CENTRAL ISSUES IN CONTEMI'ORARY ECONOMIC TIIEORY AND POLICY General Editor: Gustavo I'iga, ,\f1ll1(ISinS /:.'ilit
Mario Baldas~rri (edi/or) KEYNES AND TilE ECONO MIC PO LICiES OI'TIIE 1980s
MariO Ilaldas~rri (rili/or) OLlGOI'OLY AND DYNAMIC COMI'ETITION Mario Baldassarri (rili/or) TilE ITALI AN ECONOMY Heaven o r 1Ie1l?
Mario Baldas~rri and Paolo Annunziato (CliilofS) IS THE ECONOMIC cycn: STILL ALI VE? Theory. EVidence and Policies
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Maria Baldas~rri and I'ierilligi Ciocca «-r/i/ors) ROOTS OI'THE ITALIAN SCHOOL OF ECONOMICS AND FINANCE From Ferrara ( 1857) to Einaudi ( 1944) (three I'olullles) Mario Baldassarri. Massimo Di Mattco and Ro\)('rt ,\, Mundell (editors) INTERNATIONAL PROllLEMS O F ECONOMIC INTERDEJ'ENDENCE
Mario B.lldas~r r i, Ce~re Imbriani and Dominick Sa ll'atore (I'
Maria llaldas~rri, Alfredo Macchiati and Diego l'iacentino (l'ili/or_l) TilE I'RIVATIZ,\TION 01' PUIlLlC UTILITIES The Case of !tal)' Mario Haldassarri, Luigi Pagan('tto and Edmund S. Phelps (.'di/()r.~) EQUITY, EHICIENCY AND GROWTI! Th(' Futur(' of the W('lfar(' Stat('
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Guido Coni and Roberto Cellini (fll i/()r~) Ir-HELLECTUAL PROI'ERTY, COMI'ETITION, AND GROWTH Debora Di Gioacchino, sergio Ginebri and Laura Sabani ("ilitorI) THE ROLE OF ORGANIZED INTEREST GROUPS IN POUCY MAKING Luca Lambertini «("iii/or) FIRMS' OBJF.CTIV~:S AND INTERNAL ORGANIS,\T10N IN A GLOBAL ECONOtl.1Y POSitive and Normative J\rwlysis Riccardo Looni and Giusep0' Usai (('ditor:;) ORGANIZATIONS TODAY
Marco Malgarini and Gustavo l'iga ("
Central Issues in ContcmpoTil ry Eeono m i e Theory ~nd Po l il·y Se ries St,lIlding Order ISUN 978-O-333-7 1464-S (IlI I.~ioIr Norrl! Am,.riC/l "Illy) You can rCl:eive future titles in this series as they are published by placing a standing order. Pl('as(' contact your books('ller or, in cas(' of difficulty. wril(' 10 us at the addr('S$ below with your name and addrl'ss. the title of thl' serit's and the ISBN quoted above. Customer Services D('partment. Macmillan Distribution Ltd. Iloundmil1s. Basingstoke, llamp• shire RG21 6XS, f.nglJnd Firms' Objectives and Internal Organisation in a Global Economy Positive and Normative Analysis
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Printed and bound in Great Bri tain by CPI Antony Rowe, Chippenham and Eastbourne Contents
Preface 3 Lllea Lall/bertill;
Existence and Uniqueness of Eq uilibrium in Labor-Managed COllTna! Oligopoly 9 Ko;! OkUgllc!l; - F('rCIlC 5zidamvszky
Wage-R ise Contract and Couma ! Competition with Labor-Managed Firms 17 Kal il/lim Ollllislli
Price Setting is Popular among Firms: WillI! Persist in Vertical Relationships with Market Uncertainty 33 Giallpa% Rossini
Contagious "Social Markel Enterprises": Th e Role of Fair Traders 51 Leol/(lr(/o llecclletli - GillSCppill(l Giall(reda
Should One Sell Domestic Fi rms \0 Foreign Ones? A TaJe of Delegation, Acq uisition and Collusion 85 Davide Drasolle
The Make-or-Buy C hoice in a Mixed Oligopoly: A Theoretical Investigation 113 Roberto Cc/lini - Lilea Lall/bertill;
Entrepreneurs' Behaviour and Performance: An Empirical Analys is on ltalian Firms 133 Filippo Oropal/o - Stef(/I/ia Rossetti
Firms' International Status and Heterogeneity in Performance: Evidence from Ital y 15 1 Lorellzo Caso/Jllri - Vakria Gat/ai - G. Alfredo Millerl'(I
Vertical Specialisation in Europe: Evidence from the Import Cont ent of Exports 189 ElllaImete Breda - Rila Ctlppariello - Roberla l izza Preface
Luca Lambertini* University of Bologna and Un;vcrsHy of AmSlcrd .. m
