A Study On The Decision Of Manufacturing Firm Outsourcing Behavior Under Incomplete Contract: Theory And Chinese Experience

With the development of information and communication technology and the reduction of trade barriers,the trade of final products has been rapidly increased,the intermediate products have been also growth rapidly due to the decrease of trade costs,which creates conditions for enterprises to lay out production networks in a global scope.Firms break the products of traditional production process and distribute different production steps in different countries and regions,which they can reduce production costs from this Global Production Network,while the countries and regions who undertake these production steps can obtain part of the profits,thus creating the Global Value Chain.This arrangements of production which are complex and globally makes the system of Global Value Chain dominated by multinational companies develop rapidly,embodied that firms outsourcing in other countries or regions more and more,whereas it lead to intermediate trades are "trading tasks" between manufacturers and their suppliers and it changed the pattern of international trade profoundly.The segmental production and assembly of products need coordination closely between the final product manufacturers and intermediate suppliers,but their bounded rationality and insufficient contract execution often produce contract frictions,lead to the interests of all parties of Global Value Chain are loss,then the incomplete contract become one of the important factors which influence and restrict the development of Global Value Chain.Based on the calculation of the World Input-Output Table,it can be seen that the production of Global Value Chain kept increasing in the era of globalization and appeared a temporary decline until the global financial crisis in 2008,and then stabilized gradually.However,a series of unilateral protectionist trade policies implemented by the United States have set off a wave of international anti-globalization since 2017.Uncertainties have increased in international trade,and aggravating the impact of incomplete contract on Global Value Chain.The rapidly development of Global Value Chain is related to China's opening up and participated actively closely.After joined the World Trade Organization in 2001,China integrated into the Global Value Chain,and brought huge bonuses of production and trade for countries around the world and has developed its own manufacturing industry.However Chinese manufacturing industry fall into the low-value manufacturing steps which are dominated by multinational companies of the developed countries for a long time,and the proportion of processing trade accounts for total trade volume stay at a high level,thus the profits decreasing day by day and it is difficult to grasp the core technology.To break through this "lock-in" effect,Chinese firms must change their ways of development,reduce the consumption of domestic resources by excessive processing trade,improve the innovation ability and technology of local manufacturing firms,seek intermediate products of cheap and high quality from abroad,build their own system of Global Value Chain and increase profits.Therefore,from the perspective of incomplete contract which is more accord with reality,this paper analyzes the micro foundation of Global Value Chain—firms outsourcing decisions,and verify the proposed propositions use the data of Chinese manufacturing firms.At the same time,combined with Chinese practical problems and development goals,and provided valuable suggestions for the internationalization operation and the construction of their own Global Value Chain of Chinese manufacturing firms from the research conclusions.Another important reason for choosing incomplete contract as the research perspective of outsourcing decision is that it has a solid theoretical foundation,and its combination with Global Value Chain is one of the frontier research fields of current international trade or industrial economy.Since the incomplete contract theory won the Nobel Prize in economics,scholars began to pay attention to the development and application of this field again,which laid a theoretical foundation for the application of incomplete contract in the Global Value Chain.This paper extends the outsourcing model of incomplete contract from the framework of the basic outsourcing model,analyzes how to make outsourcing decisions according to influencing factors for firms to achieve profit maximization under incomplete contract,and compared the difference with the case of complete contract in the basic model,finally verifies the propositions from relevant datas of Chinese manufacturing firms.The research content of this paper mainly includes the following parts:The first part is the introduction and literature reviews.Firstly,it introduces the research background and meaning,research ideas,research contents and methods,innovation and deficiencies.Then,it sorts out three main categories of literatures related to the research topic of this paper,including the system of firm organizational forms,the establishment and development of outsourcing theory,and some application and related achievements of incomplete contract theory in the field of outsourcing.Finally,we briefly review the literatures above.The second part is the theoretical model.In order to analysis and empirical test for expansion of outsourcing model more conveniently,this paper sorted out the basic outsourcing model and its factors and mechanism which influencing the outsourcing decision of firm at first.Then we relax one of the assumptions,introduce the incomplete contract,expand an outsourcing model of incomplete contract,compare the difference between the outsourcing decision of firm in complete and incomplete contract,and discuss the endogeneity of the impact of incomplete contract on outsourcing.Finally,we propose a series of propositions to be verified on the basis of mathematical analysis.The third part is data description and empirical test.The data part firstly introduces the data sources and processing methods which are needed to verify the proposition,including Chinese Industrial Enterprise Database,Chinese Customs Database,Tariff Database and so on.Then it introduces the measurement method of variables and the characteristic facts of Chinese manufacturing firms,including contract execution efficiency,outsourcing and total factor productivity.Among them,many charts are drawn to show the characteristics of changing data clearly.The empirical test part includes four chapters.The fourth chapter examines the impact of firm productivity on outsourcing decision under incomplete contract,including the threshold effect of outsourcing boundary and the impact of outsourcing