Distance costs and Multinationals' foreign activities
AbstractWe derive a gravity equation from two general equilibrium models with multinational firms: a symmetric firm model where foreign affiliates rely on specific intermediate goods and a heterogenous firms model with country-specific fixed costs. Although the reduced form gravity equation is the same, the structural models behind it differ. In the heterogenous firm model less (but larger) firms enter more distant markets which yields lower aggregate sales. In the symmetric firm intermediate input model, in contrast, lower aggregate sales result from lower sales per foreign affiliate. We use the gravity equation to discriminate between the two models. Thereby, we find more support for the heterogenous firm model.
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Bibliographic InfoPaper provided by Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University in its series CEI Working Paper Series with number 2006-6.
Length: 26 p.
Date of creation: Oct 2006
Date of revision:
Gravity equation; multinational firms; distance costs;
Find related papers by JEL classification:
- F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
- F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
- C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
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