 2014 issue of Harvard Business Review.

Key Sources of Research:

Buybacks Around the World
Market Timing, Governance and Regulation

Alberto Manconi Urs Peyer Theo Vermaelen
September 2015

https://knowledge.insead.edu/sites/www.insead.edu/files/images/1bb_around_the_world_revised_-_september_8_2015-2.pdf

 

 

EXPLOITING EXCESS RETURNS FROM SHARE BUYBACK ANNOUNCEMENTS

White Paper by Catalyst Capital Advisors

http://www.catalystmutualfunds.com/i/u/6149790/f/Catalyst_Buyback_Strategy_White_Paper_2013-12-31.pdf

 

 

BUYBACKS: FROM BASICS TO POLITICS

WILLIAM LAZONICK
The Academic-Industry Research Network

August 19, 2015

http://www.theairnet.org/v3/backbone/uploads/2015/08/Lazonick-Buybacks-Basics-to-Politics-20150819.pdf

 

Investment Opportunities and Share Repurchases

Walter I. Boudry*
Jarl G. Kallberg
Crocker H. Liu

Current Version: 08 September 2009

http://scholarship.sha.cornell.edu/cgi/viewcontent.cgi?article=1503&context=articles

 

The savvy executive’s guide to buying back shares

By Bin Jiang and Tim Koller
Mckinsey
2011

https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-savvy-executives-guide-to-buying-back-shares

 

 

The Real Effects of Share Repurchases

Heitor Almeida, Vyacheslav Fos, and Mathias Kronlund
University of Illinois at Urbana-Champaign

October 22, 2014

https://business.illinois.edu/halmeida/repo.pdf

 

Buybacks and the board: Director perspectives on the share repurchase revolution

Richard Fields, Tapestry Networks
August 2016

https://irrcinstitute.org/wp-content/uploads/2016/08/FINAL-Buybacks-Report-Aug-22-2016.pdf

 

 

 

The Cannibalized Company Part 2

How the cult of shareholder value has reshaped corporate America

By Karen Brettell, David Gaffen and David Rohde

http://www.reuters.com/investigates/special-report/usa-buybacks-pay/

 

 

The Cannibalized Company Part 1

How the cult of shareholder value has reshaped corporate America

By Karen Brettell, David Gaffen and David Rohde

http://www.reuters.com/investigates/special-report/usa-buybacks-cannibalized/

 

 

Corporate Buybacks and Capital Investment: An International Perspective

Joseph W. Gruber and Steven B. Kamin

20017

https://www.federalreserve.gov/econres/notes/ifdp-notes/corporate-buybacks-and-capital-investment-an-international-perspective-20170411.htm

 

 

The Case for Stock Buybacks

SEPTEMBER 15, 2017

https://hbr.org/2017/09/the-case-for-stock-buybacks

 

 

Profits Without Prosperity

FROM THE SEPTEMBER 2014 ISSUE

https://hbr.org/2014/09/profits-without-prosperity

 

 

Stock buybacks: From retain-and- reinvest to downsize-and-distribute

By William Lazonick

2015

 

https://www.brookings.edu/wp-content/uploads/2016/06/lazonick.pdf

Stock Market Indicators: S&P 500 Buybacks & Dividends

 

https://www.yardeni.com/pub/buybackdiv.pdf

 

 

 

 Buyback Quarterly

FACTSET
20016

https://insight.factset.com/hubfs/Buyback%20Quarterly/Buyback%20Quarterly%20Q3%202016_12.19.pdf

https://www.factset.com/websitefiles/PDFs/buyback

 

The Ugly Truth Behind Stock Buybacks

https://www.forbes.com/sites/aalsin/2017/02/28/shareholders-should-be-required-to-vote-on-stock-buybacks/#13b556ce6b1e

Understanding Trade in Intermediate Goods

Understanding Trade in Intermediate Goods

 

One of the key source of International Trade statistics is a document published by the UNCTAD since 2013:

Key Statistics and Trends in International Trade

Please see references below to access reports for 2015 and 2016.

 

In 2014, out of USD 18.5 trillion in global trade, about USD 8 trillion was in intermediate goods.

 

From TRADE IN INTERMEDIATE GOODS AND SERVICES

Introduction: the international dimension of the exchange of intermediate inputs

1. Trade in intermediate inputs has been steadily growing over the last decade. However, despite the internationalisation of production and the increasing importance of outsourcing and foreign investment, some studies have found little rise in intermediate goods trade as a share of total trade1. More than half of goods trade is however made up of intermediate inputs and trade in services is even more of an intermediate type with about three quarters of trade flows being comprised of intermediate services. Trade in intermediate goods and services thus deserves special attention from trade policymakers and so far few studies have investigated how it differs from trade in consumption goods or services.

2. An intermediate good can be defined as an input to the production process that has itself been produced and, unlike capital, is used up in production3. The difference between intermediate and capital goods lies in the latter entering as a fixed asset in the production process. Like any primary factor (such as labour, land, or natural resources) capital is used but not used up in the production process4. On the contrary, an intermediate good is used, often transformed, and incorporated in the final output. As an input, an intermediate good has itself been produced and is hence defined in contrast to a primary input. As an output, an intermediate good is used to produce other goods (or services) contrary to a final good which is consumed and can be referred to as a “consumption good”.

3. Intermediate inputs are not restricted to material goods; they can also consist of services. Thelatter can be potentially used as an input to any sector of the economy; that is for the production of the same, or other services, as well as manufacturing goods. Symmetrically, manufacturing goods can be potentially used to produce the same, or other manufacturing goods, as well as services.

4. An important question we can ask is how to identify inputs among all goods and services produced in an economy. Many types of goods can be easily distinguished as inputs, when their use excludes them from final consumption. Notable examples include chemical substances, construction materials, or business services. The exact same type of good used as an input to some production process can however be destined to consumption. For instance, oranges can be sold to households as a final good, as well as to a factory as an input for food preparation. Telecommunication services can be sold to individuals or to business services firms as an intermediate input for their output. The United Nations distinguish commodities in each basic heading on the basis of the main end-use (United Nations, 2007). It is however recognized that many commodities that are traded internationally may be put to a variety of uses. Other methodologies involve the use of input-output (I-O) tables to distinguish between intermediate and consumption goods.

5. The importance of intermediate goods and services in the economy and trade is associated with a number of developments in the last decades. Growth and increased sophistication of production has given birth to strategies involving fragmentation and reorganisation of firm’s activities, both in terms of ownership boundaries, as in terms of the location for production. In what follows, the international dimension of the exchange of intermediate goods and services is explored by clarifying terms and concepts as well as the links between trade in intermediate inputs and FDI.

From Key Statistics and Trends in International Trade 2015

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From Key Statistics and Trends in International Trade 2015

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 From Key Statistics and Trends in International Trade 2015

inter3

From Key Statistics and Trends in International Trade 2015

inter4

From Key Statistics and Trends in International Trade 2015

inter

From Key Statistics and Trends in International Trade 2015

inter5

From Key Statistics and Trends in International Trade 2015

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From Key Statistics and Trends in International Trade 2015

inter7

From Key Statistics and Trends in International Trade 2015

Trade networks relating to global value chains have evolved during the last 10 years. In 2004, the East Asian production network was still in its infancy. Most trade flows of parts and components concerned the USA and the European Union, with a number of other countries loosely connected with these two main hubs. As of 2014 trade of parts and components was much more developed. The current state is characterized not only by the prominent role of China, but also by a much more tightly integrated network with a much larger number of countries many of which have multiple connections to different hubs.

From Mapping Global Value Chains: Intermediate Goods Trade and Structural Change in the World Economy

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Key sources of Research:

 

TRADE IN INTERMEDIATE GOODS AND SERVICES

OECD Trade Policy Working Paper No. 93
by Sébastien Miroudot, Rainer Lanz and Alexandros Ragoussis

2009

https://www.oecd.org/trade/its/44056524.pdf

 

 

An Essay on Intra-Industry Trade in Intermediate Goods

Rosanna Pittiglio

2014

http://file.scirp.org/pdf/ME_2014051916452646.pdf

 

 

The Rise of International Supply Chains: Implications for Global Trade

http://www3.weforum.org/docs/GETR/2012/GETR_Chapter1.2.pdf

 

 

 

Growing Trade in Intermediate Goods: Outsourcing, Global Sourcing or Increasing
Importance of MNE Networks?

by
Jörn Kleinert
October 2000

https://www.ifw-kiel.de/ifw_members/publications/growing-trade-in-intermediate-goods-outsourcing-global-sourcing-or-increasing-importance-of-mne-networks/kap1006.pdf

 

 

 

Imported Inputs and the Gains from Trade

Ananth Ramanarayanan
University of Western Ontario
September, 2014

https://www.economics.utoronto.ca/index.php/index/research/downloadSeminarPaper/49816

 

 

 

Key Statistics and Trends in International Trade 2015

Division on International Trade in Goods and Services, and Commodities
United Nations Conference on Trade and Development

http://unctad.org/en/PublicationsLibrary/ditctab2015d1_en.pdf

 

 

 

Key Statistics and Trends in International Trade 2016

Division on International Trade in Goods and Services, and Commodities
United Nations Conference on Trade and Development

http://unctad.org/en/PublicationsLibrary/ditctab2016d3_en.pdf

 

 

Integration of Trade and Disintegration of Production in the Global Economy

Robert C. Feenstra
Revised, April 1998

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.39.7178&rep=rep1&type=pdf

 

 

 

GLOBAL VALUE CHAINS: CHALLENGES, OPPORTUNITIES, AND IMPLICATIONS FOR POLICY

OECD, WTO and World Bank Group
Report prepared for submission to the G20 Trade Ministers Meeting Sydney, Australia, 19 July 2014

https://www.oecd.org/tad/gvc_report_g20_july_2014.pdf

 

 

Trade in Value Added: Concepts, Estimation and Analysis

Marko Javorsek* and Ignacio Camacho

20015

http://www.unescap.org/sites/default/files/AWP150Trade%20in%20Value%20Added.pdf

 

 

The Similarities and Differences among Three Major Inter-Country Input-Output Databases and their Implications for Trade in Value-Added Estimates

Lin Jones and Zhi Wang, United States International Trade Commission Li Xin, Beijing Normal University and Peking University Christophe Degain, World Trade Organization

