Supplier certification and quality investment in supply chains

Global sourcing has made quality management a more challenging task, and supplier certification has emerged as a solution to overcome suppliers' informational advantage about their product quality. This article analyzes the impact of certification standards on the supplier's investment in quality, when a buyer outsources the production process. Based on our results, deterministic certification may lead to under‐investment in quality improvement technology for efficient suppliers, thereby leading to potential supply chain inefficiency. The introduction of noisy certification may alleviate this under‐investment problem, when the cost of information asymmetry is high. While allowing noisy certification always empowers the buyer to offer a menu to screen among heterogeneous suppliers, the buyer may optimally choose only a limited number of certification standards. Our analysis provides a clear‐cut prediction of the types of certifiers the buyer should use for heterogeneous suppliers, and we identify the conditions under which the supplier benefits from noisy certification. © 2013 Wiley Periodicals, Inc. Naval Research Logistics, 2013     

Impact of transfer pricing methods for tax purposes on supply chain performance under demand uncertainty

Transfer pricing refers to the pricing of an intermediate product or service within a firm. This product or service is transferred between two divisions of the firm. Thus, transfer pricing is closely related to the allocation of profits in a supply chain. Motivated by the significant impact of transfer pricing methods for tax purposes on operational decisions and the corresponding profits of a supply chain, in this article, we study a decentralized supply chain of a multinational firm consisting of two divisions: a manufacturing division and a retail division. These two divisions are located in different countries under demand uncertainty. The retail division orders an intermediate product from the upstream manufacturing division and sets the retail price under random customer demand. The manufacturing division accepts or rejects the retail division's order. We specifically consider two commonly used transfer pricing methods for tax purposes: the cost‐plus method and the resale‐price method. We compare the supply chain profits under these two methods. Based on the newsvendor framework, our analysis shows that the cost‐plus method tends to allocate a higher percentage of profit to the retail division, whereas the resale‐price method tends to achieve a higher firm‐wide profit. However, as the variability of demand increases, our numerical study suggests that the firm‐wide and divisional profits tend to be higher under the cost‐plus method than they are under the resale‐price method. © 2013 Wiley Periodicals, Inc. Naval Research Logistics, 2013     

Book reviews

Book Review: The Future of the Defence Firm: New Challenges, New Directions. Edited by Andrew Latham and Nicholas Hooper NATO ASI Series, Kluwer Academic Publishers ISBN 0–7923–3268–7

James E. Payne and Anandi P. Sahu (eds.) Defense Spending &; Economic Growth, Boulder, CO: Westview Press, 1993.     

Missile systems: “Flexible modularity” and incremental technological change in military production∗

It is often stated that technological change in the military field is characterised by the introduction of radical innovations rather than by incremental processes of technological change. This article illustrates the diversity of military innovation by arguing that technological change in missiles systems is dominated by incremental change. While some large weapons platforms display the design rigidities normally associated with complex systems, missiles are characterised by “flexible modularity”. Flexible modularity facilitates the continuous introduction of upgrades, and makes missile systems amenable to gradual technological change. Besides, it has significant implications for the future role of missile systems, and poses special problems for missile disarmament and technology control initiatives.     

RAISING THE COST OF REBELLION: THE ROLE OF THIRD‐PARTY INTERVENTION IN INTRASTATE CONFLICT

This paper presents a simple model to characterize explicitly the role that an intervening third party plays in raising the cost of rebellion in an intrastate conflict. Extending the Gershenson‐Grossman (2000 Gershenson, D. and Grossman, H.I. 2000. Civil conflict: ended or never ending?. Journal of Conflict Resolution, 44(6): 807–821.  [Google Scholar]) framework of conflict in a two‐stage game to the case involving outside intervention in a three‐stage game as in Chang et al. (2007b Chang, Y.‐M., Potter, J. and Sanders, S. 2007b. War and peace: third‐party intervention in conflict. European Journal of Political Economy, 23(4): 954–974.  [Google Scholar]), we examine the conditions under which an outside party optimally intervenes such that (i) the strength of the rebel group is diminished or (ii) the rebellion is deterred altogether. We also find conditions in which a third party optimally intervenes but at a level insufficient to deter rebellion. Such behavior, which improves the incumbent government’s potential to succeed in conflict, is overlooked in some conflict studies evaluating the effectiveness of intervention. One policy implication of the model is that an increase in the strength of inter‐governmental trade partnerships increases the likelihood that third‐party intervention deters rebellion.     

