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Regional Trade Integration and Multinational Firm Strategies

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  • Foley, C. Fritz
  • Antras, Pol

Abstract

This paper analyzes the effects of the formation of a regional trade agreement on the level and nature of multinational firm activity. We examine aggregate data that captures the response of U.S. multinational firms to the formation of the ASEAN free trade agreement. Observed patterns guide the development of a model in which heterogeneous firms from a source country decide how to serve two foreign markets. Following a reduction in tariffs on trade between the two foreign countries, the model predicts growth in the number of source-country firms engaging in foreign direct investment, growth in the size of affiliates that are active in reforming countries both before and after the tariff reduction, and an increase in the extent to which the sales of affiliates in reforming countries are directed towards other reforming countries. Analysis of firm-level responses to the creation of the ASEAN free trade agreement yields results that are consistent with these predictions.

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Bibliographic Info

Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 3374522.

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Date of creation: 2009
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Publication status: Published in Nber Working Paper Series
Handle: RePEc:hrv:faseco:3374522

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  1. Aitken, B. & Harrison, A. & Lipsey, R.E., 1995. "Wages and Foreign Ownership: A Comparative Study of Mexico, Venezuela, and the United States," Papers 95-21, Columbia - Graduate School of Business.
  2. Grossman, Gene & Helpman, Elhanan & Szeidl, Adam, 2004. "Optimal Integration: Strategies for the Multinational Firm," CEPR Discussion Papers 4477, C.E.P.R. Discussion Papers.
  3. Heyman, Fredrik & Sjoholm, Fredrik & Tingvall, Patrik Gustavsson, 2007. "Is there really a foreign ownership wage premium? Evidence from matched employer-employee data," Journal of International Economics, Elsevier, vol. 73(2), pages 355-376, November.
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  5. Jonathan E. Haskel & Sonia C. Pereira & Matthew J. Slaughter, 2002. "Does Inward Foreign Direct Investment Boost the Productivity of Domestic Firms?," Working Papers 452, Queen Mary, University of London, School of Economics and Finance.
  6. Beata K. Smarzynska, 2003. "Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers through Backward Linkages," William Davidson Institute Working Papers Series 548, William Davidson Institute at the University of Michigan.
  7. Maggie X. Chen, 2008. "Regional Economic Integration and Geographic Concentration of Multinational Firms," Working Papers 2009-07, The George Washington University, Institute for International Economic Policy.
  8. Massimo Motta & George Norman, 1993. "Does economic integration cause foreign direct investment?," Economics Working Papers 28, Department of Economics and Business, Universitat Pompeu Fabra.
  9. Volker Nocke & Stephen Yeaple, 2004. "An Assignment Theory of Foreign Direct Investment," NBER Working Papers 11003, National Bureau of Economic Research, Inc.
  10. Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 451-71, June.
  11. James R. Markusen & Anthony J. Venables, 1996. "The Theory of Endowment, Intra-Industry, and Multinational Trade," NBER Working Papers 5529, National Bureau of Economic Research, Inc.
  12. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, December.
  13. Aitken, Brian & Harrison, Ann & DEC, 1994. "Do domestic firms benefit from foreign direct investment? Evidence from panel data," Policy Research Working Paper Series 1248, The World Bank.
  14. Diego Puga & Anthony J. Venables, 1995. "Preferential Trading Arrangements and Industrial Location," CEP Discussion Papers dp0267, Centre for Economic Performance, LSE.
  15. Markusen, James R., 1984. "Multinationals, multi-plant economies, and the gains from trade," Journal of International Economics, Elsevier, vol. 16(3-4), pages 205-226, May.
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Cited by:
  1. Freund, Caroline & Ornelas, Emanuel, 2010. "Regional trade agreements," Policy Research Working Paper Series 5314, The World Bank.

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