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U.S. Exports and Multinational Production

Author

Listed:
  • Huiwen Lai

    (SAS Institute Inc.)

  • Susan Chun Zhu

    (Michigan State University)

Abstract

This paper presents a monopolistic competition model of trade and multinational production that incorporates asymmetric trade barriers and international differences in production costs. The model predicts the functional form for the dependence of U.S. exports and multinational production on tariffs, distance, and production costs. To deal with simultaneity, we estimate the nonlinear equations of U.S. exports and multinational production simultaneously. In the estimation, we also include country fixed effects and allow for endogenous location choice by firms. The estimation yields reasonable estimates of the structural parameters, including the elasticity of substitution. Based on the estimates, we then simulate the effects of trade liberalization. We find that the elimination of tariffs worldwide would increase U.S. exports by 3.0% and U.S. multinational production by 21.7%. This large expansion of U.S. overseas production mainly results from an expected increase in the number of U.S. foreign affiliates in response to tariff reductions. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • Huiwen Lai & Susan Chun Zhu, 2006. "U.S. Exports and Multinational Production," The Review of Economics and Statistics, MIT Press, vol. 88(3), pages 531-548, August.
    • Handle: RePEc:tpr:restat:v:88:y:2006:i:3:p:531-548
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    Cited by:

    1. Christophe Gouel & Houssein Guimbard & David Laborde, 2012. "A Foreign Direct Investment database for global CGE models," Working Papers 2012-08, CEPII research center.
    2. Bruce A. Blonigen & Lionel Fontagné & Nicholas Sly & Farid Toubal, 2012. "Cherries for Sale: Export Networks and the Incidence of Cross-Border M&A," NBER Working Papers 18414, National Bureau of Economic Research, Inc.
    3. Bergstrand, Jeffrey H. & Egger, Peter, 2007. "A knowledge-and-physical-capital model of international trade flows, foreign direct investment, and multinational enterprises," Journal of International Economics, Elsevier, vol. 73(2), pages 278-308, November.
    4. Alessandro Barattieri, 2011. "Estimating Trade and Investment Flows: Partners and Volumes," Cahiers de recherche 1133, CIRPEE.

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