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Intensive and Extensive Decisions of Firms with Spatial Dependency

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  • ITO Yukiko
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    Abstract

    We examine how firms operating in three or more countries show different international spatial dependencies, compared to those operating in just two countries (home and one foreign country). In a multi-country model, we focus on the significance of rival locations abroad, which has not been considered in bilateral two-country models. We present a model in which a multinational enterprise (MNE) determines the spatial extension of operations (measured by the number of foreign countries per parent firm) and the intensity of production (measured by the volume of local sales or exports per foreign location). We call these "extensive decisions" and "intensive decisions," respectively. We then estimate how their affiliates' locations are substitutable or complementary with each other. We use panel data on Japanese-owned foreign affiliates from 2000-2007 and measure key determinants to trade and foreign direct investment (FDI) multilaterally, relative to other foreign locations. We find that 1) the setup of a new location for local sales is replaceable with the imports from surrounding economies, 2) the setup of a new location for exports is encouraged by the market size of surrounding economies, and 3) the export volume to the third foreign economies are also enhanced.

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    Bibliographic Info

    Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 12024.

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    Length: 29 pages
    Date of creation: Apr 2012
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    Handle: RePEc:eti:dpaper:12024

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    1. Limao, Nuno & Venables, Anthony J., 1999. "Infrastructure, geographical disadvantage, and transport costs," Policy Research Working Paper Series 2257, The World Bank.
    2. Andrew B. Bernard & J. Bradford Jensen & Peter K. Schott, 2003. "Falling trade costs, heterogeneous firms and industry dynamics," LSE Research Online Documents on Economics 20027, London School of Economics and Political Science, LSE Library.
    3. Matthieu Crozet & Pamina Koenig, 2010. "Structural gravity equations with intensive and extensive margins," Canadian Journal of Economics, Canadian Economics Association, vol. 43(1), pages 41-62, February.
    4. Baltagi, Badi H. & Egger, Peter & Pfaffermayr, Michael, 2007. "Estimating models of complex FDI: Are there third-country effects?," Journal of Econometrics, Elsevier, vol. 140(1), pages 260-281, September.
    5. Cletus C. Coughlin & Eran Segev, 2000. "Foreign Direct Investment in China: A Spatial Econometric Study," The World Economy, Wiley Blackwell, vol. 23(1), pages 1-23, 01.
    6. Thomas Chaney, 2011. "The Network Structure of International Trade," NBER Working Papers 16753, National Bureau of Economic Research, Inc.
    7. Bruce A. Blonigen & Ronald B. Davies & Glen R. Waddell & Helen T. Naughton, 2004. "FDI in Space: Spatial Autoregressive Relationships in Foreign Direct Investment," NBER Working Papers 10939, National Bureau of Economic Research, Inc.
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