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Global Economy
30-31 January 2004, CESifo Conference Centre Munich

"Global Economy" has now been introduced as the fifth research area of the CESifo network. Consequently, the first conference, organised by John Whalley, co-ordinator of the new area, took place in Munich on 30-31 January 2004. Twelve presentations and a general discussion concerning the organisation and the focus of the newly set up group took place over the two days.

After the introduction and address of John Whalley and Hans-Werner Sinn, Ludger Woessmann (together with Stefan Lachenmaier) presented the paper "Does Innovation Cause Exports?" Trade and growth theories predict a mutual causation of innovation and exports. By using an instrumental variable approach with a German micro data set and taking into account that innovation can also be caused by exports, Woessmann and Lachenmaier find empirical evidence for a causal positive effect of innovations on the export share of German manufacturing firms.

The second presentation in this session was given by Ray Riezman (University of Iowa) on "Outsourcing of Innovation" (joint work with Edwin L.-C. Lai and Ping Wang). The focus is on cost-reducing research and development activities that can be outsourced. The set up of the model is characterised by a principal-agent approach with fixed and performance based contracts. Among the major findings are that performance-based contracts increase the chance of outsourcing and welfare improvement; even an informed principal who foresees leakage of information may find it optimal to design a contract that allows leakage to occur. Lastly, stronger protection of trade secrets makes R&D outsourcing more likely and is welfare improving.

Marc Muendler

from the University of California at San Diego opened the second session on Developing Country Trade Issues. In his talk on "Trade Technology, and Productivity: A Study of Brazilian Manufactures", he presented an estimation of the production function from which he inferred firm-level productivity which then is related to trade. Muendler finds that trade liberalisation and intensified foreign competition force national firms to raise their productivity markedly and that the shutdown probability increases with more competition from abroad. The first effect sets in rather quickly whereas the second effect unfolds slowly over time.

Frank Westermann

(University of Munich) then gave an insight into "Liberalization, Growth and Financial Crises" by focusing on the developing world and specifically on Mexico. He claims that financial liberalisation leads to higher average long-run growth even though crises are more likely to occur. The data show that the gains from liberalising financial markets are higher than the gains from trade.

The third session put the emphasis on International Agreements. Volker Nitsch from the Free University Berlin asked whether the membership in regional trade arrangements (RTA) boosts liberalisation of trade policy. In the joint work with Daniel Sturm, he finds no measurable effect on average, but large differences between various RTAs.

The relationship between international policy co-ordination and domestic policy reputation was the main focus of Paola Conconi's talk. In her joint paper with Carlo Perroni "Self Enforcing International Agreements and Domestic Policy Credibility" she shows that domestic credibility might be best supported when countries do not have the opportunity to enter into binding agreements. At the same time, international policy co-operation may be sustained most easily when countries cannot pre-commit to policy domestically.

In a first draft, John Whalley (University of Western Ontario) related globalisation issues as discussed by economists with socially based value systems. He brought up issues on the interaction between different value systems as market integration intensifies. Social values are a central input for economic transactions. Hence, liberalisation of regional markets might generate various effects that have not been considered by economists in a comprehensive way. For example, social values could be regarded as constraints for transactions.

The last presentation of the first day was given by Udo Kreickemeier (University of Nottingham) who spoke about "Fair Wages and Human Capital Accumulation in a Global Economy". He analysed trade between two countries which differ in their attitudes towards wage inequality. The country with no preference for relatively equal wages does not observe unemployment whereas the average wage level in the other country is too high for unskilled labour. Kreickemeier then derives the effects of a globalisation shock on prices and employment.

Pascalis Raimondos-Moller

opened the sessions of the second day by presenting his paper entitled "Non-Preferential Trading Clubs". These are subsets of countries that conduct a non-discriminatory tariff reform. He shows that co-ordination of tariffs accompanied by side payments between these countries increases welfare without affecting outside countries - a strict Pareto improvement.

Hui Huang from the University of Western Ontario proceeded with her paper "GATS Negotiations in the WTO". She introduced a joint spatial-intertemporal model to show that negotiations on the liberalisation of services do not necessarily have to be welfare improving. This can be the case if free trade in goods does not already apply.

The last session of the conference was opened by Nicolas Schmitt (University of Geneva) who presented his joint work with Horst Raff on "Why Parallel Imports May Raise Producers' Profits". In contrast to the existing literature, manufacturers can benefit from parallel imports. This is the case when competitive retailers have to order inventories before they know the realisation of demand and when products are involved whose sale values drop at the end of the period. This prevents retailers from destructive competition and leads to higher sales and profits for the manufacturer.

Finally, Giovanni Facchini from the University of Illinois at Urbana-Champaign spoke about "Cultural Differences, Insecure Property Rights and the Mode of Entry by Foreign MNC". He distinguishes between multinational corporations and domestic firms and three organisational forms that differ in veto rights allocation and residual claims. He finds that the type of market entry is characterised by a trade-off resulting from a credibility effect, an insurance effect and a bargaining power effect.

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