International trade and the internal organization of firms: An evolutionary approach

Masahiko Aoki and others have distinguished two alternative modes for a firm’s internal organization. We argue that the profitability of each mode depends on the distribution of firms across modes and on the general economic environment. We characterize the evolutionary equilibria in both a parametric and a general model, and argue that corner equilibria predominate. We analyze the effects of trade between the two countries in (a) outputs only and (b) inputs (factors) as well as outputs. Our most striking conclusion is that in case (b) a less efficient mode can displace a more efficient mode when trade barriers are sufficiently low.