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Third Country Effects in Multinational Production Networks

  • Maggie Xiaoyang Chen

    ()

    (Department of Economics/Institute for International Economic Policy, George Washington University)

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 a firm's decision to invest in a foreign country is independent of its locations in third countries. This paper extends the literature by examining 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 suggests the importance of investigating the causes and effects of foreign direct investment in the context of multinational production network

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File URL: http://www.gwu.edu/~iiep/assets/docs/papers/Chen_IIEPWP2009-1.pdf
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Paper provided by The George Washington University, Institute for International Economic Policy in its series Working Papers with number 2009-01.

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Length: 36 pages
Date of creation: Mar 2009
Date of revision:
Handle: RePEc:gwi:wpaper:2009-01
Contact details of provider: Web page: http://www.gwu.edu/~iiep/
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  1. Badi H. Baltagi & Peter Egger & Michael Pfaffermayr, 2005. "Estimating Models of Complex FDI: Are There Third-Country Effects?," Center for Policy Research Working Papers 73, Center for Policy Research, Maxwell School, Syracuse University.
  2. 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.
  3. Maggie X. Chen, 2008. "Regional Economic Integration and Geographic Concentration of Multinational Firms," Working Papers 2009-07, The George Washington University, Institute for International Economic Policy.
  4. Karolina Ekholm & Rikard Forslid & James R. Markusen, 2007. "Export-Platform Foreign Direct Investment," Journal of the European Economic Association, MIT Press, vol. 5(4), pages 776-795, 06.
  5. Massimo Motta & George Norman, 1993. "Does economic integration cause foreign direct investment?," Economics Working Papers 28, Department of Economics and Business, Universitat Pompeu Fabra.
  6. 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.
  7. Diego Puga & Tony Venables, 1995. "Preferential trading arrangements and industrial location," LSE Research Online Documents on Economics 2151, London School of Economics and Political Science, LSE Library.
  8. Blonigen, Bruce A. & Davies, Ronald B. & Waddell, Glen R. & Naughton, Helen T., 2007. "FDI in space: Spatial autoregressive relationships in foreign direct investment," European Economic Review, Elsevier, vol. 51(5), pages 1303-1325, July.
  9. Markusen, James R., 1984. "Multinationals, multi-plant economies, and the gains from trade," Journal of International Economics, Elsevier, vol. 16(3-4), pages 205-226, May.
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