December, 2014

https://www.usitc.gov/publications/332/ec201412b.pdf

 

 

Advanced Topics in Trade
Lecture 9 – Multinational Firms and Foreign Direct Investment

Heiwai Tang – SAIS
April 8, 2015

http://www.hwtang.com/uploads/3/0/7/2/3072318/lecture_8_new.pdf

 

 

Efforts to Measure Trade in Value-Added and Map Global Value Chains: A Guide

Andrew Reamer

May 29, 2014

https://gwipp.gwu.edu/files/downloads/Reamer_ISA_Trade_in_Value_Added_05-29-2014.pdf

 

 

 

Global Value Chains for Value Added and Intermediate Goods in Asia

N Shrestha

20015

http://www.econ.ynu.ac.jp/cessa/publication/pdf/CESSA%20WP%202015-07.pdf

 

 

 

Global Value Chains: The New Reality of International Trade

Sherry Stephenson
December 2013

http://e15initiative.org/wp-content/uploads/2015/09/E15-GVCs-Stephenson-Final.pdf

 

 

Asia and Global Production Networks Implications for Trade, Incomes and Economic Vulnerability

Benno Ferrarini

David Hummels

20014

https://www.adb.org/sites/default/files/publication/149221/asia-and-global-production-networks.pdf

 

 

Participation of Developing Countries in Global Value Chains:
Implications for Trade and Trade-Related Policies

by
Przemyslaw Kowalski, Javier Lopez Gonzalez, Alexandros Ragoussis
and Cristian Ugarte

https://www.die-gdi.de/uploads/media/OECD_Trade_Policy_Papers_179.pdf

 

 

GLOBAL VALUE CHAINS: SURVEYING DRIVERS, MEASURES AND IMPACTS

João Amador
Sónia Cabral

2014

https://www.bportugal.pt/sites/default/files/anexos/papers/wp20143.pdf

 

World Intermediate goods Exports By Country and Region

2014

WITS World International Trade Statistics

http://wits.worldbank.org/CountryProfile/en/Country/WLD/Year/2014/TradeFlow/Export/Partner/all/Product/UNCTAD-SoP2

 

 

Trade in global value chains

2013

WTO

https://www.wto.org/english/res_e/statis_e/its2013_e/its13_highlights4_e.pdf

 

 

The Rise of Trade in Intermediates: Policy Implications

  • February 10, 2011

http://carnegieendowment.org/2011/02/10/rise-of-trade-in-intermediates-policy-implications-pub-42578

 

 

International trade with intermediate and final goods under economic crisis

Elżbieta Czarny, Warsaw School of Economics
Paweł Folfas, Warsaw School of Economics
Katarzyna Śledziewska, Warsaw University

http://www.etsg.org/ETSG2012/Programme/Papers/375.pdf

 

 

 

Trade in Intermediate Goods: Implications for Productivity and Welfare in Korea

Young Gui Kim

Hak K. PYO

Date Written: December 30, 2016

 

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2929118

 

 

Growing Together: Economic Ties between the United States and Mexico

BY CHRISTOPHER WILSON

https://www.wilsoncenter.org/sites/default/files/growing_together_economic_ties_between_the_united_states_and_mexico.pdf

 

 

Mapping Global Value Chains: Intermediate Goods Trade and Structural Change in the World Economy

Timothy J. Sturgeon
Olga Memedovic

https://www.unido.org/fileadmin/user_media/Publications/Research_and_statistics/Branch_publications/Research_and_Policy/Files/Working_Papers/2010/WP%2005%20Mapping%20Glocal%20Value%20Chains.pdf

 

India’s Intermediate Goods Trade in the Inter Regional Value Chain:
An examination based on Trade data and Input Output Analysis

Simi Thambi

https://www.jsie.jp/Annual_Meeting/2013f_Yokohoma_n_Univ/pdf/10_2%20fp.pdf

 

Global Supply Chains

https://www.usitc.gov/publications/332/pub4253_2.pdf

 

 

Global value chains in a changing world

Edited by Deborah K. Elms and Patrick Low

https://www.wto.org/english/res_e/booksp_e/aid4tradeglobalvalue13_e.pdf

 

Production and Distribution Planning : Strategic, Global, and Integrated

Production and Distribution Planning : Strategic, Global, and Integrated

 

Multiple Perspectives on production and distribution planning

  • Plant and Distribution Center Location problem – Strategic – Structural and Design
  • Procurement problem – where to source from – Tactical – Allocation, Assignment
  • Production and Distribution Scheduling – Operational  – Managing Flows
  • Multi Echelon Inventory Management- Operational – Managing Stocks
  • Supply Chain Integration, Collaboration, Coordination – Hierarchical Planning

Normally, production and distribution planning are handled separately in firms.  Integrated planning of production and distribution can add significant value to a company, particularly, in strategic decisions.

 

From Facility Location and Supply Chain Management – A comprehensive review

Since, in the literature, model objectives change as a function of the planning horizon length, we consider it opportune to define the features of each horizon in order to contextualize the parameters chosen for the models’ comparison. According to [14], the planning horizons of the supply chain can be clustered as follows:
Strategic planning: this level refers to a long-term horizon (3-5 years) and has the objective of identifying strategic decisions for a production network and defining the optimal configuration of a supply chain. The decisions involved in this kind of
planning include vertical integration policies, capacity sizing, technology selection, sourcing, facility location, production allocation and transfer pricing policies.
Tactical planning: this level refers to a mid-term horizon (1-2 years) and has the objective of fulfilling demand and managing material flows, with a strong focus on the trade-off between the service level and cost reduction. The main aspects considered in tactical planning include production allocation, supply chain coordination, transportation policies, inventory policies, safety stock sizing and supply chain lead time reduction.
Operational planning: this level refers to a short term period (1 day to 1 year) and has the objective of determining material/logistic requirement planning. The decisions involved in programming include the allocation of customer demands, vehicle routing, and plant and warehouse scheduling.

 

From

pdp2

 

 

From  Integrated Location-Production-Distribution Planning in a
Multi products Supply Chain Network Design Model

pdp

 

Key words:

  • ‘supply chain strategic design’,
  • ‘supply chain planning’,
  • ‘supply chain optimization’,
  • ‘supply chain network design’,
  • ‘supply chain production planning’,
  • ‘supply chain delocalization’,
  • ‘logistic network design’,
  • ‘facility location’,
  • ‘distribution network design’,
  • ‘production-distribution systems’,
  • ‘location-allocation problem’,
  • ‘supply chain linear programming’
  • ‘supply chain mixed-integer programming’.

From  From Manufacturing to Distribution: The Evolution of ERP in Our New Global Economy

Over the past fifty years, manufacturing has changed from individual companies producing and distributing their own products, to a global network of suppliers, manufacturers, and distributors. Efficiency, price, and quality are being scrutinized in the production of each product. Because of this global network, manufacturers are competing on a worldwide scale, and they have moved their production to countries where the costs of labor and capital are low in order to gain the advantages they need to compete.

Today, the complex manufacturing environment faces many challenges. Many products are manufactured in environments where supplies come from different parts of the world. The components to be used in supply chain manufacturing are transported across the globe to different manufacturers, distributors, and third party logistics (3PL) providers. The challenges for many manufacturers have become how to track supply chain costs and how to deal with manufacturing costs throughout the production of goods. Software vendors, however, are now addressing these manufacturing challenges by developing new applications.

Global competition has played a key role in industrialized countries shifting from being production-oriented economies to service-based economies. Manufacturers in North America, Western Europe, and other industrialized nations have adapted to the shift by redesigning their manufacturing production into a distribution and logistics industry, and the skills of the labor force have changed to reflect this transition. Developing countries have similarly changed their manufacturing production environments to reflect current demands; they are accommodating the production of goods in industries where manufacturers have chosen to move their production offshore–the textile industry being a prime example of this move.

A report from the US Census Bureau titled Statistics for Industry Groups and Industries: 2005 and another from Statistics Canada titled Wholesale Trade: The Year 2006 in Review indicate that wholesalers are changing their business models to become distributors as opposed to manufacturers. Between 2002 and 2005, overall labor and capital in the manufacturing sectors decreased substantially. US industry data (from about 10 years ago) indicates that the North American manufacturing industry was engaged in 80 percent manufacturing processes and only 20 percent distribution activities. Today, however, these percentages have changed dramatically; the current trend is in the opposite direction. Manufacturing processes account for around 30 percent of the industry processes, and wholesale and distribution activities, approximately 70 percent.

In addition, a report from the National Association of Manufacturers indicates that the US economy imports $1.3 trillion (USD) worth of manufactured goods, but exports only $806 billion (USD) worth of goods manufactured in the US. This negative trade balance is a clear indication of the changing economic trend toward the manufacturing of goods in low-cost labor nations.

The main reason for this huge manufacturing shift is the increasing operating costs of production in industrialized countries. These rising costs are forcing manufacturers to move their production to developing nations because of the low cost of labor in these countries. This includes Asian countries (such as China and Indonesia) as well as Eastern European countries (such as the Czech Republic and Slovakia).

The number of workers (in percentages) in specified industries in G7 countries, and uses 1980 as the base year with 100 percent full employment in each industry. The industries with relatively constant rates of employment are the food and drink and the tobacco industries. Since 1995, all other industries have been maintaining less and less manufacturing employees, as indicated by the declining slopes in the graph. The shift in the textiles and leather, metals, and other manufacturing industries is moving toward production of goods in low-wage, developing countries.

Manufacturing is a global industry, and although a manufacturing company may be based in an industrialized country, it may have the bulk of its manufacturing facilities in a developing country. Producing goods in such a country reduces wage and capital costs for the manufacturer; however, some manufacturing control is lost in offshore production. Shipping, distribution, and rental costs, for example, are often difficult to track and manage, and quality control can be compromised in a production environment that is not local.

Two main outcomes can be seen within the manufacturing industry because of this manufacturing shift: manufacturers have a sense of having relinquished control of their production to low-cost labor nations, and supply chain management (SCM) has now become the answer to manufacturing within industrialized nations.

Suppliers that provide components to manufacturers often have issues with quality. Being part of a large network of suppliers, each supplier tries to offer the lowest prices for its products when bidding to manufacturers. Although a supplier may win the bid, its products may not be up to standard, and this can lead to the production of faulty goods. Therefore, when using offshore suppliers, quality issues, product auditing, and supplier auditing become extremely important.

