Trade and Multi-product Firms

This paper explores how firm’s internalization strategies - specifically exporting and foreign direct investment (FDI) - relate to their product scope. We develop a model incorporating firm heterogeneity and multi-product firms. The most productive firms engage in FDI and produce the broadest range of products. Firms with intermediate productivity levels tend to export, offering fewer product varieties than FDI firms. In contrast, low-productivity firms typically operate domestically and have the smallest product scope. The model also predicts that the ratio of the product scope of exporters and domestic firms and the ratio of FDI firms and exporters should decline as the difficulty of expanding the product scope increases. The Japanese firm-level data support the theoretical predictions.