International trade behavior of firms: a study of transactions carried out across countries with special reference to selected French and Indian firms in leather shoes industry

Abstract

There is general agreement among trade theorists that there is an only net gain to be realized in a world of free trade without any barriers across borders. Traditional and new trade theories explain international trade on the basis of differences existing across countries within the frameworks of perfect and imperfect competition respectively. This analysis could be enriched to understand the actual behavior of firms. International trade behavior of firms (ITBF) is, for the purposes of the present study, defined as the propensity of firms to carry out transactions across countries. This study is an attempt to conceptualize the nature of ITBF by incorporating the approaches of transactions cost and institutional choice within the traditional framework of profit maximization. Here, the conceptualization of ITBF involves the organization of all related transactions occurring between related stages constituting full vertical chain of supply, production and distribution. To keep the analysis sharply on the question of why and how firms carry out transactions across countries, present study focuses only on selected transactions involved in leather shoes industry (LSI). Firms are rational economic units of decision making attempting to maximize the expected profits. Firms, associated with the supply of similar products, collectively make up an industry. We have conceptualized an industry specific vertical chain of value addition. This vertical chain spans across the markets of inputs, intermediate and final goods (and services). In the case of consumer goods such as shoes, it may extend upto final consumers. It consists of a few technologically separable stages. For instance in LSI, we have identified seven such major stages which collectively constitute the vertical chain of LSI. There are what we call related transactions which occur between transactionally related stages across the vertical chain. Firms organize all related transactions by associating themselves with appropriate configuration of institutional arrangements (CIAs) while carrying out ultimate transactions which occur between the final stage of the vertical chain and final consumers. We characterize ultimate transactions with respect to a few attributes in order to align all related transactions with appropriate CIAs while organizing the full vertical chain. Firms choose the characteristics of ultimate transactions (CTs) in order to maximize the expected profits. We distinguish various CTs ir1 LS1 with respect to the following three attributes: Price (P), Volume (V), and Specificity (S). The attribute of specificity is a measure of mutual dependency that arise, in LSI, because of transacting intermediate goods or services specific to differentiated-shoes. We show that there appears to be appropriate CIAs to govern all related transactions for every choice of CTs. The right choice of CIAs minimizes both production and transactions costs. However there is no cause and effect relationship which appears to be existing between CIAs and CTs. But they coexist. Related stages are organized in different countries so as to internalize country specific advantages. Such internalization may lead to cost minimization for a particular choice of CTs. In such situations related transactions are carried out across countries. International trade is nothing but the value of all related transactions which take place across borders. It appears that internalization of the country specific advantages is contingent upon the choice of appropriate CIAs to be associated with. However the feasibility of making a particular set of institutional arrangements (IAs) appears to be determined by the prevailing institutional environment in respective countries. Institutional environment, together with standard economic constraints, appears to determine both the choice set and the incentive structure of economies. It does so by acting as a constraint on the map of all potential IAs to define the feasible set. From this perspective whether certain economic activities are carried out in a set of countries is actually an empirical question of whether right institutional environment has been stimulated or not ceteris paribus. Firms make the following three choices simultaneously in order to maximize the expected profits in the context of market imperfections, uncertainties and asymmetric information: (i) a mix of CTs. (ii) CIAs, and (m) countries to organize all related stages across countries simultaneously to govern all related transactions. All these choices together determine ITBF. Policy Implications of the Study: It appears that country specific advantages are only necessary condition but not sufficient for trade to take place between countries. A favorable institutional environment appears to be the overriding consideration which appears ultimately to determine the choice of countries to organize related stages across countries ceteris paribus. Ultimately the choices of different countries to organize related stages lead to related transactions take place across borders. And international trade is essentially the value of transactions carried out across borders. The above hypotheses appear to explain why trade is not always taking place between every pair of labor abundant and capital abundant countries as predicted by trade theories. However it appears that trade mostly take place between a pair of relatively labor abundant and labor scarce countries which have conducive institutional environment. However right institutional environment could be stimulated by appropriate government intervention so as to initialize the obvious gains from trade. In order to benefit from international trade: (i) the role of governments is to stimulate the right institutional environment to influence ITBF in the desired direction so as to achieve the stated objectives of the respective governments; and (ii) the role of firms is to make appropriate choice of IAs to realize higher unit value by greater international involvement.