Because the manufacturing model is changing, manufacturing has become more of a service-based industry than a pure manufacturing industry. Even though the physical process of manufacturing hasn’t changed, the actual locations of where the goods are being produced have. This fact is now compelling industrialized countries to engage in more assembly driven activities–a service-based model. The manufacturing process has transformed into obtaining parts and reassembling them into the final product. The final product is then redistributed throughout the appropriate channel or to the consumer. SCM methods are now reacting to this change as well; they are taking into account final assembly needs, and they are distributing particular products to consumers or manufacturers.

SCM is becoming the norm for manufacturers in the industrialized world. Offshoring is now standard practice, and methods such as SCM have been set up to deal with these economic and logistical business realities.

The economic shift happening in both industrialized and developing countries is dramatic. As the level of management knowledge increases, better methods of constructing offshore products are available in SCM solutions. In both types of economies, the changes in the labor force skill sets and manufacturing environments have consequently led to new software solutions being developed in order to manage this dramatic change.

Within the software industry, many SCM and enterprise resource-planning (ERP) vendors are following the economic shift. They are developing new functionality–ERP-distribution software–to meet the recent demands and needs of the changing manufacturing and distribution industries.

SCM and ERP software are converging to better address these new demands in the manufacturing industry. In the enterprise software market, ERP software vendors have reached a point of saturation; their installs are slowing down and they are seeing a reduction in sales. Therefore, ERP providers are developing new functionality in order to remain competitive with other ERP vendors, in addition to looking for new opportunities. ERP vendors are trying to adapt to the changing market in order to increase their revenues. They are integrating SCM functionality into their ERP offerings, creating ERP-distribution software that can span the entire production process across many continents (if necessary), and that is able to track final goods, components, and materials.

Traditional ERP solutions included some SCM functionality, which was needed to distribute the companies’ produced goods. These systems also allowed components and parts to be imported in order to assemble these goods. But offshore manufacturing and expansion into new markets has required SCM functionality in ERP software to be extended. Some larger vendors have acquired other companies in order to meet these changing demands. For example, Oracle acquired G-Log, a transportation management systems (TMS) vendor, and Agile, a product lifecycle management (PLM) vendor; and Activant acquired Intuit Eclipse.

SCM software vendors, in contrast, have felt encroached upon by ERP vendors. The situation has posed a real threat to SCM providers in the market, forcing them to extend their ERP functionality to compete with ERP vendors and to try to gain new clients in the distribution and logistics industry.

ERP-distribution software has integrated SCM functionality into its existing functionality to navigate through the complex global manufacturing environment. SCM software maps five processes into one solution: planning, sourcing (obtaining materials), producing, delivering, and returning final products if defective. These processes help to track and manage the goods throughout their entire life cycles. In addition, ERP solutions are used to manage the entire operations of an organization, not only a product’s life cycle. This gives users the broad capability to manage operations and use the SCM functionality to manage the movement of goods, whether components or finished product.

With the ability to gain accurate inventory visibility and SCM production, ERP-distribution software is able to see the whole chain of manufacturing and distribution events, from supplier to manufacturer, all the way to the final consumer.

There are three business models.

  • The first is the SCM model, which includes the manufacturing process.
  • The second is the retail model, which is the distribution of final products to the consumer, business, or retailer.
  • The third model is a combination of the first two business models, joined by the ERP-distribution software solution into one seamless process.

Within the SCM process, goods can either be brought in (imported) through foreign manufacturers, or acquired locally. The goods are then given to a distributor, 3PL provider, or wholesaler in order to reach the final client.

Within the retail model, the products are taken from a distributor, 3PL provider, or wholesaler, and are distributed to the appropriate person. Note that there is a “shift” for the consumer. This is to indicate that through the Internet or other forms of technology, consumers are now able to buy directly from distributors. The power of the consumer has changed; where manufacturers once provided products to consumers, consumers are now creating demand, and manufacturers have to meet that demand.

SCM solutions focus on the relationship between the supplier and manufacturer. However, ERP- distribution software has taken functionality from SCM software and combined it with retail software (such as point-of-sale and e-commerce solutions); it is now able to span across the entire supply chain and to track goods along the complete manufacturing process.

This is a simplified view of the complexities of today’s manufacturing processes. These complexities have made it crucial for trading partners to unite with manufacturers in order to help alleviate the frustrations that can occur within this global network. Specifically, trading partners are coming together with manufacturers to unite services, products, and customer experience so that business processes (such as manufacturing and distribution) become more efficient and that goods can move through these processes with minimal problems.

SCM can be thought of as the management of “warehousing processes,” in which the movement of goods occurs through multiple warehouses or manufacturing facilities. Tracking the costs of moving products and components through the maze of warehousing and manufacturing facilities is a tricky process, and many organizations lose money at each warehousing step.

Within the flow of goods in the manufacturing sector, the warehouse is a crucial part of the supply chain. Traditionally, the warehouse has been a source of frustration because the manufacturer or supplier pays for the use of the warehouse (whether owned or rented by the company). This leads to two possible scenarios: 1) the costs of the warehouse are incurred by a 3PL or manufacturing company, or 2) the costs are passed from one warehouse to another warehouse, and the original warehouse charges for these costs.

The typical warehouse process includes the following steps: receiving, put away, picking, kitting, packing, repacking, cross-docking, and shipping. ERP-distribution software is able to track costs across the entire organization and to aid companies in reducing costs that were previously tough to track.

ERP-distribution system encompasses the entire production of the final good. The ERP- distribution system is able to include inventory visibility from points “A to Z” (start to finish) and to track each warehouse cost from supplier to manufacturer to user, whether consumer, business, or retailer.

The Final Word: ERP-distribution software has been developed to meet the growing needs of the manufacturing and distribution industries. The capabilities incorporated into the software work across entire organizations, and even across continents.

Because of the economic shift in the manufacturing industry, the emergence of new software has been vital for businesses to stay competitive, meet the industry demands and emerging shift, and to keep business processes efficient to gain better profit margins.

ERP-distribution software is able to track the processes of manufacturing goods and distributing components, even if the manufacturer has facilities in North America and the Far East. With the SCM component in ERP software, manufacturing and tracking goods becomes manageable. Distributors and manufacturers can now work together in order to better meet customer requirements.

In addition of factors for domestic location selection analysis, other factors in international location selection are:

  • Exchange Rates
  • Taxes and Tariffs
  • Transfer Prices

How do companies in Computers, Automotive, Apparel, Electronics, Consumer Goods, Machinery manage their supply chain planning functions?  What software do they use for forecasting, planning, and scheduling?

I know of these software solutions for Network Design and Optimization:

Key Sources of Research:

 

Combined Strategic and Operational Planning – An MILP Success Story in Chemical Industry

Josef Kallrath

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.506.4194&rep=rep1&type=pdf

 

 

Planning in the Process Industry

Josef Kallrath

http://www.astro.ufl.edu/~kallrath/files/kallrath2008d.pdf

 

Solving Planning and Design Problems in the Process Industry Using Mixed Integer and Global Optimization

Josef Kallrath

http://www.astro.ufl.edu/~kallrath/files/kallr05a.pdf

 

 

Mathematical Programming Models and Formulations for Deterministic Production
Planning Problems

Yves Pochet

http://www.diku.dk/hjemmesider/ansatte/pisinger/production/Pochet.pdf

 

Supply Network Planning and Plant Scheduling in the Chemical-Pharmaceutical Industry – A Case Study Investigation

Gang Yang, Martin Grunow and Hans-Otto Guenther

http://gebrc.nccu.edu.tw/proceedings/APDSI/2003/Papers/not_present_pdf/SNPandPSinCPI2003.pdf

 

 

Advanced Planning and Scheduling Solutions in Process Industry

Editors: Günther, Hans-Otto, van Beek, Paul (Eds.)

http://www.springer.com/la/book/9783540002222

 

Advanced Planning and Scheduling in Manufacturing and Supply Chains

Authors: Mauergauz, Yuri

http://www.springer.com/la/book/9783319275215

 

 

Centralised supply chain master planning employing advanced planning systems

Martin Rudberga* and Jim Thulin

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.177.7313&rep=rep1&type=pdf

 

 

Planning and Scheduling in Supply Chains: An Overview of Issues in Practice

Stephan Kreipl • Michael Pinedo

http://www.poms.org/journal/2004-01-Kreipl.pdf

 

 

Sales and operations planning in the process industry

Sayeh Noroozi

Joakim Wikner

https://www.iei.liu.se/prodek/pic/publikationer/1.549942/Salesandoperationsplanningintheprocessindustry.pdf

 

 

Optimal planning in large multi-site production networks

Christian H. Timpe, Josef Kallrath

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.565.6621&rep=rep1&type=pdf

 

 

Mixed Integer Optimization in the Chemical Process Industry –
Experience, Potential and Future Perspectives

Josef Kallrath

http://www.astro.ufl.edu/~kallrath/files/kall00c.pdf

 

Planning and scheduling in the process industry

Josef Kallrath

2002

https://pdfs.semanticscholar.org/79f2/bba952f67315ccfd639ce874f966b02d1c18.pdf?_ga=2.18515577.1763587969.1506656275-754417939.1465928807

 

Modeling and design of global logistics systems: A review of integrated strategic and tactical models and design algorithms

Marc Goetschalckx  Carlos J.Vidal, Koray Dogan

https://www.researchgate.net/profile/Marc_Goetschalckx/publication/223361474_Modeling_and_design_of_global_logistics_systems_A_review_of_integrated_strategic_and_tactical_models_and_design_algorithms/links/09e4150b3dc45e40ef000000.pdf

 

 

Strategic Analysis of Integrated Production- Distribution Systems: Models and Methods

Morris Cohen and H Lee

1988

https://www.researchgate.net/profile/Morris_Cohen3/publication/238722412_Strategic_Analysis_of_Integrated_Production-Distribution_Systems_Models_and_Methods/links/554578ab0cf23ff71686afbc.pdf

 

 

Integrated production/distribution planning in supply chains: An invited review

Sß. Selcßuk Erengucß a, N.C. Simpson b, Asoo J. Vakharia

1999

http://warrington.ufl.edu/departments/isom/docs/vakharia/1999_EJOR.pdf

 

 

