不完全契約下外國供給者的研發行為 - 政大學術集成

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(1)國立政治大學國際經營與貿易研究所碩士論文. 不完全契約下外國供給者的研發行為政治大立 Foreign Supplier's R&D Activities. ‧ 國. 學. under Incomplete Contracts. ‧. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. 指導教授：徐則謙教授研究生：褚泓毅撰中. 華. 民. 國. 一. 百. 年. 六. 月.

(2) Foreign Supplier’s R&D Activities under Incomplete Contracts. 政治大. Hong-Yi Chu∗ ,Tse-Chien Hsu†. 立. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. June, 2011. ∗. Hong-Yi Chu, Postgraduate at the Department of International Business, National Chengchi University. Address: 64 Chih-Nan Road, Section 2, Wenshan 11623, Taipei, Taiwan. E-mail: blackdan859@gmail.com. † Tse-Chien Hsu, Department of International Business, National Chengchi University. Address: 64 Chih-Nan Road, Section 2, Wenshan 11623, Taipei, Taiwan. E-mail: tsechien@gmail.com.

(3) 摘要. 過去的文獻成功地運用不完全契約, 解釋低資本密集的產業偏向採用外包合作而非垂直. 政治大. 整合。然而, 不完全契約理論卻忽略外包接單廠商自身的研發行為, 尤其是在接單競爭被. 立. 強化時。因此, 我們延伸不完全契約模型, 發現若接單廠商身處越資本密集的產業, 越能. ‧ 國. 學. 從上游廠商奪取利潤, 因此有更強的誘因從事研發活動。當接單競爭強化時, 我們發現低. ‧. 資本密集的產業較不願意從事研發活動, 甚至被市場淘汰, 所以可以看到生產活動逐漸高資本密集的廠商或產業集中。另外我們利用計量模型驗證文章中的結論, 並得到一致. n. al. er. io. sit. y. Nat. 的結果。. Ch. engchi. JEL 分類代號: D23,F12,F14,F23,L22. 關鍵詞: 跨國外包, 財產權理論, 研發行為。. i n U. v.

(4) 摘要. Previous study utilizes incomplete contracts theory to explains why industries with lower. 政治大. capital intensity adopt outsourcing policy instead of vertical integration. However, incom-. 立. plete contracts is silent in explaining foreign supplier’s R&D activities, especially when. ‧ 國. 學. the competition is intensified. We extend the incomplete-contracting model, and discover. ‧. that foreign supplier of higher capital intensity producer has a higher profit extracted from. sit. y. Nat. final-good producers. Such excess profit gives foreign supplier more incentive to engage. n. al. er. io. in R&D activities. When competition is intensified, we also show that suppliers of less. i n U. v. capital intensive producer spend less in R&D or may leave the market; therefore within. Ch. engchi. an industry, factors are reallocated to suppliers of capital-intensive producers or toward suppliers in capital intensive industries. Econometric evidence we provide supports the prediction of the model.. JEL Classification: D23,F12,F14,F23,L22 Key Words: Foreign Outsourcing, Property-right Theory, R&D..

(5) CONTENTS. 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 1. 2. Theoretical Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 5. 2.1 Producing in Home Country . . . . . . . . . . . . . . . . . . . . . . . . . .. 7. 2.2. 治政 Outsourcing to Another Country . . . . . 大 . . . . . . . . . . . . . . . . . . 立 R&D Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 7 11. 學. ‧ 國. 2.3. 3. Empirical Evidence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17. ‧. 3.1 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17. sit. y. Nat. 3.2 Result . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22. n. al. er. io. 4. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25. Ch. engchi. i n U. v.

(6) LIST OF FIGURES. 1.1 Scatter plot of capital intensity and R&D . . . . . . . . . . . . . . . . . . .. 2. 2.1 Decision tree for final-good producer . . . . . . . . . . . . . . . . . . . . .. 8. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v.

(7) LIST OF TABLES. 3.1 The mean data sorted by industry. . . . . . . . . . . . . . . . . . . . . . . 19. 3.2 Empirical variables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 3.3 Descriptive statistics of empirical variables . . . . . . . . . . . . . . . . . . 21. 治政大spending . . . . . . . . . . . Empirical results of the determinants of R&D 立. 3.4 Correlation coefficient matrix . . . . . . . . . . . . . . . . . . . . . . . . . 22. 學 ‧. ‧ 國 io. sit. y. Nat. n. al. er. 3.5. Ch. engchi. i n U. v. 23.

(8) 1. INTRODUCTION. In this more and more integrated global economy, producers have frequently moved part of production process to foreign counties with lower factor cost. Previous literatures focusing on which organizational structures, namely vertical integration or outsourcing,. 政治大. the final-good producers choose when they distributed production processes to different. 立. location (Antras, 2003). We abstract from firm structures and narrow our topic to the. ‧ 國. 學. R&D activities of a final-good producer’s foreign supplier. In partucular, we discuss the problem within the context that final-good producers choose outsourcing as the organi-. ‧. zational structure. We provide the theoretical model and empirical evidence to confirm. Nat. sit. y. previously empirical study revealing that R&D activities are positively correlated with. n. al. er. io. capital intensity (Bound, Cummins, Griliches, Hall, and Jaffe, 1982). We further theo-. i n U. v. retically analyze how the suppliers’ decision of R&D alters when the level of competition. Ch. engchi. is intensified. We show that within an industry or across industries, suppliers have more incentive to engage in R&D when the production process of final goods is more capital intensive. When competition other countries with lower factor price emerge, current foreign suppliers of more capital intensive final-good producers tend to upgrade their technology. On the contrary, foreign suppliers of less capital intensive final-good producers tend to exit. Factors are therefore reallocated toward suppliers of capital intensive producers within an industry or toward suppliers of capital intensive industries. Figure 1.1 provides a scatter plot of the capital intensity, measured as the ratio of total capital stock to total employment, and foreign supplier’s R&D spending of Tai-.

