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Interdependence in Multinational Production Networks

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  • Chen, Maggie

Abstract

The majority of multinational firms today operate a multilateral production network. Most existing empirical analyses have, however, focused on firms' choice between producing at home and investing overseas and assumed that a firm's decision to invest in a foreign country is independent of its locations in third countries. This paper examines the effect of existing production network on multinationals' entry decision. Using detailed French multinational subsidiary level data, the paper finds strong evidence of horizontal and vertical interdependence across multinationals' foreign production locations. There is, however, little evidence of horizontal interdependence between home-country production and foreign investment when the third-country effects are taken into account, constituting a sharp contrast to the conventional emphasis. This result is robust to the various specifications and sensitivity analyses undertaken in the paper, and highlights the importance of investigating the causes and effects of foreign direct investment in the context of multinational production network.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 23506.

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Date of creation: 2009
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Handle: RePEc:pra:mprapa:23506

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Keywords: multinational firm; production network; interdependence; entry decision; trade cost; input-output linkage;

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  1. David L. Carr & James R. Markusen & Keith E. Maskus, 2001. "Estimating the Knowledge-Capital Model of the Multinational Enterprise," American Economic Review, American Economic Association, American Economic Association, vol. 91(3), pages 693-708, June.
  2. Krugman, Paul & Venables, Anthony J., 1993. "Integration, Specialization and Adjustment," CEPR Discussion Papers, C.E.P.R. Discussion Papers 886, C.E.P.R. Discussion Papers.
  3. Laura Alfaro & Andrew Charlton, 2007. "Intra-industry foreign direct investment," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 19690, London School of Economics and Political Science, LSE Library.
  4. Venables, Anthony J, 1996. "Equilibrium Locations of Vertically Linked Industries," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(2), pages 341-59, May.
  5. 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.
  6. Jim Markusen & Caroline Ekholm, Rikard Forslid, 2005. "Export-Platform Foreign Direct Investment," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp050, IIIS.
  7. Maggie X. Chen, 2008. "Regional Economic Integration and Geographic Concentration of Multinational Firms," Working Papers, The George Washington University, Institute for International Economic Policy 2009-07, The George Washington University, Institute for International Economic Policy.
  8. Diego Puga & Tony Venables, 1995. "Preferential trading arrangements and industrial location," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 2151, London School of Economics and Political Science, LSE Library.
  9. Baltagi, Badi H. & Egger, Peter & Pfaffermayr, Michael, 2007. "Estimating models of complex FDI: Are there third-country effects?," Journal of Econometrics, Elsevier, Elsevier, vol. 140(1), pages 260-281, September.
  10. Gordon H. Hanson & Raymond J. Mataloni & Matthew J. Slaughter, 2003. "Vertical Production Networks in Multinational Firms," NBER Working Papers 9723, National Bureau of Economic Research, Inc.
  11. Bruce A. Blonigen & Ronald B. Davies & Glen R. Waddell & Helen T. Naughton, 2004. "FDI in Space: Spatial Autoregressive Relationships in Foreign Direct Investment," NBER Working Papers 10939, National Bureau of Economic Research, Inc.
  12. Motta, Massimo & Norman, George, 1996. "Does Economic Integration Cause Foreign Direct Investment?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(4), pages 757-83, November.
  13. Keith Head & Thierry Mayer, 2004. "Market Potential and the Location of Japanese Investment in the European Union," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 959-972, November.
  14. Stephen Ross Yeaple, 2003. "The Role of Skill Endowments in the Structure of U.S. Outward Foreign Direct Investment," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 726-734, August.
  15. Markusen, James R., 1984. "Multinationals, multi-plant economies, and the gains from trade," Journal of International Economics, Elsevier, Elsevier, vol. 16(3-4), pages 205-226, May.
  16. Bruce Blonigen, 2005. "A Review of the Empirical Literature on FDI Determinants," Atlantic Economic Journal, International Atlantic Economic Society, International Atlantic Economic Society, vol. 33(4), pages 383-403, December.
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Cited by:
  1. Debaere, Peter & Lee, Hongshik & Lee, Joonhyung, 2012. "Language, Ethnicity and Intra-firm Trade," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9029, C.E.P.R. Discussion Papers.

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