This dissertation uses three chapters to investigate the relationships between the conditional policies and the exporting behavior of firms. Two policies are discussed: the domestic content protection policy (DCPP) and the rules of origin (ROOs).

In Chapter 1, by explicitly incorporating a physical content requirement scheme into the heterogeneous firm model, we examine how the imposition by Foreign country of the DCPP affects the behavior of Home final-goods firms. Two conclusions are obtained. First, a stricter DCPP and the higher transportation costs raise the burden of the DCPP compliance, leading to the decreasing Home labor wage rate, the decreasing number of Home firms with the DCPP compliance, and the increasing number of those with the DCPP noncompliance. Second, through raising the penalty tariff, the Foreign government can effectively increase the incentives of Home firms to obey the DCPP, whereas its effect on the Home labor wage rate is uncertain.

Chapter 2 combines the intermediate sector and two types of the ROOs－ physical ROOs and value-added ROOs－in a Cournot duopoly model to investigate how ROOs influence the exporting behavior of the outside-FTA firm and how they protect the inside-FTA firm. It obtains four main findings. First, if the circumvention effect is less than double the cost difference effect, the ROOs are beneficial to the inside-FTA firm. Second, if the circumvention effect dominates the sum of the cost difference effect and the price discrimination effect, then the ROOs are more likely to benefit the outside-FTA firm under a loose ROOs requirement, a low substitutability between the two goods, a small market size difference, or low transportation costs. Third, and contrary to the results presented by Ishikawa et al. (2007), this chapter shows that an inside-FTA firm and an outside-FTA firm cannot both gain from the ROOs simultaneously. In particular, the ROOs are not necessarily beneficial to the inside-FTA firm, challenging the conventional wisdom that the ROOs are protective of member countries. Finally, the physical ROOs are more protective of the inside-FTA firm, whereas the value-added ROOs are more beneficial to the outside-FTA firm, when the ratio of physical ROOs and value-added ROOs is equal.

Chapter 3 extends the model of Chapter 2, including foreign direct investment (FDI) into the investigation to flourish the discussion of the effects of ROOs on firm behavior and obtaining noteworthy results. First, although stringent ROOs can protect the inside-FTA firm by increasing its profit, the protective effect is overestimated if the government disregards possible changes to the behavior of the outside-FTA firm. Second, stricter ROOs might not be useful for attracting FDI. Reforming the investment climate, simplifying business regulations, and providing tax concession are all effective ways to increase FDI inflows. Finally, cheaper FTA intermediaries induced by lower transportation costs enable easier compliance with ROOs, and provide governments with the incentive to assist the intermediate sector in improving the competitiveness of FTA inputs.

This dissertation uses three chapters to investigate the relationships between the conditional policies and the exporting behavior of firms. Two policies are discussed: the domestic content protection policy (DCPP) and the rules of origin (ROOs).

In Chapter 1, by explicitly incorporating a physical content requirement scheme into the heterogeneous firm model, we examine how the imposition by Foreign country of the DCPP affects the behavior of Home final-goods firms. Two conclusions are obtained. First, a stricter DCPP and the higher transportation costs raise the burden of the DCPP compliance, leading to the decreasing Home labor wage rate, the decreasing number of Home firms with the DCPP compliance, and the increasing number of those with the DCPP noncompliance. Second, through raising the penalty tariff, the Foreign government can effectively increase the incentives of Home firms to obey the DCPP, whereas its effect on the Home labor wage rate is uncertain.

Chapter 2 combines the intermediate sector and two types of the ROOs－ physical ROOs and value-added ROOs－in a Cournot duopoly model to investigate how ROOs influence the exporting behavior of the outside-FTA firm and how they protect the inside-FTA firm. It obtains four main findings. First, if the circumvention effect is less than double the cost difference effect, the ROOs are beneficial to the inside-FTA firm. Second, if the circumvention effect dominates the sum of the cost difference effect and the price discrimination effect, then the ROOs are more likely to benefit the outside-FTA firm under a loose ROOs requirement, a low substitutability between the two goods, a small market size difference, or low transportation costs. Third, and contrary to the results presented by Ishikawa et al. (2007), this chapter shows that an inside-FTA firm and an outside-FTA firm cannot both gain from the ROOs simultaneously. In particular, the ROOs are not necessarily beneficial to the inside-FTA firm, challenging the conventional wisdom that the ROOs are protective of member countries. Finally, the physical ROOs are more protective of the inside-FTA firm, whereas the value-added ROOs are more beneficial to the outside-FTA firm, when the ratio of physical ROOs and value-added ROOs is equal.