(9) 1. Introduction. 2. Fig. 1.1: Scatter plot of capital intensity and R&D. 立. 政治大. ‧ 國. 學. wanese firms, and each point represents a firm. The Y-axis measures the logarithm of. ‧. R&D spending of ODM (Original Design Manufacturing) and OEM (Original Equipment Manufacturing) firms. The X-axis corresponds to the logarithm of capital intensity in. y. Nat. n. al. er. io. significantly connected to R&D activities.. sit. each industry. From the simple regression model, we can see that capital intensity is. i n U. v. Why foreign suppliers of capital-intensive industries engage in more R&D activities?. Ch. engchi. To answer this question, we build on the theory of incomplete contracts initially proposed by Williamson (1971) and Grossman and Hart (1986) and later developed by Antras (2003). Similar to Antras (2003), to produce the final good we assume that capital is provided by final-good producers and labor is provided by foreign suppliers. Because of contract incompleteness, revenue is distributed according to two parties’ ex-post bargaining power instead of the contribution of input they provide. Therefore, part of the capital contribution might be captured by foreign suppliers. This foreign suppliers’ excess profit can be used to cover the fixed R&D costs. Because excess profit increases with amount of capital or the contribution of capital, both positively correlated with capital intensity, we.

(10) 1. Introduction. 3. observe R&D expenditure increases with capital intensity. When new suppliers located in a country with lower factor cost emerges, only capital intensive suppliers within an industry or suppliers in a capital intensive industry are willing to invest in R&D activities and upgrade their productivity to compete with the new suppliers. Others choose to exit the market. In suppliers’ countries, factors are reallocated toward suppliers of capital intensive producers to form the fixed R&D cost and to satisfy their higher demand of factors after productivity is augmented. We therefore observe that in suppliers’ countries, labor intensive industries contract and capital intensive industries grow after competition is intensified. Furthermore, since suppliers of labor intensive producers exit, they are re-. 政治大 data of Taiwanese enterprises 立 to testify our propositions, and we also find a significantly. placed by suppliers in newly emerged countries. In the empirical section, we use firm-level. ‧ 國. 學. consistent result.. Previous literatures trying to link R&D activities and capital intensity show two vari-. ‧. ables are positively correlated (Bound, Cummins, Griliches, Hall, and Jaffe, 1982) 1 ,. sit. y. Nat. although they are silent in providing a theoretical explanation. We provide a theoretical. io. al. er. explanation based on the division of production process between different firms and the nature of contract incompleteness. Our model also complements with previous theories. n. v i n C h of multinational explaining the organizational structures e n g c h i U firms under global division of. production process and incomplete contracts (Antras, 2003; Antras and Helpman, 2004). They find that vertical integration rather than outsourcing will be adopted in high capital intensive industries, and they also assume that foreign suppliers are passive and static in R&D activities. To fill this gap in the literature, this paper focuses on outsourcing relationship between two parties and investigates how foreign supplier behaves in the theory of incomplete contracts and finds the answer of figure 1.1. Moreover, in this model we can explain the endogenous R&D activities as well as endogenous industry evolution. The rest of the paper is organized as follows. The next section develops a theoretical 1. The only exception is Liu and Chen (2003) which show two variables are negatively correlated..

(11) 1. Introduction. 4. framework to analyze the foreign supplier’s behavior in R&D activities. In section 3, we present econometric evidence supporting the view in our theoretical work. Section 4 concludes.. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v.

(12) 2. THEORETICAL MODEL. Consider a world with two countries, country A and country B. There inhabits a group of representative consumers with identical preference. These representative consumers’ utility function follows this form,. 政1 X 治大 X , 0 < µ < 1, U =x + 立 µ J. µ j. 0. (2.1). j=1. ‧ 國. 學. where x0 is the consumption of a homogeneous good. We assume that x0 is produced in both countries, but the production efficiency differs in these countries. We also assume. ‧. that x0 is tradable and labor is the only input. Xj denotes the composite consumption in. sit. y. Nat. sector j, and µ is a parameter. Such composite consumption in each sector j is a constant. n. al. Xj =. Z. Ch. α1. xj (i)α di. er. io. elasticity of substitution function of different varieties xj (i),. i n U. v. ,0 < α < 1. engchi. (2.2). where the number of variety in sector j is exogenously determined. It could also be easily showed that the elasticity of substitution between two varieties in sector j is 1/ (1 − α). We assume µ < α, and this setting implies that varieties within a sector are more substitutable for each other than they are for varieties from a different sector. We could compute its inverse demand function for each variety i in sector j: pj (i) = Xjµ−α xj (i)α−1. (2.3). Let’s assume that production involves two input factors: capital and labor. In country A, each final-good producer in variety i in sector j owns Ki amount of capital without any cost. We assume that the Ki amount of capital follows a distribution G(K) with.

