An important component of Robert Lipsey's work has been his research on multinational firms, and his careful documentation of their behavior in terms of production and intra-firm trade. In this paper, we extend recent theory referred to as the knowledge-capital model', which simultaneously generates motives for both horizontal and vertical multinational production. We use this model to derive predictions about foreign affiliates' pattern of production for local markets versus production for exports as functions of country characteristics such as market sizes, size differences, and relative endowment differences. These predictions are then taken to data on affiliate production and trade. Results confirm several hypotheses. The ratio of production for export sales to production for local sale by affiliates of foreign multinationals depends negatively on market size, investment and trade costs in the host country, and positively on the relative skilled-labor abundance of the parent country (skilled-labor scarcity of the host country).
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
7163.
Length: Date of creation: Jun 1999 Date of revision: Publication status: published as With Robert C. Feenstra and William Zeile, published as "Accounting for Growth with New Inputs: Theory and Evidence", American Economic Review, Vol. 82, no. 2 (1992): 418-421. Handle: RePEc:nbr:nberwo:7163
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Find related papers by JEL classification: F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
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