Trade, industrial structure, and brand

In the past few decades, many Taiwanese firms have served as subcontractors to the United States and Japanese branding firms. For example, in 2007, Taiwanese firms accounted for 90% of the world's laptop output. However, over 90% of this output was under the foreign outsourcing firms' brands. This leads to two questions: (i) Why do most subcontractors not establish their own brands in the final goods market? (ii) Under which conditions would those subcontractors be more likely to establish their own brands? This article considers that two players, a US branding firm and a Taiwanese subcontractor, play a hybrid game that decides whether they should cooperate. Under this cooperation scenario, the US branding firm decides to outsource production to the Taiwanese subcontractor and the latter also agrees to take this job. The result shows that without horizontal differentiation, the subcontractor will become a branding firm only if it is subsidized to do so. However, even if the subcontractor and the branding firm remain to have the comparative advantage in production and branding, respectively, if (i) the brands are horizontally differentiated; (ii) the sunk cost to brand is low enough; and (iii) the brand value of this potential branding firm is high enough, then the subcontractor might choose to brand and enter the final goods market even without subsidies. This article also provides empirical evidence that confirms this argument for Taiwanese companies. Copyright 2011 The Author 2011. Published by Oxford University Press on behalf of Associazione ICC. All rights reserved., Oxford University Press.