(13) 2. Theoretical Model. Ki ∈ [1, ∞). 2.. 6. The final-good producer has to hire labor to produce in its home coun-. try. Simultaneously, there is a large number of firms in country B, and these firms could also provide the final-good producer with adequate labor. In other words, the final-good producer may choose to outsource this work to a foreign firm in country B. After all production is finished, only the final-good producer can sell its product to the representative consumers. Suppose that production function in every sector is a Cobb-Douglas function of the inputs, η. 1−ηj. xj (i) = Ki j Li. (2.4) 治政大 where K is the amount of立 capital or a specific patent owned by the final-good producer, i. ‧ 國. 學. Li is the amount of labor hired by final-good producer or hired by the foreign supplier and η is sector-specific capital share. If η is larger, it means that during production process. ‧. capital is more essential in this sector. Following the setting of incomplete contracts, we. sit. y. Nat. assume that xj (i) is still an intermediate input for final-good producers, and only the. io. er. final-good producer can translate one xj (i) into one final product. For the final-good producer, its object is to maximize its profit by hiring optimal amount of labor or by. al. n. v i n outsourcing such work. In the C following discussion, we will focus on a given industry, so hengchi U we ignore index j to make it more concise. From equation (2.3) and (2.4), we can have revenue function as following: α(1−η). Ri = pi xi = X µ−α Kiαη Li 2. (2.5). In the following part, we will discuss the relationship between capital intensity and R&D spending,. and our results would be reverse if Ki is smaller than one. If the amount of capital is small enough, higher capital intensity, given the amount of capital fixed, would reduce the output and profit. In such case, there would be no incentive to engage in R&D. This assumption can be satisfied if we consider capital accumulation. In the long-run when the saving rate is high enough, it is possible to observe that K > L. Furthermore, the heterogeneous of capital endowment can be explained by producers’ different aptitudes in saving..

(14) 2. Theoretical Model. 7. 2.1 Producing in Home Country. First, let’s presuppose that outsourcing does not exist. The final-good producer has the intention to maximize Ri − wLi , and it has to hire the local labor at the local wage rate w. The optimal hired amount of the labor and the sales revenue for the final-good producer are as following:. . Li = X µ−α Kiαη α (1 − η) w −1 Ri =. n. . X µ−α Kiαη α (1 − η) w −1. 1 1−α(1−η). 1 α(1−η) o 1−α(1−η). (2.6). (2.7). 政治大. Now we have the optimal amount of labor and the sales revenue. The net profit for. 立. the producer can be represented as follow,. ‧ 國. 學. πi = Ri − wLi = (1 − Φ) Ri , Φ = α (1 − η). (2.8). ‧. Equation (2.8) implies that the higher capital share is, the higher profit the producer. sit. y. Nat. will earn3 . Since labor cost is the only cost that the final-good producer has to care,. io. er. we can see a clear and negative relationship between wage rate w and net profit πi from equation (2.7) and (2.8). In other words, an increase in local wage rate will result in a. al. n. v i n C hproducer. Thus, ifUthe local wage rate in country B is decrease in the net profit for the engchi. relatively lower, the final-good producer might not keep hiring labor in local market but outsource the procedure to country B.. 2.2 Outsourcing to Another Country. If outsourcing happens, both parties,the final-good producer and the foreign supplier, would have to negotiate how to cooperate during production. Figure 2.1 summarizes the 3. This can be easily examined by taking one simple derivatives as following, ∂ ln πi /∂η =. α (1 − Φ). −1. ln (K/L) > 0 iff K > L. This derivative tells us that a higher capital share will accom-. pany with higher level of profit given capital intensity is larger than one..

(15) 2. Theoretical Model. 8. Fig. 2.1: Decision tree for final-good producer. 立. 政治大. ‧ 國. 學. sequence of both parties’ decisions and activities. Due to the contracts incompleteness,. ‧. both parties will start to bargain the output after production. Moreover, the output manufactured through the outsourcing in country B is valueless to other producers in. y. Nat. sit. country A in any sector or industry. This setting reflects a very common phenomenon in. n. al. er. io. OEM and ODM industries. Because the foreign suppliers have to adjust their design to. i n U. v. meet the needs of every order, their products are nearly impossible to resell to another. Ch. engchi. buyer. This setting is also one of the features derived from incomplete contracts. Since the output is useless outside this relationship, the contract incompleteness gives rise to a standard holdup problem. After production, both parties will negotiate how to divide the output xi . Because production process is divided among two parties, final-good producers do not necessarily own the property right of the intermediate input. It might be more reasonable to assume that the outside option for both parties is zero. To generalize our analysis, we assume that once the negotiation fails a third party, court for instance will arbitrate and there will be a probability δ ∈ (0, 1) which the final-good producer will obtain xi through arbitration. We also assume both parties are risk-neutral. If the final-good producer fails.

(16) 2. Theoretical Model. 9. to negotiate and wants to take over all output, it will on average receive a fraction δ of the amount of xi produced. Since the final-good producer will lose a fraction (1 − δ) of original producing amount, bargaining with the foreign supplier would be an adoptable policy if δ is significant. By substituting δxi into equation (2.5), we can translate the output of δxi into δ α times of sales revenue. Following the most common setting in the literature, we assume the ex-post bargaining as a Generalized Nash Bargaining, and that gives the final-good producer a fraction β ∈ (0, 1) of the ex-post gains from trade. For the final-good producer,. bi if it fails to bargain, so revenue for bargaining will be only it will on average receive δ α R. 政治大 revenue for final-good producer 立 will be. 學. ‧ 國. bi , where R bi is the sales revenue under outsourcing relationship. The total (1 − δ α ) R bi + β (1 − δ α ) R bi δαR. (2.9). ‧. and that will also be the profit because the final-good producer is not obligated to pay. y. Nat. for labor input. On the other side, the foreign supplier set its labor input to maximize. sit. er. io. bi − w1 L bi , where w1 is the wage rate in foreign country and w1 is strictly (1 − β) (1 − δ α ) R. smaller than w by assumption. By solving the first order condition, we obtain the optimal. n. al. Ch. i n U. amount of labor and sales revenue under outsourcing:. . engchi. v. bi = (1 − β) (1 − δ α ) X µ−α K αη Φw1−1 L i. 1 1−Φ. 1 n −1 Φ o 1−Φ α µ−α αη b Ri = (1 − β) (1 − δ ) X Ki Φw1. (2.10). (2.11). Checking equation (2.6), (2.10) and comparing these two first order conditions, we can discover that (1 − β) (1 − δ α ) is less than one, and we can find out an underinvestment in labor input. Such underinvestment stems from the fact that, with incomplete contracts, the foreign supplier receives only (1 − β) (1 − δ α ) of the marginal return to its ex ante investment. From equation (2.7) and (2.11), the sales revenue would also be lower for the same reason. Similar to the previous section, we obtain the net profit for the foreign.

