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Research at the Chair of International Economics covers a rich variety of topics, ranging from the labor market effects of globalization to Trade, Development and International Migration.

In the area “Globalization and Labor Markets”, our most recent research investigates the employment and wage effects of international trade, and whether traditional labor market institutions, such as unions, can still play a role within firms operating in a globalized world.

Our projects on “Trade and Development” are centered around two main research questions: the role of China in the World Economy, and the link between trade and inequality in developing and emerging markets. The quality of institutions (e.g. financial markets, governmental institutions) is deemed crucial to understand both firms’ export behavior and the inequality effects of trade in developing countries.

Finally, we also carry out research in the field of International Migration and the Brain Drain. Inspired by the current debate on skill-shortages in many industrialized countries, in a recent project we have analyzed to what extent the mutual recognition of immigrants’ qualifications may foster intra-EU high-skill migration.

Estimating the local effectiveness of institutions: a latent-variable approach

Antonia Reinecke and Hans-Jörg Schmerer

There is consensus in the academic debate that strong institutions promote exports. Most existing studies in this field build on country- or province-level estimates of institutional quality without taking regional heterogeneity into consideration. Our new identification strategy allows constructing more detailed proxies on the effectiveness of institutions at the firm-level. An otherwise identical firm located in an environment with good institutions and better government effectiveness should be able to export more. Put differently, the export performance comprises information on the institutional quality the firm is faced with. We argue that this interdependence can be uncovered if effectiveness is linked to the firm's distance from its political hub. Development in earlier stages is likely more focused on provincial capitals. Development in the hinterland takes place with a certain lag. This second hypothesis enables us to use distance as a proxy for the effectiveness of institutions. Using methods of structural equation modeling we predict unobserved institutional quality at the zip-code level. We demonstrate the impact of this novel identification strategy in a treatment effect analysis that compares the effects based upon the provincial measure of institutions with our new index that comprises firm-level information as well. We can show that the magnitude of the effect of institutional quality on the propensity to export is extremely biased in estimates that neglect regional differences in institutions effectiveness.
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Government Efficiency and Exports in China: A Treatment Effect Analysis

Antonia Reinecke and Hans-Jörg Schmerer

This paper investigates the role of local governments’ efficiency on exports in China. China’s provinces are characterized by high diversity in both government efficiency and export level. We argue that the probability to enter the export market as well as export volume is positively affected by high government efficiency. In compliance with appropiated literature trade cost and firm productivity are positively related with high government efficiency by lowering risk and laying solid foundation for firm development. The econometric analysis builds on Chinese NBS firm level data. By defining firms located in high efficient provinces as treated by high government efficiency we were able to analyse causality between government efficiency and exports by conducting a treatment effect analysis using neares neighbor matching. We find a positive and highly significant infuence of high government efficiency on both export probabilty and export volume.

Chinas Wachstumsmodell und potenzielle Risiken für den Welthandel

Antonia Reinecke and Hans-Jörg Schmerer

This article is a contribution to the ifo Schnelldienst 07/16 "China’s Growth Model in Trouble: How Great is the Risk for the World Economy?". The year began with a glut of bad news about economic developments in China. What are the implications for Germany and Europe? And why the development of China is currently perceived with such great concern? And who is assumed to be affected by these concerns - China or countries that have a supposedly high dependence on China due to intensification of trade for years? Based on data from the World Bank and relevant macroeconomic models possible potentials and challanges for the future of China and the world economy are discussed. We can show that a departure from China's established growth strategy is inevitable given the accumulated excess capacity, but the dependence of the world economy on China should not be overestimated.

Redistribution, Trade and Corruption: An Empirical Assessment

Antonia Reinecke and Hans-Jörg Schmerer

This paper explores the role of institutional quality in the trade and inequality nexus. Does corruption shape the relationship between trade and inequality through its impact on redistribution? Our answer to this question builds on the hypothesis that trade rises inequality through higher per capita income at the top of the income distribution. Motivated by recent theoretical evidence, we argue that governments may intervene through appropriate redistribution schemes that aim at taxing the gains from trade in a way that reduces inequality. Corruption and bad institutions may induce distortions that neutralize those positive effects: inequality rises due to trade liberalization if bad institutions prevent redistribution schemes by the government. We find that trade increases inequality but the effect hinges on the level of institutional quality. Quite to the contrary to common wisdom, we even find negative effects of trade on inequality in countries with high institutional standards as low corruption or a high level of political rights.

The migration of professionals within the EU: any barriers left?

Stella Capuano (IAB) and Silvia Migali

Despite the effort at EU level to harmonize the process of recognition of foreign educational qualifications, the European states differ in their propensity to accept high-school and academic certificates obtained in other EU member states. In turn, a country's higher degree of
recognition of foreign qualifications might be an attractor of non-native skilled workers. We provide evidence on this issue using new data on the outcome of the recognition process in every EU country. Estimating different panel data gravity models, we find that the migration rate to a given destination country is positively affected by its propensity to recognize foreign educational qualifications.

Offshoring and Firm Overlap

Stella Capuano (IAB), Hartmut Egger (Universität Bayreuth), Michael Koch (Universität Bayreuth) and Hans-Jörg Schmerer

We set up a model of offshoring with heterogeneous producers that captures two empirical regularities on offshoring firms: larger, more productive firms are more likely to make use of the offshoring opportunity; the fraction of firms that engages in offshoring is positive and smaller than one in any size or revenue category. These patterns generate an overlap of offshoring and non-offshoring firms, which is non-monotonic in the costs of offshoring. In an empirical exercise, we employ firm-level data from Germany to estimate key parameters of the model. We show that ignoring the overlap leads to a severe downward bias in the estimated gains from offshoring, which amounts to almost 60 percent in our model.

Firm performance and trade with low-income countries Evidence from China

Hans-Jörg Schmerer and Luhang Wang (University of Xiamen)

Do firms in developing countries shift trade towards developed economies as a result of high economic growth? The matched customs-manufacturing firm data used in this study confront this hypothesized link with empirical evidence. Our analysis reveals a rising low-income country trade share around and after China’s accession to the World Trade Organization. Based on this stylized fact, we analyze the link between firm characteristics and trade with low-income countries. We find evidence for sequential sorting into different export-modes according to firm-productivity: i) only the most productive firms export to low-income countries, ii) exporting to low-income countries is mostly coupled to exporting to high-income countries, and iii) firms that switch to export to markets with higher potential are younger than firms that switch to export to both high- and low-income markets. Moreover, we find that firms tend to start exporting through specialization on high-income markets before diversifying to both type of markets.

Trade and Unions: Can Exporters Benefit from Collective Bargaining?

Andreas Hauptmann (IAB), Stella Capuano (IAB) and Hans-Jörg Schmerer

Unions are often stigmatized as being a source of inefficiency due to higher collective bargaining outcomes. This is in stark contrast with the descriptive evidence presented in this paper. Larger firms choose to export and are also more likely to adopt collective bargaining. We rationalize those stylized facts using a partial equilibrium model that allows us to evaluate firms’ value functions under individual or collective bargaining. Exporting further decreases average production costs for large firms in the collective bargaining regime, allowing them to benefit from additional external economies of scale due to lower bargaining costs. Our findings suggest that the positive correlation between export status and collective bargaining can be explained through size. Including controls for firm-size destroys the estimated positive relationship between export status and collective bargaining. Using interaction terms between size and the export status, we find that larger exporters tend to do collective bargaining, whereas smaller exporters tend to refrain from collective agreements.

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