Whether finlls illdeed behave so as to maximize profils is a long stal/ding issue in industrial economics, as testified by several classical contributions datillg back to rhe lale '50s and '60s, well before the gallle theory revolutiol1 that has generated (he New Industrial ECOll011lics, now knoul/1 as Theory of Industrial OrgaJlization. That early debate, now alas almost forgotten, discussed the possibility {or firms to maxil1lize the growth rate, the volume of safes, or revenues, instead of profits (see Balllnol, 1958; Marris, 1953; Penrose, 1959; Williamson, 1966; and Solow, 1971). A parallel but completely independent stream of literaltlre focLlsed upon labour-managed firms (Ward, 1958; Vanek, 1977; Ireland and Lenv, 1982), or - almost eqLlivalently - workers' el1ferprises (Serte!, 1982; Aoki, 1984), whose objective is the maximization of valLIe added per worker, and/or profit sharing. Relatively later, the theory of strategic delegation has revived the il/terest for the idea that managerial firms may actually aim at maximizing a combination of profits and sales (Vickers, 1985) or profits and revenues (Fershllnan and Judd, 1987). After approximately two decades of globalization, the issLle of defining firms' objectives has come back to the fore once again, strictly entmlgled with the companion issue of outsourcing vs vertical integral ion (see McLaren, 2000; GrOSSllWll and Helpl11an, 2002, inter alia). In a l1utshell, the problem boils down to detennilling jointly the internal structure of the finll and its long-
* dllca./[email protected]>, Department of Economics.
3 FIRMS' OBJECTIVES AND INTERNAL ORGANISATION IN A GLOBAL ECONOMY nm investment projects In Ilew products and technologies, in relation with the global market where specialized labour or capital inputs can be sought for outside the firm itself and even outside the country of residence of the finn. This clearly implies that globalizatioll is not just a matter of free trade. It has expanded the set of possibilities made available to any given finn but it has also increased the competitive pressure to which the finn is exposed, along several dimensions. The papers presented herewith revisit the theme of defining {inns' objectives in the cOl'nparatively new perspective shaped by globalization. Far from pretendhlg 10 be exhaustive, this collection of original studies aims at providing the reader with some new insights on the links between the internal structure of finns, their incentives, and their pet[on1lance. The first two papers deal with labour·managed (LM) firms. While Okuguchi and Szidarovszky investigate the existence of equilibrium in a Cournot oligopoly with LM finns uShlg Brouwer's fixed point theorem, Ohnishi studies the possibility of using wage premia in LM markets. In the third paper, Cianpaolo Rossini investigates the plausibility of price·setting behaviour in a model where the {inns must choose between vertical integration and outsourcing under uncertainty. He examines two differellt vertical relationships, namely a non symmetric (impet[ectly) competitive one and a cooperative one based 011 a bargaining process amollg vertical production stages (or {inns}. In the first, quantity setting is preferred by {imls, because it eliminates uncertainty in expected temlS. In the second, he shows that uncertainty entails an asymmetric distribution of gains along the vertical production chain. The fourth paper deals with fair trade, which is, so to speak, a new entry in the current spectrum of strategies a firm could adopt. Here, Becchetti and Cianfreda show that a desirable side-effect generated by the introduction of socially responsible goods is that of inducing socially responsible imitation by traditional profit maximizing {inns. As a consequence, there arises a consumer-driven market mechanism promoting equity. The papers by Dragone and Cellini and !Ambertini revisit
4 L. L AMBERTINI Preface