(17) 2. Theoretical Model. 10. supplier. bi = (1 − Φ) R bi − w1 L bi . b πi = R. (2.12). The net profit of the foreign supplier increases with higher capital share4 . Higher capital share induces the outsourcing firm to hire less labor under profit-maximizing principle, so the labor cost for the foreign supplier will be much relieved; therefore, the foreign supplier can make greater profit under a higher capital share industry. Moreover, with incomplete contracts, the foreign supplier can capture the contribution of capital of the final-good producer, so the net profit of the foreign supplier increases with higher capital share.. 政治大 under outsourcing. Combine 立equation (2.8) and (2.9), outsourcing will take place if the For the final-good producer, outsourcing would be adopted if its net profit is greater. bi + β (1 − δ α ) R bi > (1 − Φ) Ri , δαR. Ch. sit. y. n. al. 1−Φ Φ. [(1 − β) (1 − δ α )]. 1 Φ. (2.13). er. w1 , D = [δ α + β (1 − δ α )] (1 − Φ)−1 w. io. D≥. Nat. and this inequality can be simplified to. ‧. ‧ 國. 學. following inequality holds. i n U. v. Notice that D is a positive constant. The disadvantage of outsourcing is the reduction. engchi. of efficiency due to contracts incompleteness. Therefore, outsourcing takes place only when the labor cost is significantly low in country B. If outsourcing does not happen, the final-good producer has to pay for labor input itself. Thus, it would bear a higher manufacturing cost if domestic wage rate is significantly high. Although incomplete contracts will reduce the labor input of the foreign supplier and the revenue of the final-good producer, the final-good producer may still adopt outsourcing policy if wage difference is significantly high. 4. It could be rigorously showed by footnote 3..

(18) 2. Theoretical Model. 11. 2.3 R&D Activities. In order to bring R&D into our discussion, we consider a labor biased production function and rewrite it as xi = Kiη (θLi )1−η , where θ is the efficiency index of the final-good producer. Suppose that the final-good producer hires its local labor, and we could rewrite its optimal amount of labor and sales revenue as:. . 立 R =. X. µ−α. Kiαη. . Φw. −1. θ. Φ. (2.14). 1 1−Φ. (2.15). 學. ‧ 國. i. 1 1−Φ. 政治大 n o. Li = X µ−α Kiαη Φw −1 θΦ. On the other hand, there exists a lot of foreign suppliers with different θ1m (θ1m is. ‧. the efficiency index of the foreign supplier m). To simplify our discussion, we assume that. y. Nat. the information of efficiency index is prevalent, and there is no cost to search a suitable. er. io. sit. foreign supplier. If outsourcing takes place, the final-good producer will screen out its partner with the greatest θ1m , and the foreign supplier hires its local labor to maximize. n. al. Ch. i n U. v. its profit. To simplify notation, we drop out subscript m. We have the optimal amount. engchi. of labor and sales revenue from first order condition:. . bi = (1 − β) (1 − δ α ) X µ−α K αη Φw1−1 θ1Φ L i. 1 1−Φ. 1 n Φ o 1−Φ α µ−α αη −1 b Ri = (1 − β) (1 − δ ) X Ki Φw1 θ1 .. (2.16). (2.17). In order to capture the efficiency gap between two different countries, we assume that the labor hired by the final-good producer are more skilled than that hired by the foreign supplier (θ > θ1 ). Again, the final-good producer has to make a decision whether to adopt outsourcing policy. Outsourcing takes place if and only if D≥. w1 θ . w θ1. (2.18).

(19) 2. Theoretical Model. 12. Note that efficiency gap between two countries will determine the final-good producer’s outsourcing policy. From equation (2.18), we can obtain an intuitive result that outsourcing will take place if wage rate between two countries is huge but efficiency gap is moderate. Hence, the foreign supplier will not be chosen if it could not upgrade its efficiency to a higher level. Suppose that there exists a technology, which could improve the efficiency of the foreign supplier immediately (θ¯1 > θ1 ), and it must cost the foreign supplier a R&D expenditure to acquire such technology. We assume that this expense is equal to F units of labor. For the foreign supplier which has built a relationship with the final-good producer, it would. 政治大 . not engage in such R&D to increase its net profit unless the following inequality holds. 立. ‧ 國. 學. ¯ i − w1 L ¯i − R bi − w1 L bi ≥ w1 F, R. bi and L bi are sales revenue and labor input when upgrading does not occur, and where R. ‧. ¯ i and L ¯ i are the same as equation (2.16) and (2.17) except that θ1 is replaced by θ¯1 . We R. θ¯1 /θ1. Φ 1−Φ. i. −1 ,. (2.19). sit. io. al. h. er. Nat. ¯i F1 ≥ w1 F , F1 = (1 − Φ) R. y. simplify previous inequality and yield the following one. where F1 is the upper limit of R&D cost for more efficient technology to be adopted.. n. v i n C hefficiency improvement ¯ This equation suggests that if the e n g c h i U ratio (θ1/θ1 > 1) is significant,. the foreign supplier would engage in R&D to enhance the contribution of each labor, and hence it would make a greater sales revenue and net profit. In order to explore the relationship between R&D and capital intensity, we take the partial derivative of natural logarithm of F1 with respect to η, and we could yield equation (2.20). ∂ ln F1 ∂Φ ∂Φ ∂η. =. −α (1−Φ)2. =. α 1−Φ. h. ln (1 − β) (1 − δ α ) X µ−α Ki. n h ln. −(1−α). Ki ¯i θ¯1 L. i. o. (Ki , η) − E , E =. i. Φw1−1 θ¯1 − Φ. α 1−Φ E. (θ¯1 /θ1 ) 1−Φ ln(θ¯1 /θ1 ). . (θ¯1 /θ1 ). Φ 1−Φ −1. (2.20). (1−Φ). Note that (θ¯1 /θ1 > 1), and E is a positive constant. E measures the decreasing contribution of labor efficiency when capital share increase. If capital share increases significantly,.

