2011 Theses Doctoral

Three Essays on Firms' Behavior in International Trade

Ahn, Jae Bin

Chapter 1 examines examines how trade finance may help explain the great trade collapse. The financial crisis of 2008-2009, the most severe world macroeconomic shock since the Great Depression, brought about a much more dramatic collapse in trade relative to GDP. This is called the "great trade collapse". I begin by exploring the differences between international and domestic trade finance. In particular, I endogenize the relative riskiness of international and domestic trade finance loans, and show why a letter of credit is used exclusively for international trade. The model explains the role of trade finance in the recent great trade collapse through two mechanisms: first, the riskiness of international transactions increases relative to domestic transactions during economic downturns, and second, international trade finance is more sensitive to adverse loan supply shocks than domestic trade finance. Both lead to larger drops in trade than domestic output during a recession. In addition, the exclusive use of a letter of credit in international transactions exacerbates a collapse in trade during a financial crisis. The basic model considers banks' optimal screening decisions in the presence of counterparty default risks. In equilibrium, banks will maintain a higher precision screening test for domestic firms and a lower precision screening test for foreign firms, which constitutes the main mechanism for the aforementioned results. In Chapter 2, I re-evaluate conventional wisdom in the literature that inward Foreign Direct Investment (FDI) benefits a host country, by increasing the competitive pressure and reducing inefficiency in the local industry. Such pro-competitive aspects of FDI are countered by the concern that the emergence of foreign firms crowds out local firms. This paper uses a heterogenous firms model to examine the pro-competitive channel through which FDI affects national weflare. Symmetric FDI liberalization improves net welfare across both participating countries. Breaking down the effects of FDI into source- and host-country, the country from which the FDI originates experiences a welfare gain following liberalization. However, a counterintuitive finding is that the welfare of the host country falls. This is explained by the production relocation process that leads to an increase in the mass of domestic firms in the source country and a decrease in the host country. In the long run, welfare losses from a decrease in the mass of domestic firms outweigh welfare gains from a price reduction from FDI goods in the host country. Chapter 3, joint work with with Professor Amit Khandelwal and Professor Shang-Jin Wei from Columbia Business School, documents that intermediaries play an important role in facilitating international trade. We modify a heterogeneous firm model to allow for an intermediary sector. The model predicts that firms will endogenously select their mode of export--either directly or indirectly through an intermediary--based on productivity. The model also predicts that intermediaries will be relatively more important in markets that are more difficult to penetrate. We provide empirical confirmation for these predictions using the firm-level census of China's trade, and generate new facts regarding the activity of intermediaries. We also provide evidence that firms begin to export directly after exporting through intermediaries.