A Review of Integrated Analysis of Production-Distribution Systems

Ana Maria Sarmiento, Rakesh Nagi

1999

http://www.eng.buffalo.edu/~nagi/papers/ana.pdf

 

Managing Perishability in Production-Distribution Planning: a discussion and review

P. Amorim H. Meyr C. Almeder
B. Almada-Lobo

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.475.3138&rep=rep1&type=pdf

 

 

Input-Output Analysis For Multi-location Supply Chain Management Control:
A Theoretic Model

Wang Lu, Tong Rencheng

https://www.iioa.org/conferences/16th/files/Papers/Wang-274.pdf

 

 

Using Operational Research for Supply Chain Planning in the Forest
Products Industry

Sophie D’Amours

Mikael Ro¨nnqvist

Andres Weintraub

http://repositorio.uchile.cl/bitstream/handle/2250/125029/DâAmours_Sophie.pdf?sequence=1

 

 

Mathematical programming models for supply chain production and
transport planning

Josefa Mula *, David Peidro, Manuel Díaz-Madroñero, Eduardo Vicens

2010

https://pdfs.semanticscholar.org/ad51/83f7e2405a9539c86dd593f5bb064f2695d5.pdf

 

 

Formation of a strategic manufacturing and distribution network
with transfer prices

Renato de Mattaa, Tan Millerb

https://ai2-s2-pdfs.s3.amazonaws.com/2d00/28a955be33b7a19b2077402d5b3b9cca1151.pdf

 

 

MEASURING THE IMPACT OF TRANSFER PRICING ON THE CONFIGURATION
AND PROFIT OF AN INTERNATIONAL SUPPLY CHAIN: PERSPECTIVES FROM
TWO REAL CASES

Marc Goetschalckx, Carlos J. Vidal and Javier I. Hernández

http://www.din.uem.br/sbpo/sbpo2012/pdf/arq0310.pdf

 

 

Integrated Strategic Planning of Global Production Networks and Financial Hedging
under Uncertain Demands and Exchange Rates

Achim Koberstein,
Elmar Lukas,
Marc Naumann

https://link.springer.com/content/pdf/10.1007%2FBF03342750.pdf

 

 

 

The Design of Robust Value Creating Supply Chain Networks:  A Critical Review

https://www.cirrelt.ca/DocumentsTravail/CIRRELT-2008-36.pdf

 

 

 

 

Global supply chain design: A literature review and critique.

Meixell, M. J. and Gargeya, V. B.

(2005).

Transportation Research Part E: Logistics and Transportation Review, 41(6): 531-550.

https://libres.uncg.edu/ir/uncg/f/V_Gargeya_Global_2005.pdf

 

 

 

A strategic model for exact supply chain network design and its application to a global manufacturer

C. Arampantzi, I. Minis, G. Dikas

http://deopsys.aegean.gr/files/DeOPSys_Lab_Report_SSCND_2016-5.pdf

 

 

Sequential Vs Integrated Optimization:  Production, Location, Inventory Control and Distribution

July 2017

https://www.cirrelt.ca/DocumentsTravail/CIRRELT-2017-39.pdf

 

 

Measuring Cost Efficiency in an Integrated Model of Production
and Distribution: A Nonparametric Approach

Subhash C. Ray

2011

http://web2.uconn.edu/economics/working/2011-04.pdf

 

 

Optimization/simulation modeling of the integrated production- distribution plan: an innovative survey

BEHNAM FAHIMNIA, LEE LUONG, ROMEO MARIAN

2008

 

http://www.wseas.us/e-library/transactions/economics/2008/30-587.pdf

https://www.researchgate.net/profile/Romeo_Marian/publication/228614476_Optimizationsimulation_modeling_of_the_integrated_production-_distribution_plan_An_innovative_survey/links/54daa3b60cf2ba88a68d6cb5/Optimization-simulation-modeling-of-the-integrated-production-distribution-plan-An-innovative-survey.pdf

 

 

Strategic Planning and Design of Supply Chains: a Literature Review

Alessandro Lambiase, Ernesto Mastrocinque, Salvatore Miranda and Alfredo Lambiase

2013

http://journals.sagepub.com/doi/pdf/10.5772/56858

 

 

The design of production-distribution networks: A mathematical programming approach

Alain Martel

https://www.researchgate.net/publication/226891333_The_Design_of_Production-Distribution_Networks_A_Mathematical_Programming_Approach

 

 

Process industry supply chains: Advances and challenges

Nilay Shah

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.114.4553&rep=rep1&type=pdf

 

 

Strategic, Tactical and Operational Decisions in Multi-national Logistics Networks:
A Review and Discussion of Modeling Issues

Gunter Schmidt
and
Wilbert E. Wilhelm

http://citeseerx.ist.psu.edu/viewdoc/download;jsessionid=5BA6B353BBCA48D0859B902AC3F2610D?doi=10.1.1.25.4951&rep=rep1&type=pdf

Strategic production-distribution models: A critical review with emphasis on global supply chain models

 

 

Dynamics of Global Supply Chain Supernetworks

A. NAGURNEY, J. CRUZ AND D. MATSYPURA

(Received and accepted November 2002)

 

https://ac.els-cdn.com/S0895717703001122/1-s2.0-S0895717703001122-main.pdf?_tid=f781c478-a79f-11e7-b471-00000aab0f6c&acdnat=1506969295_6d30c9e8a854b9cc1ec23a57d00143d0

 

 

 

 

Integrated supply chain planning under uncertainty using an improved stochastic approach

Hadi Mohammadi Bidhandi a,⇑, Rosnah Mohd Yusuff

 

https://ac.els-cdn.com/S0307904X1000452X/1-s2.0-S0307904X1000452X-main.pdf?_tid=49ede574-a7a1-11e7-87fa-00000aacb360&acdnat=1506969863_699a0bd5cc6d414ed2f1caebcdda820f

 

 

Optimizing the Supply Chain of a Petrochemical Company under Uncertain Operating and Economic Conditions

Haitham M. S. Lababidi,*,† Mohamed A. Ahmed,‡ Imad M. Alatiqi,† and Adel F. Al-Enzi§

https://www.researchgate.net/profile/Haitham_Lababidi/publication/228426675_Optimizing_the_supply_chain_of_petrochemical_products_under_uncertain_operational_and_economical_conditions/links/5620c42208ae93a5c9244ea5.pdf

 

 

A strategic model for exact supply chain network design and its application to a global manufacturer

C. Arampantzi, I. Minis, G. Dikas

http://deopsys.aegean.gr/files/DeOPSys_Lab_Report_SSCND_2016-5.pdf

 

 

Sequential versus Integrated Optimization: Lot Sizing, Inventory Control and Distribution

Maryam Darvish*, Leandro C. Coelho

https://www.cirrelt.ca/DocumentsTravail/CIRRELT-2017-39.pdf

 

 

A MANUFACTURING ENGINEERING PERSPECTIVE ON SUPPLY CHAIN INTEGRATION

Samuel H. Huang, Ge Wang

John P. Dismukes

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.41.1852&rep=rep1&type=pdf

 

 

A review and critique on integrated production–distribution planning models and techniques

Trends in Intra Firm Trade of USA

Trends in Intra Firm Trade of USA

 

 

Intra Firm Trade

Intra-firm trade consist of trade between parent companies of a compiling country with their affiliates abroad and trade of affiliates under foreign control in this compiling country with their foreign parent group.

Intra Industry Trade

Different types of trade are captured in measurements of intra-industry trade:

a) Trade in similar products (“horizontal trade”) with differentiated varieties (e.g. cars of a similar class and price range).

b) Trade in “vertically differentiated” products distinguished by quality and price (e.g. exports of high-quality clothing and imports of lower-quality clothing).

 

From GLOBALISATION AND INTRA-FIRM TRADE: AN EMPIRICAL NOTE

 

Products which are traded internationally, but which stay within the ambit of a multinational enterprise (MNE), represent a significant portion of foreign trade for several OECD countries. This type of trade is called intra-firm trade as opposed to international trade among unrelated parties, also called arm’s length trade. Intra-firm trade is an important part of the process of globalisation, by which is meant the increasing interdependence of markets and production in different countries through trade in goods and services, cross-border flows of capital, and exchanges of technology.

The phenomenon of intra-firm trade is of interest to trade policy makers, as well as to competition and tax authorities. The use of transfer pricing in intra-firm trade may introduce an element of uncertainty into the value of a fairly large part of international trade and into customs valuation needed for the application of tariffs or similar measures. Competition and tax issues may also arise from intra-firm trade to the extent that the latter may facilitate the dissimulation of real transaction prices between the parent company and its affiliates.

A surge in foreign direct investment (FDI) during the 1980s’ has been cited as evidence in favour of globalisation; it is argued that MNEs have played a central role in globalisation by extending their corporate networks beyond national boundaries through the establishment of foreign branches and subsidiaries. It is often assumed that intra-firm trade reflects these foreign production activities by MNEs, as they trans- fer their factors of production from one country to another.

Little attention has been paid so far to the phenomenon of intra-firm trade. The literature on the subject is still relatively limited and recent. This is partly because most international trade statistics do not distinguish between intra-firm trade and arm’s length trade.

 

From GLOBALISATION AND INTRA-FIRM TRADE: AN EMPIRICAL NOTE

In considering the interrelationship between globalisation and international trade, it is conceptually useful to distinguish between four types of international trade:

(A) intra industry, intra-firm trade;

(B) intra-industry, arm’s-length trade;

(C) inter-industry, intra firm trade;

(D) inter-industry, arm’s-length trade.

Intra-industry trade is defined as the mutual exchange of similar goods within the same product category (Grubel and Lloyd, 1975, and Greenaway and Milner, 1986).

Intra-industry trade is generally a function of product differentiation and may or may not involve intra-firm trade. If motor vehicles produced in France are exported to the United States and U.S.-built motor vehicles are exported to France, the two countries are said to be involved in intra-industry trade even though such trade is not necessarily intra-firm trade. Intra-industry trade can be readily calculated for any given product category, as only the traditional bilateral trade statistics for that product category are needed.

Intra firm trade is harder to quantify, since knowledge of the relationship between the firms involved in the transactions is necessary. Data on intra-firm trade are available only. through firm surveys, involving the preparation of questionnaires by national authorities.