(20) 2. Theoretical Model. 13. labor input would be less important in production process; therefore, the foreign supplier would not apply R&D to improve the contribution of labor input. The right hand side of equation (2.20) is positive if K/L is large enough. The capital intensity is the function of capital share and capital, so we can find out a positive correlation as follow.. . . ∂ ln Ki α (K , η) = i ¯i ∂η θ¯1 L 1−Φ. . . . Ki 1 + ln ¯ ¯ Φ θ1 Li. . >0. h. ∂ Ki 1−α −(1−α) (K , η) = (1 − β) (1 − δ α ) X µ−α Ki Φw1−1 θ¯1 i ¯i ∂Ki θ¯1 L 1−Φ. 1 i 1−Φ. >0. The right hand side of above equation may be negative if K/L is small enough. To avoid. 政治大. this problem, we assume that there exists a lower limit of capital which ensures the capital. 立. intensity is greater than one. Above two equations imply that an increase in capital or. ‧ 國. 學. capital share will lead to an increase in capital intensity, and a higher capital intensity will lead to a positive relation between capital share and R&D in equation (2.20). We can. ‧. find out that the foreign supplier can bear a higher R&D cost in a higher capital intensity. sit. y. Nat. industry than a lower one if its capital intensity is high enough.. n. al. er. io. Proposition 1. For the foreign supplier, there exists a threshold E, and if its logarithm. i n U. v. of capital intensity is larger than E, the supplier would engage in more R&D in a higher capital intensity industry.. Ch. engchi. This result is similar to what we showed in equation (2.12). The foreign supplier which bears less labor cost and shares the contribution of capital in a higher capital share industry can make a greater profit. Given the same efficiency improvement, the foreign supplier in a higher capital share industry is willing to spend more to increase its labor efficiency and the sales revenue. After R&D is done, not only the foreign supplier is better off but also the final-good producer. The final-good producer receives more output and sales revenue derived from the efficiency improvement. As a result, if the foreign supplier actively engages in R&D, the relationship between two parties would be closer..

(21) 2. Theoretical Model. 14. Now let’s assume that there is another growing economy (country C) joining the competition of outsourcing, and these new foreign suppliers from such growing economy possess abound and cheaper labor pool. Because the final-good producer has two kinds of partners to choose, there is now a possibility for the final-good producer to change its outsourcing partner. Let’s follow the previous setting, if the new firm has the opportunity to participate production, it would hire optimal labor amount to maximize its profit. We obtain the optimal labor and sales revenue as following,. . Lei = (1 − β) (1 − δ α ) X µ−α Kiαη Φw2−1 θ2Φ. n. 政治大. (1 − β) (1 − δ α ) X µ−α Kiαη Φw2−1 θ2. 立. 1 Φ o 1−Φ. ,. 學. ei − w2 Lei = (1 − Φ) Rei πei = R. ‧ 國. ei = R. 1 1−Φ. where w2 (w2 < w1 ) is the wage rate in new country and θ2 is the efficiency index. We. ‧. assume θ2 < θ1 . It can be explained by the possibility that labors from the growing. sit. y. Nat. economy are less educated or that the infrastructure is not adequate, so the labor is less. io. er. productive. Note that δ is the same in both countries. In a real world, δ is smaller in growing economy because contractual problems are more costly in growing economy due. al. n. v i n to its political corruption andC less legal protectionU (Antras and Helpman, 2004). hengchi. To. simplify following discussion, we ignore such difference in contractual problems to focus on how difference in wage rate affects R&D decision5 . We also assume that the bargaining power β remains the same. Now the final-good producer has two options, it chooses either the existing partner or another one from the growing economy as its outsourcing partner. It would build a new relationship with the new partner if following inequality holds. 5. bi (w1 , θ1 ) < [δ α + β (1 − δ α )] Rei (w2 , θ2 ) . [δ α + β (1 − δ α )] R. If δ is significantly low, final-good producer will not cooperate with such new supplier. In this case,. the potential competition that the existed supplier may be confronted with will disappear, so the existed supplier would not engage in further R&D activities..

(22) 2. Theoretical Model. 15. Rearrange this inequality and yield θ1 w2 < 1. θ2 w1. (2.21). Intuitively, because both foreign suppliers are identical except the wage rate and efficiency index, the final-good producer will outsource its labor works to the new firm as long as the wage rate gap remains huge and efficiency index is close enough. Understandably, there will be some marginal foreign suppliers losing their jobs due to the emerging of the growing economy. If the marginal supplier wants to reverse such difficult situation, it would resort to R&D to improve its efficiency. When the marginal supplier fails to. 政治大 spending (F ) in R&D that the firm would like to spend is 立. increase its efficiency, the outside option of the firm is always zero; therefore, the maximal. . ¯ i w1 , θ¯1 . F2 ≥ w1 F , F2 = (1 − Φ) R. 學. ‧ 國. 2. ‧. Again, to discuss the relationship between R&D and capital share, we take the partial. sit. io. n. al. (2.22). er. Nat. α Ki ∂F2 ∂Φ = ln ¯ ¯ ∂Φ ∂η 1 − Φ θ1 Li. y. derivative of natural logarithm of F2 with respect to η, and yield equation (2.22).. i n U. v. From equation (2.22), given capital intensity is larger than one, we find out that the. Ch. engchi. marginal foreign supplier in an industry with higher capital share is likely to invest more in R&D. Proposition 2. With fierce competition, the existing marginal foreign supplier is likely to engage in more R&D in a higher capital intensity industry than it in a lower one, or if they are suppliers of capital intensive producers.. Compared with proposition 1, this proposition indicates a fact that for some foreign suppliers, competition from another labor abundant country will drive the existing firms devoting to more R&D activities. With incomplete contract, the profit of the outsourcing firm is related to the capital intensity. The firm in a higher capital intensity industry has.

