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Home bias in trade: location or foreign-ness?

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  • Carolyn L. Evans

Abstract

With "home bias," a consumer differentiates between domestic goods and imports and tends to purchase the domestic variety. A vast number of empirical studies in the international trade literature report the apparent prevalence of a large degree of home bias (the case of the "missing trade," the "border puzzle"). Many theoretical studies, in turn, assume its presence. Despite this wide usage, the origins of home bias remain cloudy. Do customs officials require extensive paper work, thus making imports prohibitively expensive? Is there some inherent distrust of a foreign product? ; This paper probes the causes of home bias. I ask whether the apparent predilection to purchase domestic goods arises from (1) pure locational factors, such as tariffs or access to a local distribution network, or (2) an inherent preference for domestic goods per se. I am able to make this decomposition through the use of data on the local sales of foreign affiliates of U.S. multinational enterprises, in addition to data on U.S. bilateral exports and domestic sales by host-country firms. ; I find that the apparent tendency to purchase domestic goods rather than imports arises almost entirely from pure locational factors. The ad valorem tariff-equivalent of producing at home and shipping to a different country ranges between 51 percent and 105 percent across industries. However, if a firm establishes and sells from a subsidiary located in the foreign country, its local sales are nearly on a par with those of domestic firms in that market. "Foreign-ness" in and of itself does not appear to impede purchases of imported goods.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 128.

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Date of creation: 2001
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Handle: RePEc:fip:fednsr:128

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Keywords: Imports ; International trade ; International economic integration;

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References

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  1. David L. Carr & James R. Markusen & Keith E. Maskus, 1998. "Estimating the Knowledge-Capital Model of the Multinational Enterprise," NBER Working Papers 6773, National Bureau of Economic Research, Inc.
  2. Alan Deardorff, 1998. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?," NBER Chapters, in: The Regionalization of the World Economy, pages 7-32 National Bureau of Economic Research, Inc.
  3. James R. Markusen, 1995. "The Boundaries of Multinational Enterprises and the Theory of International Trade," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 169-189, Spring.
  4. Jong-Wha Lee & Phillip Swagel, 1994. "Trade Barriers and Trade Flows across Countries and Industries," NBER Working Papers 4799, National Bureau of Economic Research, Inc.
  5. Carolyn L. Evans, 2003. "The Economic Significance of National Border Effects," American Economic Review, American Economic Association, vol. 93(4), pages 1291-1312, September.
  6. Markusen, James R. & Venables, Anthony J. & Eby Konan, Denise & Zhang, Kevin H., 1996. "A Unified Treatment of Horizontal Direct Investment, Vertical Direct Investment, and the Pattern of Trade in Goods and Services," Working Paper Series 465, Research Institute of Industrial Economics.
  7. McCallum, John, 1995. "National Borders Matter: Canada-U.S. Regional Trade Patterns," American Economic Review, American Economic Association, vol. 85(3), pages 615-23, June.
  8. S. Lael Brainard, 1993. "A Simple Theory of Multinational Corporations and Trade with a Trade-Off Between Proximity and Concentration," NBER Working Papers 4269, National Bureau of Economic Research, Inc.
  9. repec:fth:michin:382 is not listed on IDEAS
  10. Anderson, James E, 1998. "Trade Restrictiveness Benchmarks," Economic Journal, Royal Economic Society, vol. 108(449), pages 1111-25, July.
  11. Harrigan, James, 1996. "Openness to trade in manufactures in the OECD," Journal of International Economics, Elsevier, vol. 40(1-2), pages 23-39, February.
  12. Bruce A. Blonigen & Wesley W. Wilson, 1999. "Explaining Armington: What Determines Substitutability Between Home and Foreign Goods?," Canadian Journal of Economics, Canadian Economics Association, vol. 32(1), pages 1-21, February.
  13. John F. Helliwell & Geneviève Verdier, 2001. "Measuring internal trade distances: a new method applied to estimate provincial border effects in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 34(4), pages 1024-1041, November.
  14. Keith E. Maskus, 1991. "Comparing International Trade Data and Product and National Characteristics Data for the Analysis of Trade Models," NBER Chapters, in: International Economic Transactions: Issues in Measurement and Empirical Research, pages 17-60 National Bureau of Economic Research, Inc.
  15. Brainard, S Lael, 1997. "An Empirical Assessment of the Proximity-Concentration Trade-off between Multinational Sales and Trade," American Economic Review, American Economic Association, vol. 87(4), pages 520-44, September.
  16. James R. Markusen & Keith E. Maskus, 1999. "Discriminating Among Alternative Theories of the Multinational Enterprise," NBER Working Papers 7164, National Bureau of Economic Research, Inc.
  17. John F. Helliwell, 1997. "National Borders, Trade and Migration," NBER Working Papers 6027, National Bureau of Economic Research, Inc.
  18. Deardoff, A.V., 1995. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?," Working Papers 382, Research Seminar in International Economics, University of Michigan.
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Citations

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Cited by:
  1. Novy, Dennis, 2006. "Trade Costs and the Open Macroeconomy," The Warwick Economics Research Paper Series (TWERPS) 778, University of Warwick, Department of Economics.
  2. Brülhart, Marius & Trionfetti, Federico, 2009. "A test of trade theories when expenditure is home biased," European Economic Review, Elsevier, vol. 53(7), pages 830-845, October.
  3. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," NBER Working Papers 10480, National Bureau of Economic Research, Inc.
  4. Ghazalian, Pascal L. & Furtan, W. Hartley, 2008. "The effects of multinational activities on the measurement of home bias," Journal of the Japanese and International Economies, Elsevier, vol. 22(3), pages 401-416, September.
  5. Raphael A. Auer, 2013. "Product Heterogeneity, Cross-Country Taste Differences, and the Consumption Home Bias," Working Papers 13.01, Swiss National Bank, Study Center Gerzensee.

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