DETERMINING THE DEFENCE INDUSTRIAL BASE

This paper models the determination of the defence industrial base – the number of different military systems a country decides to maintain. High R&D costs means that few countries can afford to produce major weapons systems and the producers also import systems. Non‐producers rely on imports and we assume their demand is driven by regional arms races. Military capability is determined by the number of systems and the quantity and quality of each. We examine how the defence industrial base is influenced by military expenditures, R&D costs, export controls, the nature of regional arms races and a variety of other factors.     

A RANDOM RATIONING MECHANISM WHICH REDUCES THE RISKS OF NO SON LEFT AT HOME

This paper empirically re‐examines the long‐run co‐movements and the causal relationships between GDP and defence expenditures in a multivariate model with real defence expenditure per capita (ME), real GDP per capita (GDP), and real capital stock per capita (K). We apply the view of the aggregate production function to construct the empirical model. Using up‐to‐date data for 27 OECD countries and 62 non‐OECD countries for the 1988–2003 period, we combine cross‐sectional and time series data to re‐investigate the relationship between GDP and ME. Previous studies using time series data may have yielded misleading results on account of the short time span of typical datasets. By contrast, we use recently developed panel unit root tests and heterogeneous panel cointegration tests, and conclude that there is fairly strong evidence in favour of the hypothesis of a long‐run equilibrium relationship between GDP and ME. The long‐run panel regression parameter results, such as the fully modified OLS, indicate that a positive relationship between GDP and ME only holds for OECD countries, whereas a negative relationship from ME to GDP only exists in non‐OECD countries under examination and in the panel as a whole. Furthermore, by implementing the dynamic panel‐based error correction model, we determine that GDP and ME lack short‐run causalities, but do show long‐run bidirectional causalities in both OECD and non‐OECD countries.     

THE LONG‐RUN RELATIONSHIP BETWEEN DEFENCE EXPENDITURES AND GDP IN TAIWAN

Using the Solow–Swan growth model and the time‐trend included in the aggregate production function, this study applies the multivariate cointegration approach to re‐investigate the long‐run and causal relationships between defence expenditures and GDP while controlling for capital and labour input in Taiwan during the 1955–2002 period. It examines the long‐run causal relationship using the weak exogeneity test and utilizes general impulse response functions to determine whether a shock to defence expenditures affects economic growth or vice versa. Our findings provide substantive evidence in favour of the existence of a long‐run equilibrium cointegrated relationship between defence expenditures, GDP, labour and capital stock. The results of the weak exogeneity test indicate that a bi‐directional causal relationship exists in the long‐run between defence expenditures and GDP. Thus, the main policy implication that emerges from the long‐run results is that increasing defence expenditures in Taiwan is an effective means to boost overall economic performance and, with this improved economy, it should then be able to increase its defence expenditures further. Lastly, from our dynamic vector error correction model estimations, it is found that defence expenditures are a major means of adjusting for disequilibria that occur within the system.     

EFFECTS OF MILITARY SPENDING ON THE PROFITABILITY OF SPANISH DEFENCE CONTRACTORS

The traditional view of the defence industry obtaining large profits from contracts with the Ministry of Defence relies on several assumptions. Among these are the use of such arrangements as an instrument of industrial policy, the strong market power enjoyed by prime contractors, and the inefficiency encouraged by the sector. The findings show that defence contracts have a positive effect on profits, as well as the prizes for innovation and the market power enjoyed by some defence subsectors.     

MILITARY EXPENDITURE AND UNEMPLOYMENT RATES: GRANGER CAUSALITY TESTS USING GLOBAL PANEL DATA

This paper investigates the empirical relationships between military expenditure and unemployment rates. A set of global panel data on 46 countries is utilized, and a panel data version of the Granger causality test is applied. The results indicate that there is little evidence of the causality running from unemployment to military expenditure regardless of how we measure military spending and determine group countries. In contrast, the causality running from military expenditure to unemployment receives empirical support if military expenditure is measured in terms of its share of GDP and if data are taken from middle‐ and low‐income countries or non‐OECD countries.