Most trade in manufactured goods among OECD countries is of the intra-industry type.  Intra-industry trade is particularly important within Europe, and to a lesser extent, in North America, accounting for roughly 60 to 70 per cent of total trade in manufacture.  This trade generally concerns differentiated products exchanged between countries that are similar in terms of per capita income and relative factor endowments. It has also been argued that economies of scale play an important role in explaining the industry pattern of intra-industry trade.

On the other hand, trade between developed and developing countries (“North-South”) is mostly of the inter-industry type, reflecting large differences in relative factor endowments between the two groups of countries. Inter-industry trade among unrelated parties (type D) – e.g. international exchange of cotton cloth produced by northern manufacturers for wine produced by southern farmers .- is the type of trade which international trade textbooks traditionally deal with.

Trade in manufactured goods between developed countries is predominantly of the intra-industry type and often takes the form of intra-firm trade. An important example of intra-industry, intra-firm trade (Type A) is United States-Canada-Mexico automobile trade. Intra-firm trade is also the dominant pattern of U.S. exports to Canada and Europe in the case of non-electrical machinery and chemicals. Another example is trade in manufactured goods between Pacific Asian economies. These economies have seen a rapid increase in intra-industry trade as a proportion of their total trade over the last decade. Such increase in intra-industry trade in Pacific Asian economies can be primarily attributed to the globalisation of corporate activities by U.S. and Japanese firms and, more recently, by other Asian firms. This involves assembly-line production based on imported parts and components in different countries in East and South East Asia (Fukasaku, 1992; Gross, 1986).

 

 

IFT

 

From An Overview of U.S. Intrafirm-trade Data Sources

 

ift2

There are large differences in BEA data and Census data particularly for Imports.  There are some measurement issues.  Import data from Mexico and China show big errors.

 

From An Overview of U.S. Intrafirm-trade Data Sources

IFT3

 

From An Overview of U.S. Intrafirm-trade Data Sources

IFT4

 

Data sources of Intra Firm Trade

  • BEA (Intra Firm Trade Data)
  • US Census Bureau (Related party trade data)

 

From Intrafirm Trade and Vertical Fragmentation in U.S. Multinational Corporations

First, we show that, although intra-MNC trade represents an important fraction of aggregate U.S. exports and imports, the median manufacturing foreign affiliate ships nothing to — and receives nothing from — its parent in the United States. Intra-MNC trade is concentrated in a small group of large affiliates and large corporations: The largest five percent of affiliates accounts for around half of the total trade to and from the parent, while the largest five percent of corporations accounts for almost two thirds of total intra- MNC trade. This skewness is also observed within the corporation: Intra-MNC trade tends to be concentrated in a small number of an MNC’s largest foreign affiliates.

The lack of intra-MNC cross-border trade that we find for foreign affiliates of U.S. multinationals is more surprising than the similar finding in Atalay et al. (2014) for intrafirm trade within the United States. Factor price differences — the theoretical motivation for vertical fragmentation and the intrafirm trade that accompanies it — are much larger across countries than across U.S. cities. In this regard, Brainard (1993) first documented the weak relationship between factor endowments and intra-MNC trade across borders.

The skewness of intra-MNC trade towards large affiliates and corporations in our first finding is reminiscent of the skewness in the distributions of other international activities. Manufacturing exports are concentrated in large firms (Bernard and Jensen, 1995), and even larger firms own foreign affiliates (Helpman et al., 2004). These patterns are consistent with theories of the firm that are based on economies of scale in production. In Grossman et al. (2006), for example, the production of inputs for the entire multinational corporation is concentrated into a few large affiliates, which exploit the strong economies of scale in production. Affiliates created to supply a foreign market — as an alternative to exporting, in order to avoid transportation costs — are relatively small. The model predicts that a small number of large affiliates ship goods within the corporation, while numerous smaller affiliates serve local markets. The concentration of intra-MNC trade in the largest firms is also consistent with the contract theory of the multinational firm proposed by Antras and Helpman (2004): In their framework with heterogeneous firms, only the largest firms choose to integrate offshore activities.

Our second set of facts relates intra-MNC trade to the upstream and downstream links between the industries of the parent and affiliate, as defined by the U.S. input-output table. As previously shown in Alfaro and Charlton (2009), we find that multinational corporations own affiliates in industries that are vertically linked to the parent’s industry. The input-output coefficient between the affiliate’s and the parent’s industries of operation, however, is not related to the existence and the magnitude of the trade in goods between the two. These findings are similar to those in Atalay et al. (2014), who study multi-establishment firms within the United States: The ownership of vertically linked affiliates is not related to the transfer of goods within the boundaries of the firm.

 

 

 

Key Sources of Research:

 

GLOBALISATION AND INTRA-FIRM TRADE: AN EMPIRICAL NOTE

Marcos Bonturi and Kiichiro Fukasaku

1993

http://www.oecd.org/unitedstates/33948827.pdf

 

 

U.S. Direct Investment Abroad: Trends and Current Issues

James K. Jackson
Specialist in International Trade and Finance

June 29, 2017

https://fas.org/sgp/crs/misc/RS21118.pdf

 

Foreign Direct Investment in the United States (FDIUS): Final Results from the 2012 Benchmark Survey

 

https://www.bea.gov/international/fdius2012_final.htm

 

 

U.S. Direct Investment Abroad (USDIA): Revised 2009 Benchmark Data

https://www.bea.gov/international/usdia2009r.htm

 

U.S. Intrafirm Trade in Goods

By William J. Zeile

1997

https://www.bea.gov/scb/pdf/internat/bpa/1997/0297iid.pdf

 

Global Production: Firms, Contracts, and Trade Structure

Pol Antràs
Harvard University
June, 2015

http://scholar.harvard.edu/files/antras/files/global_production_slides.pdf

 

 

Trade in Goods Within Multinational Companies:
Survey-Based Data and Findings for the United States of America

William J. Zeile
U.S. Bureau of Economic Analysis
Washington, DC 20230
2003

https://www.bea.gov/papers/pdf/IFT_OECD_Zeile.pdf

 

 

An Overview of U.S. Intrafirm-trade Data Sources

Kim J. Ruhl
New York University Stern School of Business
May 2013

https://archive.nyu.edu/bitstream/2451/31994/2/Ruhl_USIntrafirm-tradeData_May2013.pdf

 

 

How Well is U.S. Intrafirm Trade Measured?

By KIM J. RUHL

20015

https://static1.squarespace.com/static/562636cfe4b043d43a7492bf/t/56746f21d8af102d24cf4264/1450471201862/How_Well_March_2015.pdf

 

 

 

An Overview of U.S. Intrafirm-trade Data Sources

Kim J. Ruhl
New York University Stern School of Business
May 2013

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.343.7532&rep=rep1&type=pdf

 

 

THE DETERMINANTS OF INTRAFIRM TRADE

Gregory Corcos

Delphine M. Irac

Giordano Miony

Thierry Verdier

First draft: January 26, 2008. This draft : December 9, 2010.

http://gregory.corcos.free.fr/coirmive.pdf

 

 

MULTINATIONAL FIRMS AND THE STRUCTURE OF INTERNATIONAL TRADE

Pol Antràs
Stephen R.Yeaple

Working Paper 18775

February 2013

http://www.nber.org/papers/w18775.pdf

 

 

INTRA-FIRM TRADE AND PRODUCT CONTRACTIBILITY (LONG VERSION)

Andrew B. Bernard
J. Bradford Jensen
Stephen J. Redding
Peter K. Schott

April 2010

http://www.nber.org/papers/w15881.pdf

 

 

FIRMS, CONTRACTS, AND TRADE STRUCTURE

POL ANTRAS

https://scholar.harvard.edu/files/antras/files/fcts.pdf

 

 

On Intra-firm Trade and Multinationals: Offshoring and Foreign Outsourcing in Manufacturing

  • Ashok Deo Bardhan
  • Dwight Jaffee

https://link.springer.com/chapter/10.1057%2F9780230522954_2

 

 

INTRAFIRM TRADE AND VERTICAL FRAGMENTATION IN U.S. MULTINATIONAL
CORPORATIONS

Natalia Ramondo
Veronica Rappoport
Kim J. Ruhl
August 2015

http://www.nber.org/papers/w21472.pdf

 

 

 

INTRA-FIRM TRADE: PATTERNS, DETERMINANTS AND POLICY IMPLICATIONS

Rainer Lanz,
Sébastien Miroudot,

OECD

https://www.biblioteca.fundacionicbc.edu.ar/images/d/d6/5kg9p39lrwnn.pdf

 

 

Intrafirm Trade and Product Contractibility

By Andrew B. Bernard, J. Bradford Jensen, Stephen J. Redding,
and Peter K. Schott

http://eprints.lse.ac.uk/28616/1/Intrafirm_trade_and_product_compatibility_(lsero).pdf

 

Vertical Specialization in Multinational Firms

Gordon H. Hanson

Raymond J. Mataloni, Jr.

Matthew J. Slaughter

Initial Draft: September 2002

https://www.princeton.edu/~erossi/courses_files/VertSpec.pdf

 

 

GLOBAL VALUE CHAINS SURVEYING DRIVERS AND MEASURES

João Amador and Sónia Cabral

2014

https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1739.en.pdf?13f6d86f40a3c60325f27cbc08a18742

https://www.bportugal.pt/sites/default/files/anexos/papers/wp20143.pdf

 

 

EU-US ECONOMIC LINKAGES:
THE ROLE OF MULTINATIONALS AND INTRA-FIRM TRADE

C. Lakatos and T. Fukui

2013

http://trade.ec.europa.eu/doclib/docs/2013/november/tradoc_151922.%202_November%202013.pdf

 

 

THREE ESSAYS ON INTRAFIRM TRADE

Sooyoung Lee

2015

http://scholar.colorado.edu/cgi/viewcontent.cgi?article=1061&context=econ_gradetds

 

 

 

On Intra-Firm Trade and Multinationals: Foreign Outsourcing and Offshoring in Manufacturing

Ashok Deo Bardhan

Dwight Jaffee

2004

https://pdfs.semanticscholar.org/9360/d993275ddc9ba520060c9022fb84435a4d6a.pdf

 

International Fragmentation of Production and the Intrafirm Trade
of U.S. Multinational Companies

Maria Borga and William J. Zeile

January 22, 2004

https://www.bea.gov/papers/pdf/intrafirmtradejanuary04.pdf

 

 

 

Globalization and trade flows: what you see is not what you get!