(23) 2. Theoretical Model. 16. more profit left to put into R&D. Because F1 < F2 , some suppliers invest in R&D only when the level of competition is intensified. Furthermore, within an industry, suppliers of less capital intensive producers or suppliers of less capital intensive industries leave the market. In the suppliers’ countries, factors are reallocated from labor intensive industries to capital intensive industries to invest in R&D and to satisfied the increase of labor demand after productivity is augmented. The suppliers’ of labor intensive industries or labor intensive producers within an industry is replaced by new suppliers in country C. We therefore have the following proposition. Proposition 3. If the level of competition is intensified, the capital intensive industries. 政治大. of suppliers’ countries expand and labor intensive industries contract. The new labor. 立. abundant country will be the new supplier of labor intensive final-good producers within. ‧ 國. 學. an industry or producers in labor intensive industries.. ‧. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v.

(24) 3. EMPIRICAL EVIDENCE. In this section we use firm-level data to test more formally the empirical validity of our propositions. First, we examine the relationship between capital intensity and R&D, and show the clear correlation in Figure 1.1 by a simple regression model. Next, we expand. 政治大. the simple regression by controlling other factors that would reasonably be expected to. 立. affect R&D spending. Finally, we analyze the determinants of the R&D spending and. ‧ 國. 學. show that R&D spending is significantly affected by both capital intensity and level of outsourcing competition.. y. ‧. Nat. n. er. io. al. sit. 3.1 Data. Ch. i n U. v. In order to evaluate the correlation between capital intensity and research behavior. engchi. under incomplete contract, it is more convincing to test our hypothesis under firm-level data. Our empirical work draws upon survey data, Report on Foreign Investment Strategies of the Manufactures, collected in 2004 by Taiwan’s Ministry of Economic Affairs (MOEA). This survey includes 1712 foreign manufacturing firms owned by Taiwanese enterprisers. Furthermore, it contains the basic characteristics of firms, including their research spending, number of employees, industry type and incentive for overseas investment. This model was built with companies under incomplete contract and we select specifically ODM and OEM businesses that are likely to suffer from incomplete contract problems. Among 1712 firms, 462 firms were engaged in ODM or OEM business, and all.

(25) 3. Empirical Evidence. 18. of them also made R&D spending in 2004. We use this cross-sectional data to verify our first two propositions. Our dependant variable, R&D spending, is collected by MOEA in 2004. Some independent and control variables are also taken from this survey. Capital intensity is not provided in this survey, so we use the data from another survey, ”Industry, Commerce and Service Census”, collected in 2006 by Taiwan’s Directorate-General of Budget, Accounting and Statistics (DGBAS). The capital intensity of each firm is measured as the ratio of total capital stock to total employment in the corresponding industry. We assume there is a high correlation between unobservable firm-level capital intensity in 2004 and. 政治大 . industry-level capital intensity in 2006.. ‧ 國. L. = α0 + α1. ij. K L. + vi. j. 學. K 立. where vi is an error due to the fact that (K/L)ij and (K/L)j are not exactly correlated.. ‧. We also assume that, once (K/L)j is controlled, the expected value of (K/L)ij does not. K L. n. al. ij. #

(26) K K

(27) X, = α0 + α1. y. . L. sit. io. E. ". j. L. er. Nat. depend on other determinants of the R&D spending.. i n U. v. j. where X denotes other determinants of the R&D spending. Hence, we adopt the capital-. Ch. engchi. labor ratio in industry-level as a proxy variable of the unavailable firm-level data. In figure 1.1, we can obtain a clear relationship between the capital intensity and R&D spending. In order to examine our proposition 2, we must find an indicator which reflects the condition of business of each firm. In this survey data, it investigates the motivations which induce these firms to engage in overseas investment, such like local market developing, cheaper raw materials and abundant labor pool. For these firms seeking cheaper labor poor, most of them are confronted with a fierce cost-down competition, so we use this incentive as a dummy variable LF, to capture fierce outsourcing competition. There is one thing to be noted that we can not distinguish such overseas investment between vertical and horizontal integration. If such foreign supplier invests for vertical integra-.

(28) 3. Empirical Evidence. 19. tion, we could infer that this supplier faces a potential competition; however, horizontal integration will not be a good indicator to capture the fierce competition. Moreover, we expect that capital intensity and fierce competition interact in R&D spending. Higher capital intensity induces foreign supplier to engage in R&D, and fierce competition would enhance its R&D spending.. Tab. 3.1: The mean data sorted by industry No of obs. 治 Sales 政大 2 1, 332, 772. Industry. 立. Food Manufacturing. Lobor. 3, 109. 179. 2, 776, 436. 20, 752. 2,282. Wearing Apparel & Clothing. 13. 1, 757, 114. 20, 722. 1,963. Leather & Fur. 12. 12, 628, 396. 439, 485. 12,005. 3. 118, 217. 3, 333. 1,225. Chemical Material. 4. 6, 997, 958. 26, 069. 331. Chemical Products. 8. 992, 918. 61, 235. 321. 6. 7, 670, 340. 123, 788. 3,285. 24. 1, 570, 678. i n U. 26, 441. 1,106. 21, 224. 2,197. n. al. Mineral Products. Ch. y. sit. io. Plastic Products. er. Nat. Rubber Products. ‧. Pulp & Paper. ‧ 國. 17. 學. Textiles Mills. R&D spending. v. e n6 g c h i9, 095, 903. Basic Metal. 26. 1, 508, 274. 16, 562. 704. Fabricated Metal Products. 29. 1, 422, 400. 22, 937. 575. Computers, Electronic & Optic. 87. 9, 689, 496. 200, 939. 1,734. Electronic Parts & Components. 126. 11, 163, 962. 269, 816. 1,876. Electrical Equipment. 46. 2, 296, 995. 29, 931. 1,339. Motor Vehicles & Parts. 40. 2, 698, 088. 54, 992. 508. Other Manufacturing. 13. 1, 635, 583. 34, 126. 726. 462. 6, 415, 129. 139, 839. 1709. Total. N otes : The value of sales and R&D are measured in thousands of New Taiwan Dollars (NTD)..

