The Geographical Scope of Multinational Firms and Heterogeneity

This paper offers an empirical assessment of the geographical scope of multinational activity at the world level. With this objective, we estimate scope elasticities, which is the relationship between the productivity of the parent firm and the probability of operating abroad in different markets through subsidiaries with the same main activity. Elasticities are estimated for a baseline cross-section of 35 home countries that represent more than 70% of total outward FDI investment at the world level. At the aggregate level, the results indicate quite consistently, through various estimation methods, that a 10% increase in the productivity of the parent firm increases the probability in a range between 0.8–1.0%. Elasticities for manufacturing more than double the elasticities for the service sector. The paper also explores the heterogeneity of scope elasticities across home countries and sectors. This heterogeneity is related to differences across bilateral home-host country characteristics such as the size of the potential host market, bilateral distance and other factors such as institutional quality of host countries and cultural closeness. The signs attached to some of these factors are in general consistent with the predictions of models of firm heterogeneity and FDI activity.