Andreas Maurer and Christophe Degain

https://www.wto.org/english/res_e/reser_e/ersd201012_e.pdf

 

 

How US corporations structure their international production chains

Natalia Ramondo, Veronica Rappoport, Kim Ruhl

07 October 2015

http://voxeu.org/article/international-production-networks-and-intra-firm-trade-new-evidence

 

 

 

WHY DO FIRMS OWN PRODUCTION CHAINS?

Enghin Atalay
Ali Hortacsu
Chad Syverson

April 2012

http://www.nber.org/papers/w18020.pdf

 

 

 

Vertical Integration and Input Flows

Enghin Atalay

Ali Hortaçsu

Chad Syverson

August, 2013

http://faculty.chicagobooth.edu/chad.syverson/research/verticalownership.pdf

http://ssc.wisc.edu/~eatalay/viplantevidence.pdf

 

 

Outsourcing versus Vertical Integration: A Dynamic Model of Industry Equilibrium.

Román Fossati

March 2014

http://webmeets.com/files/papers/EARIE/2014/101/1March2014-RomanFossati.pdf

 

 

Production Networks, Geography and Firm Performance

Andrew B. Bernardy

Andreas Moxnesz

Yukiko U. Saitox

This Version: May 2014 –

http://cepr.org/sites/default/files/MOXNES%20-%20j_network_ERWIT4.pdf

 

 

 

 

Vertical Integration and Firm Boundaries: The Evidence

FRANCINE LAFONTAINE AND MARGARET SLADE

2007

http://eva.fcs.edu.uy/pluginfile.php/52932/mod_resource/content/2/Lafontaine_Slade%20-%20Vertical%20integration%20and%20firm%20boundaries.pdf

 

 

 

 

Foreign affiliates with and without intra-firm trade:
Evidence from sub-Saharan Africa

Sotiris Blanas

Adnan Seric

http://www.unido.org/fileadmin/user_media/Research_and_Statistics/WPs_2010/WP_13.pdf

 

 

 

Outsourcing, Vertical Integration, and Cost Reduction

Simon Loertscher†

Michael H. Riordan‡

September 8, 2014

http://www.law.northwestern.edu/research-faculty/searlecenter/events/antitrust/documents/Loertscher_Outsourcing.pdf

 

 

 

VERTICAL PRODUCTION NETWORKS IN MULTINATIONAL FIRMS

Gordon H. Hanson
Raymond J. Mataloni, Jr.
Matthew J. Slaughter

May 2003

http://www.nber.org/papers/w9723.pdf

 

 

Network structure of production

Enghin Atalaya, Ali Hortaçsua,1, James Robertsb, and Chad Syversonc

Edited by Lars Peter Hansen, University of Chicago, Chicago, IL, and approved February 2, 2011 (received for review October 15, 2010)

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3069152/pdf/pnas.201015564.pdf

 

 

 

Cross-border Vertical Integration and Intra-firm Trade:
New evidence from Korean and Japanese firm-level data

Hyunbae CHUN

Jung HUR

Young Gak KIM

Hyeog Ug KWON

http://www.rieti.go.jp/jp/publications/dp/17e049.pdf

http://hompi.sogang.ac.kr/hchun/chun_aep_2017.pdf

 

 

 

Offshoring in the Global Economy
Lecture 1: Microeconomic Structure
Lecture 2: Macroeconomic Implications

Robert C. Feenstra

September 2008
http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.294.715&rep=rep1&type=pdf

 

 

 

THE NETWORK STRUCTURE OF INTERNATIONAL TRADE

Thomas Chaney

January 2011

http://www.nber.org/papers/w16753.pdf

FDI vs Outsourcing: Extending Boundaries or Extending Network Chains of Firms

FDI vs Outsourcing: Extending Boundaries or Extending Network Chains of Firms

 

Foreign Direct Investments of Firms can have three objectives:

  • Vertical Integration (Control of Supply Chain)
  • Horizontal Integration (Seeking Market Share)
  • Diversification ( Market Seeking)

In this post, Focus is on Sourcing of Goods and Services in FDI and Outsourcing Decisions of Firms.  That means focusing on supply chain related issues.

 

From GLOBAL SOURCING

A fi…rm that chooses to keep the production of an intermediate input within its boundaries can produce it at home or in a foreign country. When it keeps it at home, it engages in standard vertical integration. And when it makes it abroad, it engages in foreign direct investment (FDI) and intra-…firm trade. Alternatively, a …firm may choose to outsource an input in the home country or in a foreign country. When it buys the input at home, it engages in domestic outsourcing. And when it buys it abroad, it engages in foreign outsourcing, or arm’s-length trade.

Intel Corporation provides an example of the FDI strategy; it assembles most of its microchips in wholly-owned subsidiaries in China, Costa Rica, Malaysia, and the Philippines. On the other hand, Nike provides an example of the arm’s-length import strategy; it subcontracts most of its manufacturing to independent producers in Thailand, Indonesia, Cambodia, and Vietnam.

 

 

Intermediate Goods – Make vs.  Buy Decisions of Firms

 

Outsourcing2

 

From Integration of Trade and Disintegration of Production in the Global Economy

 

The rising integration of world markets has brought with it a disintegration of the production process, in which manufacturing or services activities done abroad are combined with those performed at home. Companies are now finding it profitable to outsource increasing amounts of the production process, a process which can happen either domestically or abroad. This represents a breakdown in the vertically-integrated mode of production – the so-called “Fordist” production, exemplified by the automobile industry – on which American manufacturing was built. A number of prominent researchers have referred to the importance of the idea that production occurs internationally: Bhagwati and Dehejia (1994) call this “kaleidoscope comparative advantage,” as firms shift location quickly; Krugman (1996) uses the phrase “slicing the value chain”; Leamer (1996) prefers “delocalization;” while Antweiler and Trefler (1997) introduce “intra-mediate trade.” There is no single measure that captures the full range of these activities, but I shall compare several different measures of foreign outsourcing, and argue that they have all increased since the 1970s.

 

Types of Supply Chain Relations:

  • Intra-firm Trade of MNCs
  • Foreign Outsourcing
  • Domestic Outsourcing
  • Vertical Integration

 

Key Terms:

  • Production Sharing
  • Vertical Integration
  • Fragmentation of Production
  • Global Value Chains
  • Outsourcing
  • Delocalization
  • Intermediate Goods Trade
  • FDI
  • Domestic Outsourcing
  • Production Offshoring
  • Onshoring
  • Economic Globalization
  • Value Added Tasks
  • Intra-firm Trade
  • Multinational Firms
  • Vertical Specialization
  • Vertical Disintegration
  • Transaction Cost Economics
  • Trade in Value Added Tasks
  • Vertical Production Networks
  • Production Unbundling

 

Key Sources of Research:

PHYSICAL CAPITAL, KNOWLEDGE CAPITAL AND THE CHOICE BETWEEN FDI AND OUTSOURCING

Yongmin Chen
Ignatius J. Horstmann
James R. Markusen

Working Paper 14515
http://www.nber.org/papers/w14515

December 2008

http://www.nber.org/papers/w14515.pdf

 

 

OUTSOURCING VERSUS FDI IN INDUSTRY EQUILIBRIUM

Gene M.Grossman
Elhanan Helpman

Working Paper 9300
http://www.nber.org/papers/w9300

October 2002

http://www.nber.org/papers/w9300.pdf

 

 

GLOBAL SOURCING

Pol Antràs
Elhanan Helpman

Working Paper 10082
http://www.nber.org/papers/w10082

November 2003

http://www.nber.org/papers/w10082.pdf

 

 

OUTSOURCING IN A GLOBAL ECONOMY

Gene M. Grossman
Elhanan Helpman

Working Paper 8728
http://www.nber.org/papers/w8728

January 2002

http://www.nber.org/papers/w8728.pdf

 

 

 

Globalization, Outsourcing, and Wage Inequality

Robert C. Feenstra

Gordon H. Hanson

January 1996

http://www.nber.org/papers/w5424.pdf

 

Global Production Sharing and Rising Inequality:  A Survey of Trade and wages

Robert C. Feenstra

Gordon H. Hanson

2001

http://www.nber.org/papers/w8372.pdf

 

 

TRADE, FDI, AND THE ORGANIZATION OF FIRMS

Elhanan Helpman

Working Paper 12091
http://www.nber.org/papers/w12091

March 2006

http://www.nber.org/papers/w12091.pdf

 

 

 

HOME AND HOST COUNTRY EFFECTS OF FDI

Robert E. Lipsey

Working Paper 9293
http://www.nber.org/papers/w9293

October 2002

http://www.nber.org/papers/w9293.pdf

 

 

Chapter Title: Introduction to “Foreign Direct Investment”

Chapter Author: Kenneth A. Froot
Chapter URL: http://www.nber.org/chapters/c6531

1992

http://www.nber.org/chapters/c6531.pdf

 

Chapter Title: Where Are the Multinationals Headed?

Chapter Author: Raymond Vernon
Chapter URL: http://www.nber.org/chapters/c6534

1992

http://www.nber.org/chapters/c6534.pdf

 

 

 

Determinants of Foreign Direct Investment: A Sectoral and Institutional
Approach

James P. Walsh and Jiangyan Yu

2010

https://www.imf.org/external/pubs/ft/wp/2010/wp10187.pdf

 

 

 

DETERMINANTS OF FOREIGN DIRECT INVESTMENT

Bruce A. Blonigen
Jeremy Piger

Working Paper 16704
http://www.nber.org/papers/w16704

January 2011

http://www.nber.org/papers/w16704.pdf

 

 

 

Determinants of Foreign Direct Investment in Developing Countries: A Comparative Analysis

Khondoker Abdul Mottaleba
Kaliappa Kalirajanb

2010

https://asiaandthepacificpolicystudies.crawford.anu.edu.au/acde/asarc/pdf/papers/2010/WP2010_13.pdf

 

 

 

Determinants of Foreign Direct Investment

Bruce A. Blonigen

Jeremy Piger

 

2014

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2535582

 

Trends and Determinants of Foreign Direct Investment in South Asia

World Bank

2013

http://documents.worldbank.org/curated/en/157221468164351904/pdf/ACS48460WP0P13055B00PUBLIC00A9RBBB1.pdf

 

 

Determinants of Foreign Direct Investment (FDI)

Yi Feng
Publication Date: Jun 2017

http://politics.oxfordre.com/view/10.1093/acrefore/9780190228637.001.0001/acrefore-9780190228637-e-559

http://politics.oxfordre.com/view/10.1093/acrefore/9780190228637.001.0001/acrefore-9780190228637-e-559?print=pdf

 

 

 

Foreign direct investment (FDI)

http://press.princeton.edu/chapters/s4IP1_8736.pdf

 

 

 

Foreign Direct Investment and the Multinational Enterprise: An Introduction

Steven Brakman and Harry Garretsen

2008

https://mitpress.mit.edu/sites/default/files/titles/content/9780262026451_sch_0001.pdf

 

 

 

AN EXTENSIVE EXPLORATION OF THEORIES OF FOREIGN DIRECT INVESTMENT

Patricia Lindelwa Makoni

http://virtusinterpress.org/IMG/pdf/10-22495_rgcv5i2c1art1.pdf

 

 

 

A selective review of foreign direct investment theories.