(29) 3. Empirical Evidence. 20. To control for other potential determinants of R&D spending, we run the multiple regression including other firm and industry characteristics. First, we have to control firm size. The expected sign of size is ambiguous, depending on the characteristics of each industry (Veugelers and Cassiman, 1999). For example, Acs and Audretsch (1987) find that large firms tend to have a relative innovative advantage in a capital-intensive industry, while small firms do in a highly innovative industry. Moreover, as we show in table 3.1, R&D spending is higher in electronic parts industry and electronic equipment industry, so we take 16 industry dummy variables, to measure the characteristic of each industry.. 政治大 stitute for or a complement 立to a firm’s internal R&D spending (Veugelers and Cassiman,. Technology sourcing is also an important determinant, which might be either a sub-. ‧ 國. 學. 1999; Piga and Vivarelli, 2004). We use a dummy variable PT, to capture the effect if such firm’s technology is sourced from purchase. Several papers have indicated that the. ‧. larger export market provides higher returns to R&D investment Bustos (February 2011).. y. sit. io. n. al. er. market effect.. Nat. We take the variable ex, the percentage of export of total production to control larger. Ch. engchi. i n U. v. Tab. 3.2: Empirical variables Variable. Definition and measurement. Expected sign. R&D. Total R&D spending of the firm in thousands of New Taiwan Dollars. K/L. The ratio of capital stock to employment in the corresponding industry. +. LF. Dummy variable, whose value is 1 if the firm invests for seeking cheaper. +. labor poor; 0, otherwise L. The amount of hired labor. ?. PT. Dummy variable, whose value is 1 if the firm sources technology from. ?. other firm; 0, otherwise EX. Percent of export. +.

(30) 3. Empirical Evidence. 21. We show the descriptive statistics of our empirical variables in table 3.3.. Tab. 3.3: Descriptive statistics of empirical variables Variable. Mean. Std. errors. Maximum. Minimum. Median. ln(R&D). 4.22. 0.88. 7.10. 0.60. 4.29. ln(K/L). 3.26. 0.25. 4.36. 2.76. 3.18. LF. 0.03. 0.16. 1.00. 0.00. 0.00. LF*ln(K/L). 0.09. 0.54. 3.93. 0.00. 0.00. ln(L). 2.67. 0.65. 4.95. 1.00. 2.60. PT. 0.05. 0.00. 0.00. EX. 66.72. 0.00. 83.50. 立. 0.22 治 1.00 政37.89 大 100.00. ‧ 國. 學. In order to avoid correlation among our independent variables, table 3.4 displays the correlation coefficient matrix of our variables. From the row 1 of table 3.4, we observe that. ‧. our independent variables, except for PT, move significantly with our dependent variable.. sit. y. Nat. There is a serious multicollinearity problem between LF and LF*ln(K/L), and that will. al. er. io. lead to an unclear or ambiguous result if we put these two variables into a regression. v i n C in the multiple regression model.h Except i Uproblem, the correlation coefficients e n g for c hthis n. model. To resolve such problem, we choose to only use LF to capture fierce competition. between the other control variables are not significant, so the multicollinearity problem will not be a concern in our model..

(31) 3. Empirical Evidence. 22. Tab. 3.4: Correlation coefficient matrix Variable. ln(R&D). ln(K/L). LF. LF*ln(K/L). ln(L). PT. EX. ln(R&D). 1.00. 0.24. 0.12. 0.13. 0.54. -0.00. 0.12. 1.00. 0.10. 0.12. 0.13. 0.03. -0.08. 1.00. 0.99. 0.08. -0.03. -0.08. 1.00. 0.09. -0.04. -0.08. 1.00. -0.02. 0.13. ln(K/L) LF LF*ln(K/L) ln(L) PT. -0.07. EX. 1.00. 立. 政治大 3.2 Result. ‧ 國. 學. Because we use firm-level data, assumption of homoskedasticity may fail whenever the. ‧. variance of the unobservables changes across different segments of industry. We use White. sit. y. Nat. heteroskedasticity-robust standard error to correct heteroskedasticity, and this setting will. io. n. al. er. provide us a robust result in a large sample size.. Ch. engchi. i n U. v.

