Time zones and FDI with heterogeneous firms

TLDR: In this article, a simple two-country (Home and Foreign) model with heterogeneous firms was proposed to capture the role of FDI via utilizing time zone differences, and it was shown that the productivities of the firms undertaking FDI are higher than the non-FDI firms.

Abstract: Based on Helpman et al. (Am Econ Rev 94:300–316, 2004), we propose a simple two-country (Home and Foreign) model with heterogeneous firms to capture the role of FDI via utilizing time zone differences. Two countries are located in different time zones and there is no overlap in daily working hours. It will be shown that productivities of the firms undertaking FDI are higher than the productivities of non-FDI firms. Although the results look quite similar with Helpman et al. (Am Econ Rev 94:300–316, 2004), the direction of service trade flow is totally different: foreign subsidiaries of high-productivity firms serve the Home market.

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Munich Personal RePEc Archive
Time Zones and FDI with Heterogeneous
Firms
Kikuchi, Toru and Marjit, Sugata and Mandal, Biswajit
Graduate School of Economics, Kobe University, Japan, Centre for
Studies in Social Sciences, Calcutta„ Visva-Bharati University,
Santiniketan, India
February 2015
Online at https://mpra.ub.uni-muenchen.de/68223/
MPRA Paper No. 68223, posted 06 Dec 2015 06:45 UTC

1
Time Zones and FDI with
Heterogeneous
Firms*
Toru
Kikuc
hi
Graduate School of
Economics,
Kobe
University, Japan
Sugata
Marjit
Centre for Studies in Social Sciences, Calcutta,
India
Biswajit Mandal
Visva-Bharati University, Santiniketan, India
ABSTRACT
Based on Helpman et al. (2004) we propose a simple
t
w
o-coun
try
(Home
and Foreign) model with heterogeneous firms to
capture
the
role of FDI
via utilizing time zone differences. Two countries
are
located in
differen
t
time zones and there is no overlap in daily
w
orking
hours. It will be shown
that productivities
of the firms
undertaking
FDI are higher than the
productivities
of non-FDI f i r m s .
Although
the results look quite similar
with Helpman et al. (2004), the
direction
of service trade flow is totally
different: Foreign subsidiaries of
high-
productivity
firms serve the Home
mark
et.
JEL classification:
F12
Keywords: Time Zones, FDI, Heterogeneous Firms
--------------------------------------------------------------------------------------------------------
*
In this paper we are essentially completing the work for Late Toru Kikuchi who was
instrumental in developing the basic idea. Sugata Marjit acknowledges the financial assistance
from the RBI endowment at CSSSC. Biswajit Mandal thankfully acknowledges the hospitality
provided by the University at Albany-SUNY during his visit as C V Raman fellow. We also
express thanks to the referee for some helpful comments and suggestions. However, we retain
sole responsibility for any remaining errors.

1
Time Zones and FDI with
Heterogeneous
Firms
ABSTRACT
Based on Helpman et al. (2004) we propose a simple
t
w
o-coun
try
(Home
and Foreign) model with heterogeneous firms
to
capture
the
role of FDI
via utilizing time zone differences. Two countries
are
located in
differen
t
time zones and there is no overlap in daily
w
orking
hours. It will be shown
that productivities
of the firms
undertaking
FDI are higher than the
productivities
of non-FDI f i r m s .
Although
the results look quite similar
with Helpman et al. (2004), the
direction
of service trade flow is totally
different: Foreign subsidiaries of
high-
productivity
firms serve the Home
mark
et.
JEL classification:
F12
Keywords: Time Zones, FDI, Heterogeneous Firms

2
1 .
In
tro
duction
Since 1980s foreign direct
inv
estmen
t
(FDI) has grown astonishingly
fast,
even faster than
international
trade. Not only did the overall level of
FDI
increase, it has also been changed from investments in
manufacturing
to
inv
estmen
t
in
services. Related to these, intra-firm trade of business
services such as engineering, consulting, and software development that do
not require
ph
ysical
shipments of products, have been playing major roles
1
.
Following these changes, new
t
yp
es
of FDI and service trade surfaced
in the recent past.
Such investment and trade
are taking
advantage
of time
zone differences between countries emerge.
The
semiconductor industry
provides a prime example of this kind of trade. Brown and Linden (2009, pp.
87–91)
wrote:
“Some chip companies with foreign design subsidiaries value
the
opportunity
to design on a 24-hour cycle because of the
enor
mous
pressure to reach the market ahead of, or no later
than,
competitors.
One established US chip company adopted a
rolling
cycle between design
centers in the United States, Europe,
and
India. More common is the bi-
national
arrangemen
t
used by
a
Silicon Valley
start-up
that had all of
its design beyond the
ini
tial specification done by a China subsidiary
established
within
months of the company’s founding.... The Silicon
Valley
staff
would review Beijing’s work from the previous day, then
sp
end
up to three hours on the phone (starting around 5 pm
1
A substantial amount of empirical research has also emerged very recently revolving around the idea of
time zones and trade. This further strengthens the underlying encouragement to write this paper. A
representative sample of empirical papers consists of Anderson (2012), Christen (2012), Costinot et al
(2012), Dettmer (2011) etc.