Nayak, Dinkar and Rahul N. Choudhury (2014).

ARTNeT Working Paper Series No. 143, March 2014,

https://www.econstor.eu/bitstream/10419/103862/1/782793517.pdf

 

 

Integration of Trade and Disintegration of Production in the Global Economy

Robert C. Feenstra

Revised, April 1998

 

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.39.7178&rep=rep1&type=pdf

 

 

 

The Distributional Effects of International Fragmentation,

Kohler, Wilhelm (2002)

Working Paper, Department of Economics, Johannes Kepler University of Linz, No. 0201

 

https://www.econstor.eu/bitstream/10419/73205/1/wp0201.pdf

 

 

 

International Fragmentation of Production and the Intrafirm Trade of U.S. Multinational Companies

Maria Borga and William J. Zeile
WP2004-02
January 22, 2004

Paper presented at:

The National Bureau of Economic Research/Conference on Research in Income and Wealth meeting on Firm-level Data, Trade, and Foreign Direct Investment, Cambridge, Massachusetts
August 7-8, 2003,
and
The OECD Committee on Industry and Business Environment/Working Party on Statistics
Session on Globalization,
Paris, France
November 3-4, 2003.

https://www.bea.gov/papers/pdf/intrafirmtradejanuary04.pdf

 

 

The governance of global value chains

Gary Gereffi
John Humphrey
Timothy Sturgeon
2005

http://www.fao.org/fileadmin/user_upload/fisheries/docs/GVC_Governance.pdf

 

The economic consequences of increased protectionism

Riksbank of Sweden

2017

http://www.riksbank.se/Documents/Rapporter/PPR/2017/170427/ppr_fordjupning_3_170427_eng.pdf

 

 

 

Deep integration and production networks: an empirical analysis

Gianluca Orefice
Nadia Rocha
World Trade Organization
Manuscript date: July 2011

https://www.wto.org/english/res_e/reser_e/ersd201111_e.pdf

 

 

 

Measuring success in the global economy: international trade, industrial
upgrading, and business function outsourcing in global value chains

Timothy J. Sturgeon and Gary Gereffi

http://unctad.org/en/docs/diaeiia200910a1_en.pdf

 

 

 

Topics in International Trade

Reading list

http://www.iwb.econ.uni-muenchen.de/studium_lehre/veranstaltungsarchiv/ss09/trade09/documents/readings-topics09.pdf

 

 

 

FOREIGN DIRECT INVESTMENT, TRADE, AND GLOBAL PRODUCTION NETWORKS
IN ASIA AND EUROPE

GPN Working Paper 2
October 2002

http://hummedia.manchester.ac.uk/schools/seed/geography/research/workingpapers/gpn/gpnwp2.pdf

 

 

Why has world trade grown faster than world output?

Mark Dean

Maria Sebastia-Barriel
http://www.columbia.edu/~md3405/Other_Paper_1.pdf

 

 

Vertical Specialization, Global Value Chains and the changing Geography of Trade: the Portuguese Rubber and Plastics Industry Case

João Carlos Lopes and Ana Santos

http://pascal.iseg.utl.pt/~depeco/wp/wp122015.pdf

 

 

The changing structure of trade linked to global production systems: What are the policy implications?

William MILBERG

 

https://static1.squarespace.com/static/53ce7840e4b01d2bd01192ee/t/53e8f8a5e4b0b053addadd1f/1407776933063/Changing-Structure-of-Trade-Linked-to-Global-Production-Systems.pdf

 

 

WHO PRODUCES FOR WHOM IN THE WORLD ECONOMY?

Guillaume Daudin (Lille-I (EQUIPPE) & Sciences Po (OFCE), Christine Rifflart, Danielle
Schweisguth (Sciences Po (OFCE))1

This version: July 2009

https://www.ofce.sciences-po.fr/pdf/dtravail/WP2009-18.pdf

 

THE NATURE AND GROWTH OF VERTICAL SPECIALIZATION IN WORLD TRADE

David Hummels
Jun Ishii
Kei-Mu Yi
March 1999

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.475.3874&rep=rep1&type=pdf

 

https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr72.pdf

 

 

Expansion Strategies of U.S. Multinational Firms

Gordon H. Hanson, Raymond J. Mataloni, and Matthew J. Slaughter

WP2001-01
May 10-11, 2001

Paper presented at:

The Brookings Trade Forum 2001, Washington, D.C.
May 10-11, 2001

https://www.bea.gov/papers/pdf/HMS1.PDF

 

 

INTERNATIONAL JOINT VENTURES AND THE BOUNDARIES OF THE FIRM

Mihir A. Desai C. Fritz Foley James R. Hines Jr.

Working Paper 9115 http://www.nber.org/papers/w9115
August 2002

 

http://dl.kli.re.kr/dl_image/IMG/02/000000005694/SERVICE/000000005694_01.PDF

 

 

 

The Globalization of Production

Gordon H. Hanson

 

http://www.nber.org/reporter/spring01/hanson.html

 

 

 

The Politics of Transnational Production Systems A Political Economy Perspective

Helge Hveem
Department of Political Science
University of Oslo

https://www2.warwick.ac.uk/fac/soc/pais/research/researchcentres/csgr/csgr-events/conferences/conference2007/papers/hveem.pdf

 

 The Architecture of Globalization: A Network Approach to International Economic Integration.

Raja Kali and Javier Reyes

Second Revision: October 9, 2006

http://comp.uark.edu/~kali/TradeNetwork.pdf

 

 

 

 

 

Paris School of Economics – Summer School on Trade

2017

https://www.parisschoolofeconomics.eu/IMG/pdf/trade-sumschool-pse-2017.pdf

 

 

Spain in the global value chains

2017

https://www.bde.es/f/webbde/SES/Secciones/Publicaciones/InformesBoletinesRevistas/ArticulosAnaliticos/2017/T3/files/beaa1703-art20e.pdf

 

 

 An Outsourcing Bibliography

Foreign Policy magazine

2004

An outsourcing bibliography

 

 

 

OFFSHORING, FOREIGN DIRECT INVESTMENT, AND THE STRUCTURE OF U.S. TRADE

2006

 

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.564.6639&rep=rep1&type=pdf

 

 

 A Survey of Literature on Research of Intra-firm Trade

WANG Li, SHEN Rui

http://www.seiofbluemountain.com/upload/product/201309/2013jrgjgc311b13.pdf

 

 

Global Value Chains

OECD, WTO and World Bank Group
Report prepared for submission to the G20 Trade Ministers Meeting Sydney, Australia, 19 July 2014

https://www.oecd.org/g20/topics/trade-and-investment/gvc_report_g20_july_2014.pdf

 

 

 

TRADE IN INTERMEDIATE GOODS AND SERVICES

OECD Trade Policy Working Paper No. 93
by Sébastien Miroudot, Rainer Lanz and Alexandros Ragoussis

https://www.oecd.org/trade/its/44056524.pdf

 

 

The Boundaries of Multinational Enterprises and the Theory of International Trade

James R. Markusen

 

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.551.4665&rep=rep1&type=pdf

 

 

Incomplete Contracts and the Boundaries of the Multinational Firm

Nathan Nunn

Daniel Trefler

June 2008

https://www.princeton.edu/~ies/IESWorkshop/NunnTreflerPaper.pdf

 

 

Trends in Cross Border Mergers and Acquisitions

Trends in Cross Border Mergers and Acquisitions

 

From The Location of Cross-Border Mergers & Acquisitions in the USA

The vast majority of foreign direct investment (FDI) takes place in the form of cross-border mergers and acquisitions (M&As), see Evenett (2004). Analyzing the determinants and consequences of M&As is part of a large and growing literature in both (international) economics and (international) business. In economics, the dominant industrial organization (IO) literature does, however, typically not deal with the cross-border aspect of M&As, but instead concentrates on national M&As (Salant et al., 1983; O’Brien and Shaffer, 2005; Davis and Wilson, 2008; Egger and Hahn, 2010). A relatively small literature explicitly tries to include the cross-border aspect of M&As, but neglects the role of country factors that are central in international economics and international business to explain the structure and variation of cross-border transactions (Anand and Delios, 2002; Nocke and Yeaple, 2007, 2008, Bertrand and Zitouna, 2006; Fugmagalli and Vasconcelos, 2009, Halverson, 2012). The impact of country wide differences on cross-border M&As is taken explicitly into account by Neary (2004, 2007) who focuses on differences in comparative advantage between countries in a general equilibrium model to explain the occurrence of cross-border M&As. Empirical support for this idea is found by Brakman et al (2013), see also Blonigen et al (2014). In the international business literature – ever since the introduction of Dunning’s Ownership-Location-Internalization (OLI) framework – the mode of foreign entry and the choice of a foreign location have been central, but not explicitly modelled, as the OLI framework is more a taxonomy of relevant elements for location choice than a model (see for example Dunning, 2000).2

Both for the modern international business and international economics literature, however, whenever the location of cross-border M&As is taken into account, it usually refers to the host country as a whole. Where to locate the M&A within the host country is not analyzed. This amounts to assuming that if foreign firms have decided to engage in an M&A they choose a country but are indifferent regarding the target location within that country. This observation is the starting point for the present paper. In contrast to this observation with respect to cross-border M&As, the within country location choice with respect to greenfield FDI has been analyzed in depth. The seminal study by Head et al. (1995) was pivotal, and initiated a large and growing body of literature; see for example Fontagne and Mayer (2005); Basile et al., (2008); Defever, (2006); or Mataloni, (2011). Similar analyses for cross-border M&As are largely absent and this is striking because the bulk of FDI is in the shape of cross-border M&As. A priori, there is no reason to assume that the location decision of greenfield investments and M&As are similar. M&As, by definition, merge with or acquire existing firms at a specific location, whereas greenfield investments can, in principle, locate anywhere.