Chapter 3 extends the model of Chapter 2, including foreign direct investment (FDI) into the investigation to flourish the discussion of the effects of ROOs on firm behavior and obtaining noteworthy results. First, although stringent ROOs can protect the inside-FTA firm by increasing its profit, the protective effect is overestimated if the government disregards possible changes to the behavior of the outside-FTA firm. Second, stricter ROOs might not be useful for attracting FDI. Reforming the investment climate, simplifying business regulations, and providing tax concession are all effective ways to increase FDI inflows. Finally, cheaper FTA intermediaries induced by lower transportation costs enable easier compliance with ROOs, and provide governments with the incentive to assist the intermediate sector in improving the competitiveness of FTA inputs.

Chapter 1
Demidova, S., and Krishna, K., (2008) “Firm heterogeneity and firm behavior with conditional policies,” Economics Letters 98, 122-128.
Grossman, G..M., (1981) “The theory of domestic content protection and content preference,” Quarterly Journal of Economics 96 (4), 583-603.
Krishna, K., and Itoh, M., (1988) “Content protection and oligopolistic interactions,” Review of Economic Studies 55 (1), 107-125.
Melitz, M., (2003) “The impact of trade on intra-industry reallocations and aggregate industry productivity,” Econometrica 71, 1695-1725.

Chapter 2
Anson, J., Cadot, O., Estevadeordal, A., Jaime, de M., Akiko S.E., and Tumurchudur, B., (2005) “Rules of origin in north-south preferential trading arrangements with an application to NAFTA,” Review of International Economics 13(3), 501-517.
Cadot, O., De Melo, J., and Portugal-Perez, A., (2006) “Rules of origin for preferential trading arrangements: implications for the ASEAN free trade area of EU and U.S. experience,” World Bank Policy Research Working Paper 4016.
Demidova, S., and Krishna, K., (2008) “Firm heterogeneity and firm behavior with conditional policies,” Economics Letters 98(2), 122-128.
Duttagupta, R., and Panagariya, A., (2007) “Free trade areas and rules of origin: economics and politics,” Economics and Politics 19(2), 169-190.
Estevadeordal, A., and Suominen, K., (2005) “Rules of origin in preferential trading arrangements: Is all well with the spaghetti bowl in the Americas?” Economia: Journal of the Latin American and Caribbean Economic Association 5(2), 63-92.
Falvey, R., and Reed, G., (2002) “Rules of origin as commercial policy instruments,” International Economic Review 43(2), 393-407.
Grossman, G.M., (1981) “The theory of domestic content protection and content preference,” Quarterly Journal of Economics 96(4), 583-603.
Ishikawa, J., Mikinoki, H., and Mizoguchi, Y., (2007) “Economic integration and rules of origin under international oligopoly,” International Economic Review 48(1), 185-210.
Ju, J. and Krishna, K., (2002) “Regulations, regime switches and non-monotonicity when non-compliance is an option: an application to content protection and preference,” Economics Letters 77(3), 315-321.
Ju, J. and Krishna, K., (2005) “Firm behavior and market access in a free trade area with rules of origin,” Canadian Journal of Economics 38(1), 290-308.
Krishna, K., and Itoh, M., (1988) “Content protection and oligopolistic interactions,” Review of Economic Studies 55(1), 107-125.
Krishna, K., and Krueger, A., (1995) “Implementing free trade areas: rules of origin and hidden protection,” NBER working paper No. 4983.
Krishna, K., (2005) “Understanding rules of origin,” NBER working paper No.11150.
Krueger, A. O., (1993) “Free trade agreements as protectionist devices: rules of origin,” NBER working paper No. 4352.
Melitz, M., (2003) “The impact of trade on intra-industry reallocations and aggregate industry productivity,” Econometrica 71(6), 1695-1725.
Richardson, M., (1995) “Tariff revenue competition in a Free Trade Area,” European Economic Review 39(7), 1429-1437
Rosellon, J., (2000) “The economics of rules of origin,” Journal of International Trade and Economic Development 9(4), 397-425.
Stefano, I., (2009) Rules of Origin in International Trade, Cambridge University Press

