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Global Production and Trade in the Knowledge Economy

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  • Wolfgang Keller
  • Stephen R. Yeaple

Abstract

This paper presents and tests a new model of multinational firms to explain a rich array of multinational behaviour. In contrast to most approaches, here the multinational faces costs to transferring its know-how that are increasing in technological complexity. Costly technology transfer gives rise to increasing marginal costs of serving foreign markets, which explains why multinational firms are often much more successful in their home market compared to foreign markets. The model has four key predictions. First, as transport costs between multinational parent and affiliate increase, firms with complex production technologies find it relatively difficult to substitute local production for imports from the parent, because complex technologies are relatively costly to transfer. Second, the activity of affiliates with complex technologies declines relatively strongly as transport costs from the home market increase, both at the intensive and the extensive margin. We also show that as transport costs from the home market increase, affiliates concentrate their imports from the parent on intermediates that are technologically more complex. We test these hypotheses by employing information on the activities of individual multinational firms, on the nature of intra-firm trade at the product level, and on the skills required for occupations with different complexity. The empirical analysis finds strong evidence in support of the model by confirming all four hypotheses. The analysis shows that accounting for costly technology transfer within multinational firms is important for explaining the structure of trade and multinational production.

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Paper provided by University of Nottingham, GEP in its series Discussion Papers with number 09/07.

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Handle: RePEc:not:notgep:09/07

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  1. Gordon H. Hanson & Raymond J. Mataloni & Matthew J. Slaughter, 2005. "Vertical Production Networks in Multinational Firms," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 664-678, November.
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Citations

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Cited by:
  1. Keller, Wolfgang & Yeaple, Stephen R, 2009. "Gravity in the Weightless Economy," CEPR Discussion Papers 7553, C.E.P.R. Discussion Papers.
  2. Gabor Békés & Carlo Altomonte, 2009. "Trade Complexity and Productivity," Working Papers 2009.62, Fondazione Eni Enrico Mattei.
  3. Wolfgang Keller & Stephen Ross Yeaple, 2013. "The Gravity of Knowledge," American Economic Review, American Economic Association, vol. 103(4), pages 1414-44, June.
  4. Keller, Wolfgang, 2009. "International Trade, Foreign Direct Investment, and Technology Spillovers," CEPR Discussion Papers 7503, C.E.P.R. Discussion Papers.
  5. Shawn ARITA & TANAKA Kiyoyasu, 2012. "Heterogeneous Multinational Firms and Productivity Gains from Falling FDI Barriers," Discussion papers 12010, Research Institute of Economy, Trade and Industry (RIETI).
  6. Luigi Benfratello & Tiziano Razzolini & Alessandro Sembenelli, 2009. "Does ICT Investment Spur or Hamper Offshoring? Empirical Evidence from Microdata," Working papers 5, Former Department of Economics and Public Finance "G. Prato", University of Torino.
  7. Stephen Yeaple, 2008. "Firm Heterogeneity and the Structure of U.S. Multinational Activity: An Empirical Analysis," NBER Working Papers 14072, National Bureau of Economic Research, Inc.
  8. Kravtsova, Victoria, 2010. "Identifying patterns of outward foreign direct investments: Some empirical evidence," Journal of Multinational Financial Management, Elsevier, vol. 20(1), pages 1-13, February.
  9. Shikher, Serge, 2009. "International production, technology diffusion, and trade," MPRA Paper 21005, University Library of Munich, Germany.

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