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The Margins of Multinational Production and the Role of Intra-firm trade

  • Irarrazabal, Alfonso
  • Moxnes, Andreas
  • Opromolla, Luca David

In this paper we ask why the gravity model of international trade also work well for foreign direct investment (FDI) flows or multinational production (MP). We propose a model of trade and horizontal FDI, where the subsidiary is allowed to source inputs from the headquarters. Under certain parameter values, the model will generate gravity relationships for both exports and MP. Matching the model with data using a unique firm-level dataset of both exports and MP reveals the following results. First, intra-firm trade appears to play a crucial role in shaping the geography of MP. Our conclusions are robust to any geographical distribution of fixed costs. Second, counterfactual experiments show that impeding FDI leads to reduced domestic labor demand by the headquarters, suggesting that outwards FDI may have positive effects on home employment.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7145.

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Date of creation: Jan 2009
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Handle: RePEc:cpr:ceprdp:7145
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  1. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," NBER Working Papers 10480, National Bureau of Economic Research, Inc.
  2. Rubinstein, Yona & Helpman, Elhanan & Melitz, Marc, 2008. "Estimating Trade Flows: Trading Partners and Trading Volumes," Scholarly Articles 3228230, Harvard University Department of Economics.
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  6. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
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  12. Andrew.B Bernard & J. Bradford Jensen & Stephen Redding & Peter K. Schott, 2007. "Firms in international trade," LSE Research Online Documents on Economics 3682, London School of Economics and Political Science, LSE Library.
  13. Mayer, Thierry & Paillacar, Rodrigo & Zignago, Soledad, 2008. "TradeProd. The CEPII Trade, Production and Bilateral Protection Database: Explanatory Notes," MPRA Paper 26477, University Library of Munich, Germany.
  14. Pol Antràs, 2003. "Firms, Contracts, and Trade Structure," NBER Working Papers 9740, National Bureau of Economic Research, Inc.
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  17. repec:hrv:faseco:4784029 is not listed on IDEAS
  18. Bruce A. Blonigen & Ronald B. Davies & Keith Head, 2002. "Estimating The Knowledge-Capital Model of the Multinational Enterprise: Comment," University of Oregon Economics Department Working Papers 2002-13, University of Oregon Economics Department, revised 01 Mar 2002.
  19. Head, Keith & Ries, John, 2008. "FDI as an outcome of the market for corporate control: Theory and evidence," Journal of International Economics, Elsevier, vol. 74(1), pages 2-20, January.
  20. Mark J. Melitz, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," NBER Working Papers 8881, National Bureau of Economic Research, Inc.
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  22. Thomas Chaney, 2008. "Distorted Gravity: The Intensive and Extensive Margins of International Trade," American Economic Review, American Economic Association, vol. 98(4), pages 1707-21, September.
  23. Brainard, S Lael, 1997. "An Empirical Assessment of the Proximity-Concentration Trade-off between Multinational Sales and Trade," American Economic Review, American Economic Association, vol. 87(4), pages 520-44, September.
  24. Kleinert, Jn & Toubal, Farid, 2006. "Dissecting FDI," CEI Working Paper Series 2006-7, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
  25. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September.
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