Are There Trade-offs between the Existing and New Foreign Activities?

For each multinational firm, designing a new foreign activity is a sequential choice. In some cases, new foreign businesses complement existing entities. In other cases, new foreign businesses substitute for old entities. These intra-firm changes in allocations of corporate resources are not deeply considered in the literature. In our model, a multinational enterprise (MNE) determines a new location, if any, either as an addition to its existing ones, or as a replacement of an old one. The location is considered under hub-spoke spatial relations. Firms maximize the worldwide corporate profit, taking into account both trade costs and fixed costs. In the empirical analysis, we use a panel data on Japanese-owned foreign affiliates and their parents (Basic Survey of Overseas Business Activities from 1996 to 2012, by METI), supplemented by the Survey of Trends in Business Activities of Foreign Affiliates of the same periods. We measure some key factors to an event of entry and exit, given the network of existing foreign locations. We compare our results with Yeaple (2008), which analyzes "hub and spokes" (central and peripheral locations) of intra-firm networks for U.S. manufacturing. We show some differences between the U.S. MNEs and Japanese MNEs. We also discuss the difference in trade-offs of intra-firm network between manufacturing and the service sectors.