Chapter 3
Anson, J., Cadot, O., Estevadeordal, A., Jaime, de M., Akiko S.E., and Tumurchudur, B., (2005) “Rules of origin in north-south preferential trading arrangements with an application to NAFTA,” Review of International Economics 13(3), 501-517.
Bhagwati, J. and Panagariya, A., (1996) “Preferential trading areas and multilateralism: strangers, friends or foes?” The Economics of Preferential Trade Agreements. Washington, DC: AEI Press.
Brenton, P., (2011) “Preferential rules of origin,” Preferential Trade Agreement Policies for Development: A Handbook. The World Bank.
Clausing, K.A., (2000) “Custom union and free trade area,” Journal of Economic Integration 15(3), 418-435.
Duttagupta, R., and Panagariya, A., (2007) “Free trade areas and rules of origin: economics and politics,” Economics and Politics 19(2), 169-190.
Either, W.J., and Horn, H., (1990) “Managerial control of international firms and patterns of direct investment,” Journal of International Economics 28(1-2), 25-45
Estevadeordal, A., (2000) “”Negotiating preferential market access: the case of the North American Free Trade Agreement, Journal of World Trade 34(1), 141-166.
Estevadeordal, A., and Suominen, K., (2005) “Rules of origin in preferential trading arrangements: Is all well with the spaghetti bowl in the Americas?” Economia: Journal of the Latin American and Caribbean Economic Association 5(2), 63-92.
Estevadeordal, A., Lopez-Cordova, J.E., and Suominen, K., (2006) “How do rules of origin affect investment flows? Some hypotheses and the case of Mexico,” IDB-INTAL Working Paper No. 22.
Estevadeordal, A., Harris, J., and Suominen, K., (2008) “Structure, restrictiveness, and trends in rules of origin around the world,” Gatekeepers of Global Commerce: Rules of Origin and International Economic Integration, 11-81.
Helpman, K., Melitz., M.J., and Yeaple, S.R., (2004) “Export versus FDI with heterogeneous firms,” American Economic Review 94(1), 300-316.
Ishikawa, J., Mikinoki, H., and Mizoguchi, Y., (2007) “Economic integration and rules of origin under international oligopoly,” International Economic Review 48(1), 185-210.
Ju, J. and Krishna, K., (2005) “Firm behavior and market access in a free trade area with rules of origin,” Canadian Journal of Economics 38(1), 290-308.
Krishna, K., and Itoh, M., (1988) “Content protection and oligopolistic interactions,” Review of Economic Studies 55(1), 107-125.
Krishna, K., and Krueger, A., (1995) “Implementing free trade areas: rules of origin and hidden protection,” NBER Working Paper No. 4983.
Krishna, K., (2005) “Understanding rules of origin,” NBER Working Paper No.11150.
Melitz, M., (2003) “The impact of trade on intra-industry reallocations and aggregate industry productivity,” Econometrica 71(6), 1695-1725.
Ornelas, E., (2005) “Trade creating free trade areas and the undermining of multilateralism,” European Economic Review 49(7), 1717-1735.
Richardson, M., (1995) “Tariff revenue competition in a Free Trade Area,” European Economic Review 39(7), 1429-1437.
Rodriguez, P.L., (2001) “Rules of origin with multistage production,” The World Economy 24(2), 201-220.
Stefano, I., (2009) Rules of Origin in International Trade, Cambridge University Press