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Entrepreneurship in International Trade

The paper Entrepreneurship in International Trade by Joel Watson and James E. Rauch describes their study of “network intermediation.”  This study was first motivated by evidence suggesting that international trade consists of incomplete networks.  The general hypothesis of the study was that the people who become trade intermediaries on an international level first work for companies in departments such as production and sales.  From there, these people begin to form networks among foreign contacts and then become entrepreneurs. These new entrepreneurs act as intermediaries, selling access to and use of the networks that they have created in foreign countries.  These intermediaries allow companies to bypass the informal barrier caused by a general lack of knowledge about trading opportunities across the world.

This paper also highlights the possibility of market failure due to the unstable position of the intermediary.  The position is often unstable because the entrepreneur is often in a situation in which the two companies being linked each have a specific goal in mind. This specific goal is to be linked to a foreign company that can serve their needs and it is possible that the intermediary might not be able to exactly meet the needs of each company, resulting in failure. Another key element of international intermediation that this paper discusses includes the parameters that equilibrium depends on.  For example, the costs of maintaining a network and the network sizes in comparison to the population. The paper is concluded with connections to realistic situations that utilize intermediaries.  Some examples include head-hunters who match executives to large businesses and agents who match manuscripts to publishers.

The study that was discussed throughout this paper relates to many of the concepts that were discussed in lecture. The role of an intermediary between buyers and sellers was taught in lecture, which included discussion of the various types of situations with intermediaries, sellers, and buyers.  In this paper, the companies and executives that are being connected through these international intermediaries are represented by the buyers and sellers in our examples. Furthermore, the often unstable position of the intermediary is parallel to the monopoly situation discussed in class. This occurs when there is one intermediary between a buyer and seller, therefore, the intermediary is entirely dependent on both the buyer and seller. Disagreement at any point between the intermediary and the buyer or the intermediary and the seller, in a monopoly situation, could result in no profit for the intermediary. Another link between lecture and this paper involves an example given in lecture. The example with groups trading goods across a river with the help of intermediaries is parallel to the head-hunter and agent examples given in this paper. This is true because the intermediary finds people who want a specific good or service and then find people who are producing this good or generating this service.

Rauch, James E., and Joel Watson. “Entrepreneurship in International Trade.” The National Bureau of Economic Research. N.p., Jan. 2002. Web. 13 Oct. 2012. <http://www.nber.org/papers/w8708>.

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