 

From Economic and Financial Integration and the Rise of Cross-Border M&As

FDI8

 

From CROSS-BORDER MERGERS & ACQUISITIONS: THE FACTS AS A GUIDE FOR INTERNATIONAL ECONOMICS

FDI

  • Most of the Foreign Direct Investment (FDI) is in the form of Cross Border M&A.

 

The motivation for Cross Border M&A can be several:

  • Horizontal Integration ( Seeking Market Share)
  • Vertical Integration ( Control of Supply Chain)
  • Diversification (Market Seeking)

Research indicate that most of the cross border M&A are for seeking markets.

 

From CROSS-BORDER MERGERS & ACQUISITIONS: THE FACTS AS A GUIDE FOR INTERNATIONAL ECONOMICS

FDI2

  • Cross Border Mergers have been rising since 1985.

 

From CROSS-BORDER MERGERS & ACQUISITIONS: THE FACTS AS A GUIDE FOR INTERNATIONAL ECONOMICS

FDI3

 

  • Europe and North America dominate regions in which cross borders M&A are taking place.

 

From CROSS-BORDER MERGERS & ACQUISITIONS: THE FACTS AS A GUIDE FOR INTERNATIONAL ECONOMICS

FDI4

From CROSS-BORDER MERGERS & ACQUISITIONS: THE FACTS AS A GUIDE FOR INTERNATIONAL ECONOMICS

FDI6

 

From CROSS-BORDER MERGERS & ACQUISITIONS: THE FACTS AS A GUIDE FOR INTERNATIONAL ECONOMICS

FDI5

From CROSS-BORDER MERGERS & ACQUISITIONS: THE FACTS AS A GUIDE FOR INTERNATIONAL ECONOMICS

FDI7

 

From  M&A Today: A Quick Pre-Financial Crisis Comparison

FDI9FTD10FDI11

Sources of M&A Data:

From Exploration of Mergers and Acquisitions Database: Deals in Emerging Asian Markets

There are four popular mergers and acquisitions databases,

  • SDC Platinum Mergers & Acquisitions (M&A) database,
  • Bloomberg M&A database,
  • Mergerstat M&A database,
  • ZEPHYR M&A database.

The SDC Platinum M&A Database covers domestic deals from 1979 to present and international deals from 1985 to present. Thomson Reuters states that the SDC includes more transactions than any other source and is widely used by the industry professionals and academic researchers.

The Bloomberg M&A database began putting the mergers and acquisitions product together in January 1998, with the intention of providing “100 percent coverage of all global deals as they were announced” (Ide, 2001). Bloomberg states that it has mergers and acquisitions staff in 12 offices worldwide compiling M&A data and relationships with over 800 legal and financial firms.

According to the Zimmerman (2006), the Mergerstat database covers both acquisitions and divestitures where at least one significant party is a U.S. company.

the ZEPHYR database covers transactions both inside and outside the U.S. and is particularly useful to study M&A deals in Europe (from 1997 forward for European transactions; from 2000 forward for North American transactions; global coverage begins in 2003).

 

Academic Libraries

 

Deloitte Consulting M&A Services

https://www2.deloitte.com/us/en/pages/mergers-and-acquisitions/solutions/merger-and-acquisition-services.html

 

KPMG Consulting

https://advisory.kpmg.us/content/kpmg-advisory/deal-advisory/ma-spotlight/ma-spotlight-june-2017.html?gclid=CjwKCAjwo4jOBRBmEiwABWNaMQAFeh6oDkE3FAlfCTiA8yKJkpHwuRPwcvBQlnZpFbm_JpODEt1AuRoC8t4QAvD_BwE

 

Thomson Reuters

https://financial.thomsonreuters.com/en/markets-industries/investment-banking-financial-advisory/mergers-and-acquisitions.html

 

PITCHBOOK.COM

http://get.pitchbook.com/mergers-and-acquisitions-data/?utm_term=mergers%20and%20acquisitions&utm_source=adwords&utm_campaign=ma&utm_content=ma&_bt=166828976390&_bm=p&_bn=g&gclid=CjwKCAjwo4jOBRBmEiwABWNaMSspbwSShK79f6OskgjShGv0_8c8qgrnqF35qv2Fu9t9ZvgwfzfTpxoCaa8QAvD_BwE

White and Case

http://mergers.whitecase.com

 

IMAA-Institute.org

https://imaa-institute.org/mergers-and-acquisitions-statistics/

FACTSET / MERGERSTAT

https://www.factset.com/data/company_data/mergers_acq

 

Bureau Van Dijk/ZEPHYR

https://www.bvdinfo.com/bvd/media/reports/global-fy-2016.pdf

 

STATISTA

https://www.statista.com/topics/1146/mergers-and-acquisitions/

UNCTAD / World Investment Report

http://unctad.org/en/Pages/DIAE/World%20Investment%20Report/World_Investment_Report.aspx

Wilmer and Hale Law Firm

https://www.wilmerhale.com/uploadedFiles/Shared_Content/Editorial/Publications/Documents/2017-WilmerHale-MA-Report.pdf

 

Dealogic.com

http://www.dealogic.com/insight/ma-outlook-2017/

Please also see other related posts:

Mergers and Acquisitions – Long Term Trends and Waves

External Balance sheets of Nations

Low Interest Rates and International Investment Position of USA

 

Key sources of Research:

CROSS-BORDER MERGERS AND ACQUISITIONS:
ON REVEALED COMPARATIVE ADVANTAGE AND MERGER WAVES

Steven Brakman
Harry Garretsen
Charles van Marrewijk

2008

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1087886https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1087886

 

Cross-Border Mergers & Acquisitions: The Facts as a Guide for International Economics

CESifo Working Paper Series No. 1823

 

Steven Brakman

Harry Garretsen

Charles van Marrewijk

 

Date Written: October 2006

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=940348

 

Cross-border Mergers and Acquisitions: Their Role in Industrial Globalisation

2000

Nam-Hoon Kang and Sara Johansson

 

http://www.oecd-ilibrary.org/docserver/download/137157251088.pdf?expires=1505877469&id=id&accname=guest&checksum=BA90C157DC1196BE6E7C3CE1726D31FF

 

 

Theoretical foundations of cross-border mergers and acquisitions: A review of current research and recommendations for the future

Katsuhiko Shimizua,*, Michael A. Hittb,1, Deepa Vaidyanathc,2, Vincenzo Pisanod,3

Available online 24 July 2004

 

 

 Determinants of Cross-Border Mergers and Acquisitions

Isil Erel / Rose C. Liao /  Michael S. Weisbach

March 15, 2011

https://fisher.osu.edu/supplements/10/9864/ELW_JFRound3Revision.pdf

The Cross-Border Mergers and Acquisitions Wave of the Late 1990s

Simon J. Evenett

 

http://www.nber.org/chapters/c9545.pdf

 

 

 

The Macroeconomic Determinants of Cross Border Mergers and Acquisitions and Greenfield Investments

Paula Neto; Antonio Brandão; António Cerqueira

2010

 

https://www.researchgate.net/profile/Antonio_Brandao3/publication/46466162_The_Macroeconomic_Determinants_of_Cross_Border_Mergers_and_Acquisitions_and_Greenfield_Investments/links/0912f50c5ab64daab5000000.pdf

 

 

The Impact of FDI, Cross Border Mergers and Acquisitions and Greenfield Investments on Economic Growth

Paula Neto; Antonio Brandão; António Cerqueira

2010

https://www.researchgate.net/profile/Antonio_Brandao3/publication/24111675_The_Impact_of_FDI_Cross_Border_Mergers_and_Acquisitions_and_Greenfield_Investments_on_Economic_Growth/links/0912f50c5ab651626b000000.pdf

 

Exploration of Mergers and Acquisitions Database: Deals in Emerging Asian Markets

 

http://www.myacme.org/ijmtp/IJMTPV14N1/3%20IJMTP14005%20Draft%203%20final.pdf

 

 

Cross Border Mergers and Acquisitions

Scott Whitaker

2016

 

 

Economic and Financial Integration and the Rise of Cross-Border M&As

STEVEN BRAKMAN

GUS GARITA

HARRY GARRETSEN

CHARLES VAN MARREWIJK

March 2009

 

 

 

The Location of Cross-Border Mergers & Acquisitions in the USA

Steven Brakman
Harry Garretsen
Charles Van Marrewijk

CESIFO WORKING PAPER NO. 5331

APRIL 2015

 

 

M&A Today: A Quick Pre-Financial Crisis Comparison

2017

 

https://financial.thomsonreuters.com/content/dam/openweb/documents/pdf/financial/pre-financial-crisis-comparison.pdf

 

 

 

 

Cross-Border Mergers and Acquisitions and Financial Development:
Evidence from Emerging Asia

Douglas H. Brooks and Juthathip Jongwanich

No. 249 | February 2011

 

https://www.adb.org/sites/default/files/publication/28703/economics-wp249.pdf

 

 

 

MERGERS AND ACQISITIONS (M&As)

Prepared by
Directorate for Financial and Enterprise Affairs, Investment Division, OECD

May 2004

 

https://www.imf.org/External/NP/sta/bop/pdf/diteg4a.pdf

 

 

 

OECD BENCHMARK DEFINITION OF FOREIGN DIRECT INVESTMENT:

FOURTH EDITION –

ISBN 978-92-64-04573-6 – © OECD 2008

 

https://www.oecd.org/daf/inv/investmentstatisticsandanalysis/40193734.pdf

 

 

 

Economic and Other Impacts of Foreign Corporate Takeovers in OECD Countries

 

https://www.oecd.org/daf/inv/investment-policy/40476100.pdf

 

 

 

A Comparative Analysis of the Economic Effects of Cross-Border Mergers and Acquisitions in European Countries

Anita Maček

 

https://cdn.intechopen.com/pdfs-wm/38482.pdf