Fixed Costs, Network Effects, and the International Diffusion of Containerization

Containerization is one of the most important innovations affecting the conduct of international trade in the second half of the twentieth century. This paper analyzes its international diffusion and the factors that shaped today’s container network. I construct a new dataset with information on the timing and intensity of adoption of containerization across countries. While adoption of container-port infrastructure follows an S-shaped curve, containerized trade moves more slowly and linearly. These findings guide the construction of a theoretical framework in which a transportation sector decides whether or not to build a container port. This decision is based on expectations about domestic and foreign firms’ choices between two transportation technologies: breakbulk shipping and containerization. Changes in fixed costs and network effects generate the patterns observed in the data. I then estimate a two-step model derived from the theoretical framework. The empirical results, which are consistent with the theoretical predictions, show that fixed costs and network effects are the main determinants of usage of containerization. Fixed costs affect containerized trade as a result of the spread of leasing companies and changes in the domestic transportation network. Network effects operate through network size, network usage, and network income. With regards to adoption, my results show that expected future usage of containerization, institutions, a country’s size in terms of trade and geographical area, and trade with Australia and the United Kingdom are the main determinants. Trade with the United States, surprisingly, has no effect. These results emphasize the importance of internal trade costs, the identity of countries’ trade partners, and institutional barriers for technological diffusion, international trade, and countries’ integration into the global economy. ∗The views in this paper are those of the author and do not necessarily represent the views or policies of the Board of Governors of the Federal Reserve System or its staff. †Email: grua.econ@gmail.com. I am indebted to Barry Eichengreen and Maurice Obstfeld for invaluable advice and continued support. I thank Pranab Bardhan, Dan Bogart, Gregory Clark, Bradford DeLong, Pedro Gardete, Yuriy Gorodnichenko, Rachita Gullapalli, Isaac Hacamo, Bronwyn Hall, Darcy Krasne, Martha Olney, Glenda Oskar, Demian Pouzo, Andres Rodriguez-Clare, Andrew Rose, Captain Robert Stewart, Richard Sutch, and the audiences at the UC Berkeley International/Macro seminar, UC Berkeley Economic History lunch and seminar, All-UC meetings, Bank of Canada, LBJ School at UT Austin, Wellesley College, University of Illinois at Chicago, University of San Francisco, Florida International University, Federal Reserve Board, and the 1st Annual CIRANO Workshop on Networks in Trade and Finance for very useful discussions and insightful suggestions. I also thank Containerisation International for allowing me free 7-day access to their online database, Jonathan Eyers for sending me the proofs of the new edition of the Reeds Marine Distance Tables, the ports of Oakland and Los Angeles for providing me with port data, and the Berkeley Economic History Lab for financial support. All errors are mine.