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Distance costs and Multinationals' foreign activities

  • Kleinert, Jn
  • Toubal, Farid

We derive a gravity equation from two general equilibrium models with multinational firms: a symmetric firm model where foreign affiliates rely on specific intermediate goods and a heterogenous firms model with country-specific fixed costs. Although the reduced form gravity equation is the same, the structural models behind it differ. In the heterogenous firm model less (but larger) firms enter more distant markets which yields lower aggregate sales. In the symmetric firm intermediate input model, in contrast, lower aggregate sales result from lower sales per foreign affiliate. We use the gravity equation to discriminate between the two models. Thereby, we find more support for the heterogenous firm model.

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File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/13510/1/wp2006-6a.pdf
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Paper provided by Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University in its series CEI Working Paper Series with number 2006-6.

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Length: 26 p.
Date of creation: Oct 2006
Date of revision:
Handle: RePEc:hit:hitcei:2006-6
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  1. Stephen Redding & Anthony J. Venables, 2001. "Economic Geography and International Inequality," CEP Discussion Papers dp0495, Centre for Economic Performance, LSE.
  2. Jörn Kleinert & Farid Toubal, 2010. "Gravity for FDI," Review of International Economics, Wiley Blackwell, vol. 18(1), pages 1-13, 02.
  3. David L. Carr & James R. Markusen & Keith E. Maskus, 1998. "Estimating the Knowledge-Capital Model of the Multinational Enterprise," NBER Working Papers 6773, National Bureau of Economic Research, Inc.
  4. Claudia M. Buch & Jörn Kleinert & Alexander Lipponer & Farid Toubal, 2005. "Determinants and effects of foreign direct investment: evidence from German firm-level data," Economic Policy, CEPR;CES;MSH, vol. 20(41), pages 52-110, 01.
  5. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, August.
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