Institute for International Economic Policy

The Institute for International Economic Policy
and the GWU Department of Economics present a
Trade and Development Workshop

Gisela Rua
Federal Reserve


"Fixed Costs, Network Effects, and the International Diffusion of Containerization"
Tuesday, March 25th, 2013, 12:30-2:00 p.m.
Kendrick Seminar Room, Monroe Hall, 2115 G Street NW, Room 321

Abstract:

Containerization is one of the most important innovations affecting the conduct of international trade in the second half of the twentieth century. This paper analyzes its international diffusion and the factors that shaped today's container network. I construct a new dataset with information on the timing and intensity of adoption of containerization across countries. While adoption of container-port infrastructure follows an S-shaped curve, containerized trade moves more slowly and linearly. These findings guide the construction of a theoretical framework in which a transportation sector decides whether or not to build a container port. This decision is based on expectations about domestic and foreign firms' choices between two transportation technologies: breakbulk shipping and containerization. Changes in fixed costs and network effects generate the patterns observed in the data. I then estimate a two-step model derived from the theoretical framework. The empirical results, which are consistent with the theoretical predictions, show that fixed costs and network effects are the main determinants of usage of containerization. Fixed costs affect containerized trade as a result of the spread of leasing companies and changes in the domestic transportation network. Network effects operate through network size, network usage, and network income. With regards to adoption, my results show that expected future usage of containerization, institutions, a country's size in terms of trade and geographical area, and trade with Australia and the United Kingdom are the main determinants. Trade with the United States, surprisingly, has no effect. These results emphasize the importance of internal trade costs, the identity of countries' trade partners, and institutional barriers for technological diffusion, international trade, and countries' integration into the global economy.

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