Byron Gangnes, University of Hawai'i at Manoa

Abstract

In recent decades, complex manufacturing sectors such as electronics have transformed from industries dominated by vertically integrated firms that source locally to industries dominated by horizontally specialized firms that source globally. To account for this, we build a two-country industry-equilibrium model in which firms concurrently choose (i) a type of input provider, (ii) an ownership structure and (iii) a location for production. We find that the industry transformation can be explained by a reduction in the cost of customizing inputs and by growth in industry demand.