(32) 3. Empirical Evidence. 23. Tab. 3.5: Empirical results of the determinants of R&D spending Dependant variable ln(R&D) Variable. I. II. C. 1.45∗∗∗. 1.55∗∗∗. (0.53) ln(K/L). (0.54). 0.85∗∗∗. 0.82∗∗∗. (0.16). (0.16). LF. III. IV. 1.58∗∗. 0.46. (0.54) 0.81∗∗∗ (0.16). 立. 0.35∗. 0.39∗. 0.45∗. (0.21). (0.22). (0.25). ‧ 國. 0.68∗∗∗. (0.05). 0.00∗. 0.00. (0.00). (0.00). 0.05. 0.08. (0.14). (0.12). Ch. sit. y 462. 0.07 462. 0.33. er. 0.07. 462. n U engchi. iv. 0.66∗∗∗. (0.05). ‧. n. al. 0.40∗∗ (0.16). 0.70∗∗∗. 0.05. 462. (0.55). (0.14). 學. io. No. of obs.. 1.11∗∗. (0.14). (0.05). Nat. R2. 0.60∗∗∗. VI. 0.17∗∗∗ 政治 (0.08) 大. LF*ln(K/L). PT. (0.45). 0.58∗∗∗. (0.29). EX. 0.32∗∗∗. (0.44). 0.55∗∗. ln(L). V. 0.33. 462. 0.46 462. (1)Standard errors are showed in parentheses.. (2)(*,**,and,***) are 10, 5, and 1 percent significance levels.. Table 3.5 shows the estimation results regarding the effect of possible determinants on firm’s R&D spending. Column I includes no other controls in the regression and is therefore the econometric model connecting to Figure 1.1. The coefficient on ln(K/L) is positive and significantly different from zero at the 1 percent significance level. The estimated elasticity of the R&D spending with respect to the capital intensity in production suggests that a 1 percent increase in K/L increase the R&D spending by around 0.85 percent. Column II includes fierce outsourcing competition in the regression. We see another significant determinant of R&D spending. If the firm faces a fierce competition,.

(33) 3. Empirical Evidence. 24. it will increase around 0.55 percent of R&D spending. In column III, we find that a significant interaction between capital intensity and fierce competition dummy. In a given capital intensity production industry, a firm facing outsourcing competition will engage higher R&D spending, and column III implies that 1 percent increase in K/L increase the R&D spending by around 0.98 percent. Column IV includes the amount of labor, and this lead to a reduction of the estimate of capital intensity which, however, remains significant at 1 percent significance level. The coefficient on ln(L) is significantly different zero at 1 percent significance level. In this model we support previous finding that firms have an innovative advantage in a capital-intensive industry (Acs and Audretsch, 1987).. 政治大 tistically significant effect 立 on R&D spending. Column V also suggests that purchasing. As shown in column V, exporting percentage of total production has a positive and sta-. ‧ 國. 學. technology from other firms seems to have a complementary effect on R&D spending, although this variable is not significant. Finally, we add industry dummy variables to. ‧. control the characteristic of each industry. The inclusions of industry type in column VI. sit. y. Nat. further decrease the effect of capital intensity on R&D spending, but it still implies that. io. al. er. under 5 percent significance level a one percent increase of K/L should lead to a 0.40 percent increase in R&D spending. In column VI, this regression model can explain roughly. n. v i n C hOverall, the significant 46 percent of total sum of squares. e n g c h i U effects of the capital intensity. and fierce competition on the R&D spending appear to be very robust, and these results are consistent with our theoretical work..

(34) 4. CONCLUSION. We have developed a theoretical framework for studying supplier’s behavior in R&D activities. In our model, heterogeneous final-good producers choose to hire local labor or to outsource part of production process. In other words, they choose the location for the. 政治大. production of labor inputs. If the wage rate gap is significant and gap of labor produc-. 立. tivity between locations is moderate, outsourcing would be an adoptable option for the. ‧ 國. 學. final-good producer.. We suppose that there exists a technology to improve the labor efficiency of foreign. ‧. supplier. We find that firm in a more capital-intensive industry will engage in more R&D. Nat. sit. y. activities. This is due to the fact that the foreign supplier in a higher capital intensity. n. al. er. io. industry has greater profit to cover the fixed cost of R&D because of contract incom-. i n U. v. pleteness and thus is willing to spend more to increase its labor efficiency and the sales. Ch. engchi. revenue. Another key result is that fierce competition will drive the foreign supplier to improve its efficiency. Because the foreign supplier’s profit is connected with capital intensity, we observe that foreign supplier in a capital intensive industry will engage in R&D activities to maintain its relationship with final-good producer; nevertheless, firm within a labor intensive industry will leave the market; therefore resources are reallocated toward capital-intensive producers and industries. Furthermore, suppliers of labor-intensive producers or industries are replaced by suppliers of low-wage countries. Our model also has empirical support. We use firm-level data from OEM and ODM industries, and the results are statistically significant..

(35) BIBLIOGRAPHY. Acs, Z. J., and D. B. Audretsch (1987): “Innovation, Market Structure, and Firm Size,” The Review of Economics and Statistics, 69(4), pp. 567–574.. 政治大. Antras, P. (2003): “Firms, Contracts, and Trade Structure,” The Quarterly Journal of. 立. Economics, 118(4), 1375–1418.. ‧ 國. 學. Antras, P., and E. Helpman (2004): “Global Sourcing,” Journal of Political Economy,. ‧. 112.. y. Nat. io. sit. Bound, J., C. Cummins, Z. Griliches, B. H. Hall, and A. B. Jaffe (1982): “Who. n. al. er. Does R&D and Who Patents?,” Working Paper 908, National Bureau of Economic Research.. Ch. engchi. i n U. v. Bustos, P. (February 2011): “Trade Liberalization, Exports, and Technology Upgrading: Evidence on the Impact of MERCOSUR on Argentinian Firms,” The American Economic Review, 101, 304–340(37). Grossman, S. J., and O. D. Hart (1986): “The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration,” The Journal of Political Economy, 94(4), pp. 691–719. Liu, M.-C., and S.-H. Chen (2003): “International R&D Deployment and Locational.

(36) BIBLIOGRAPHY. 27. Advantage: A Case Study of Taiwan,” Working Paper 10169, National Bureau of Economic Research. Piga, C. A., and M. Vivarelli (2004): “Internal and External RD: A Sample Selection Approach*,” Oxford Bulletin of Economics and Statistics, 66(4), 457–482. Veugelers, R., and B. Cassiman (1999): “Make and buy in innovation strategies: evidence from Belgian manufacturing firms,” Research Policy, 28(1), 63–80. Williamson, O. E. (1971): “The Vertical Integration of Production: Market Failure. 政治大. Considerations,” The American Economic Review, 61(2), pp. 112–123.. 立. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v.

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