Capturing Dynamic Gains from International Trade: The Role of Financialization by William Milberg

Abstract

This paper links the financialization of non-financial corporations to the extensive governance of global value chains (GVCs) by “lead,” non-financial firms.  The increasing ability of firms to break up production vertically and internationally has allowed them to maintain cost mark-ups  -- and thus profits and shareholder value  -- even in a context of slower economic growth.  Management pursuit of short-term stock price gains (in part the result of executive compensation schemes) have encouraged this restructuring of production, with firms narrowing their scope to core competence. Regression analysis of 35 US manufacturing and service industries over the period 1998–2006 supports aggregate and firm-level studies showing that offshoring is associated with a higher share of corporate profit in total value added. But the ‘dynamic’ gains from offshoring have not been fully realized because firms have purchased financial assets—especially share buybacks and higher dividend payments—to raise shareholder value, rather than investing in productive assets that raise productivity, growth, employment and income. The paper explores the implications of the GVC-financialization link for the theory of the firm, the theory of international trade and payments and for economic policy.

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