Vickerss (1985) model o{ strategic delegation to tackle, respectively, the issues o{ (i) horizontal mergers and collusion, and (ii) outsourcing. Dragone shows that, in a Cournot oligopoly, the presence o{ a managerial {ringe may indeed affect the stability o{ collusion in outputs. The interesting policy ilnplication o{ his analysis is that, choosing the appropriate size o{ the fringe, a regulator may affect the equilibrium outcome so as to enhance social welfare. Cellin i and Lamberrini analyse the make-or-buy decisions of finns in a mixed duopoly where one unit is a pure profit-seeker while the other has operated a strategic separation between ownership and COl1lrol. The main finding is that that different equilibria may arise, depending on demwld and cost parameters: if the technology employed for producing the intermediate input is too costly, then the internal organization o{ firms at equilibrium is mixed, implying a conflict between private alld social preferences, as the latter would always prefer vertical integration to outsourcing. The last three papers deal with the empirical side o{ the issue, that is, they focus on the measurement of {inns' performance. Oropallo and Rossetti use micro-data drawn {rom Istat structural business statistics on Italian firms to evaluate the impact of several factors, such as investments, human capital, service inputs, age, and context variables, on profits alld productivity. Casaburi, Gattai alld Minerva look at the empirical evidence about the link between {inns' per{omwnce altd their hlternational status, using a sample of Italian enterprises. Their results can be summarized as {ollows: (i) {inns that engage in the {oreign production of final goods, in addition to export activities, are more productive thalt finns that only export abroad; (ii) finns that engage in final goods off-shoring are more productive than finns that engage in inputs off-shoring; and (iii) over the period 1998-2003, exporters' performance in Italy was not any better than non-exporters' one. The authors' overall appraisal of the analysis carried out in their paper is that lhe better per{onnance characterising globally ellgaged {inns ca n be mainly attributed to the selection driven by {IXed costs associated to operating internationally. Breda, Cappariello and Zizza use iltput-output tables to estimate the import content o{ exports {or several European countries, interpreting it as a measure o{
5 FIRMS' OBJECTIVES AND INTERNAL ORGANISATION IN A GLOBAL ECONOMY internationalisation in recel1l years. They show that Italy experienced the weakest growth whereas GennallY enjoyed the most sizeable rise, and argue that Italial1 firms might have felt a lower pressure to transfonn their orgmlisation as a result of lagged effects of the Lira crisis ill !he firs! half of !he '90s.
6 L. L AMBERTINI Preface
BIBLIOGRAPHY
AOK I M., 71le Co-operalive Game Theory of {he Finll, Oxford, Clarendon Press, 1984. BAUMOL w., ~ On the Theory of Oligopoly., ECOl/omica, no, 25, 1958, pages 187- 198. FERSIITMAN C. - J UDD K., "Equilibl'ium Incentives in Oligopoly., American Eco• IWlllic Review, no. 77, 1987, pages 927-940. GROSSMAN G.M, - HELPMAN E., «Integration versus Outsourcing in Industry Equi• librium_, Qllarlerly JOllmal of Ecollomics, no. 117,2002, pages 85- 120. IRElAND N. - LAw P., The Ecol/olllics of Labor Managed ElJterprises, London, Croom Helm, 1982. MARR IS R .. ~ A Model of Managerial EnteqJI·ise., QlI(lrlerly Jo/mwl of £Colwmics, no. 77, 1963, pages 185-209. MCLAREN J., «Gl obali zation and Vertical StlUctlll"e. , Americal/ Ecol/omic Review, no. 90, 2000, pages 1239-1254. PENROSE E., The Theory of the Growlh of the Finn, Oxford, Blackwe ll , 1959. SERTEL M. , Workers alld II/ce Il/ illes, Amsterdam, Nor1h Holland. 1982. SOLOW R. , «Some Implications of Alternative Criteria for Ihe Finn., in MAR RIS R. - WOOD A. (eds.), The Corporate Ecol/omy, London, Macmillan, 197 1. VANEK J ., The General T/wory of lAbor-managed Market &ollOlI/les, Ithaca (NY). Cornell University Press, 1977. VICKE RS J., «Delegation and the Theory of the Firm», Ecol/olllic JOllmal, no. 95 (Conference Papers), 1985, pages 138-47. WARD N., MThe Fil'm in Ill yl"ia: Market Syndicalism., American ECOl1omic Review, no. 48, 1958, pages 566-589. WILLIAMSON 0 ... Profit, Growth and Sales Maximisation., EcmlOlllica, no. 33, 1966, pages 1-1 6.
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