share,then simulating the results of complete contract by the counterfactual analysis method,and compared the differences between them,finally changes the measurement method of productivity for robustness test.The fifth chapter examines the impact of foreign relative contract execution efficiency on outsourcing decision under incomplete contract.In addition to changing other indicators to examine the robustness of regression results,panel instrumental variable method is also used to test whether the results are robust.The sixth chapter examines the impact of firm outsourcing costs on its decision under incomplete contract,including firm entry costs,intermediate trade costs and foreign wage costs,and compared the differences with the case of the complete contract.When examining the impact of wage costs,the results are re-examined with the wage level are adjusted by human capital.The seventh chapter examines the impact of firm factor intensity and elasticity of substitution of final product consumption on outsourcing decision,including incomplete contracts and complete contracts,and comparing the differences between them,in which firm factor intensity includes capital intensity,labor intensity and R&D intensity,and test their robustness.In addition,the above results are examined and analyze the reasons by the heterogeneous performance of firms according to different classification standards of ownership,region and technology under the incomplete contracts.The fourth part is the summary and the research prospect.Firstly summarizes the main conclusions of this paper,then puts forward corresponding decisional suggestions from the macro level of the government and micro level of the firm.Finally looks forward to the next step of the research.From the theoretical analysis and empirical test above,this paper have the main conclusions following:Firstly,the threshold value of influence of firm productivity on outsourcing under incomplete contract is larger than that under complete contract,and the former influence coefficient on outsourcing share is smaller than that of latter.Through the test of the data of Chinese manufacturing firms,whether the contract is complete or not,the outsourcing share of firms increases with the their productivity when the productivity is higher than the threshold of outsourcing.However,due to the incomplete contract,the firm must pay the additional losses by incomplete contract in order to maximize profits,and they decide outsourcing from abroad require higher productivity,so the threshold value of firm productivity under incomplete contract is greater than the case of complete contract,and the loss caused by incomplete contract can reduce outsourcing share which firms want to,and cause the productivity effect on outsourcing share are less than complete contract.Secondly,the improvement of foreign relative contract execution efficiency can promote firms to increase the share of outsourcing,but the degree of increase is affected by the firm capital intensity and the elasticity of substitution of final products.Although the evidence of Chinese manufacturing firms indicates that foreign relative contract execution efficiency has a positive effect on outsourcing share,it is found that the quadratic function of firm capital intensity and the elasticity of consumption substitution have significant effects on the relative contract execution efficiency through the test of firm factor intensity and elasticity of consumption substitution.In order to solve the problem of endogenous fundamentally,this paper use the origin of law as instrumental variables for panel instrumental variable method test,the result is satisfactory,and verified that there are two main aspects of endogenous: one is the macro level of national economic development and degree of education,the other is the micro level of firm capital intensity and the elasticity of substitution of final product consumption.Thirdly,as in the case of complete contract,outsourcing cost under incomplete contract has a negative impact on outsourcing share too,and the impact of wage cost after human capital adjustment is greater than that of nominal wage.According to the analysis of the theoretical model,whether the contract is complete or not,the firm outsourcing share is negatively correlated with the outsourcing cost,including the fixed cost paid by firm enter the foreign market,the labor wage cost of foreign suppliers producing intermediate products and the trade cost,and there are no difference between them.The evidence of Chinese manufacturing firms verified these conclusions,and after adjust wages by human capital and re-examination,it can be found that the effect of real wages on firm outsourcing share was high than nominal wages,and the significance was also improved.Fourth,only capital intensity has a negative impact on outsourcing share under incomplete contracts,while elasticity of substitution for final product consumption has a positive impact on outsourcing share,and both of them are greater than in the cases of complete contracts.Although theoretical model consider that the firm factor intensity can affect offshoring share by other variables and make the estimated negative results of incomplete contract biased,but the inspection of Chinese manufacturing firms found that the coefficient of incomplete contract cases is slightly larger than the result of the complete contract,and only the influence of the capital intensity is significant.With the rate of capital and labor as substitution variables to test,the results did not change significantly.According to the model analysis,the positive effect of elasticity of substitution of final product on outsourcing under incomplete contract is greater than that under complete contract.The results of data test also verifies the conclusion.From these research conclusions,this paper provides some decisional suggestions from the macro level of government and micro level of firms.Government should stick to reduce import tariffs of intermediates and expand the scope of the tariffs reduction at first,then offer the platform of communication and cooperation for Chinese manufacturing firms and abroad supplier of intermediates further,and finally reduce or even eliminate the system obstacles of different ownership firms,encourage and protect the firm R&D,especially the private firms and high-tech firms.Firms should choose the appropriate outsourcing strategy according to difference of their productivity at first,then strengthen cooperation with foreign suppliers,outsoure from countries or regionals with better contract environment,choose outsourcing share from adjusted salary according to human capital,and finally choose outsourcing shares according to capital factor input and product demand elasticity.