3
California
time) providing feedback and reviewing assignments for that
da
y
in Beijing. In a single-location firm this work-feedback cycle
tak
e
t
wo
days instead of
one.”
Not only firms, but also consumers also prefer to consume services
early taking the
ad
vantage of time zone differences. Ireland, pitching to host
Europe’s
main
international
call centers, offers another example. Cairncross
(1997, p. 219) emphasized the rise of the call-center service industry in Ireland,
which is taking geographical
advantage
of being in between the U.S. and
Europ
e.
To summarize above arguments: due to the communications
rev
olution,
time zone differences may become a primary d r i v i n g force for
service trade.
Furthermore,
these kinds of service trade invite new
t
yp
es
of
incen
tiv
es
for FDI. From home consumers’/firm’s viewpoints, it is preferable
that some subsidiaries locate at distant areas to serve the Home market.
Although
this
p
oin
t
is at odds with the “proximity
advantages”
of FDI (e.g.,
Brainard,
1997), it seems to be
imp
ortan
t
to consider these new
t
yp
es
of FDI
incen
tiv
es. Related to these phenomena, Marjit (2007) examined the role of
in
ternational
time zone differences in a vertically
integrated
Ricardian
framework. It
has
been shown there that time zone differences emerge as an
independen
t
driving force of
international
trade besides taste, technology and
resource
endo
wmen
t.
2
What remains, however, unanswered is the relationship between
firm-
pro
ductivit
y
and FDI with time zone difference. Based on casual
2
Jones et al. (2005) also emphasize the role of time zone differences as a
determinan
t
of
efficien
t
worldwide division of labor.
Furthermore,
fragmentation
of
pro
duction
stages
and of service provision has been studied within a static
trade-theoretic
framew
ork
by Jones
and Kierzkowski (1990), Grossman and Helpman (2005), Long, Riezman
and
Soubeyran
(2005), Do and Long
(2008).

Frequently asked questions

Q1. What have the authors contributed in "Time zones and fdi with heterogeneous firms" ?

Based on Helpman et al. ( 2004 ) the authors propose a simple two-country ( Home and Foreign ) model with heterogeneous firms to capture the role of FDI via utilizing time zone differences. 

Q2. What is the preference of the representative Home consumer?

The preference of the representative Home consumer are given by= 1 − log + (1) Where z is t h e consumption of the homogeneous good, x(v) is t h e6consumption of variety v, = , > 1 is the elasticity of substitution between varieties. 

Q3. what is the role of time zone differences in FDI?

4e m piricism, the authors believe that time-saving technological improvement (e.g., utilization of communications networks such as the Internet) can trigger a series of events that leads to reallocations of industry structure via FDI. 

Q4. What is the effect of a decrease in the productivity of one country?

It i s also decreasing in productivity dispersion, as parametrized bylower k.Proposition 2: A decrease in one country’s delivery costs for imported services decreases the relative sales of domestic production. 

Q5. What is the effect of time zone differences on FDI?

Their result suggests that a time-saving technological change improvement in the developed country, which then requiresmore services provided with the benefit of time zone differences, triggers high- productivity firms’ 

Q6. What is the draw of the time difference between foreign products and domestic products?

To parameterize the timing of delivery, the authors treat the utilization of communications networks (i.e., technological improvement) as a reduction in the delivery time of imported products (i.e., a decrease in 0 )5. 

Q7. What is the argument for FDI and trade pattern?

introduction of nonoverlapping time zones with low communication cost adds an interesting dimension to the FDI and trade pattern literature. 

Q8. What is the effect of FDI on the productivity of firms?

2004)11It is then straightforward to see that the ratio of domestic production toFDI is decreasing in delivery timeliness of imported services as 6 is assumed to be a constant because people’s valuation for waiting time does not change very quickly. 

Q9. What is the recent research on time zones and trade?

The Silicon Valley staff would review Beijing’s work from the previous day, then spend up to three hours on the phone (starting around 5 pm1 A substantial amount of empirical research has also emerged very recently revolving around the idea of time zones and trade. 

Q10. What is the role of time zone differences in FDI?

Based on casual2 Jones et al. (2005) also emphasize the role of time zone differences as a determinantof efficient worldwide division of labor. 

Q11. What is the effect of building foreign subsidiaries?

In other words, in a sense of timeliness, building Foreign subsidiaries via FDI implies building subsidiaries closer to the Home market (see, Figure 1).