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An Empirical Assessment of the Factor Proportions Explanation of Multi-National Sales

  • S. Lael Brainard
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    This paper provides empirical evidence that challenges the factor proportions explanation of multinational activity. The same tests on intra-industry ratios and total volumes that were used to demonstrate that a substantial part of trade is explained by factor proportions and income similarities rather than differences are applied to affiliate sales with surprisingly similar results. Some support for the factor proportions hypothesis is derived by comparing affiliate production destined for export to the parent's market, which is the category of activity most likely to be motivated by factor proportions considerations, with that destined for sale in the local market. Affiliate production destined for export home is moderately more responsive to factor proportions differences. However, the two types of activity differ more in their responses to transport costs and destination market income. Overall, the evidence suggests that only a small part of multinational activity into and out of the U.S. in the late 1980s can be explained by factor proportions differences.

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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4583.

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    Date of creation: Dec 1993
    Date of revision:
    Publication status: Published as "An Empirical Assessment of the Proximity-Concentration Trade-Off Between Multinational Sales and Trade", American Economic Review, Vol. 87, no. 4 (September 1997): 520-544.
    Handle: RePEc:nbr:nberwo:4583
    Note: ITI
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    1. Harry P. Bowen & Edward E. Leamer & Leo Sveikauskas, 1986. "Multicountry, Multifactor Tests of the Factor Abundance Theory," NBER Working Papers 1918, National Bureau of Economic Research, Inc.
    2. Kravis, Irving B. & Lipsey, Robert E., 1982. "The location of overseas production and production for export by U.S. multinational firms," Journal of International Economics, Elsevier, vol. 12(3-4), pages 201-223, May.
    3. Hummels, David & Levinsohn, James, 1995. "Monopolistic Competition and International Trade: Reconsidering the Evidence," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 799-836, August.
    4. Grubert, Harry & Mutti, John, 1991. "Taxes, Tariffs and Transfer Pricing in Multinational Corporate Decision Making," The Review of Economics and Statistics, MIT Press, vol. 73(2), pages 285-93, May.
    5. S. Lael Brainard, 1993. "An Empirical Assessment of the Proximity-Concentration Tradeoff between Multinational Sales and Trade," NBER Working Papers 4580, National Bureau of Economic Research, Inc.
    6. Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Scholarly Articles 3445092, Harvard University Department of Economics.
    7. Lipsey, Robert E & Weiss, Merle Yahr, 1981. "Foreign Production and Exports in Manufacturing Industries," The Review of Economics and Statistics, MIT Press, vol. 63(4), pages 488-94, November.
    8. Horst, Thomas, 1972. "The Industrial Composition of U. S. Exports and Subsidiary Sales to the Canadian Market," American Economic Review, American Economic Association, vol. 62(1), pages 37-45, March.
    9. Ignatius J. Horstmann & James R. Markusen, 1990. "Endogenous Market Structures in International Trade," NBER Working Papers 3283, National Bureau of Economic Research, Inc.
    10. Ethier, Wilfred J. & Horn, Henrik, 1990. "Managerial control of international firms and patterns of direct investment," Journal of International Economics, Elsevier, vol. 28(1-2), pages 25-45, February.
    11. Ethier, Wilfred J, 1986. "The Multinational Firm," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 805-33, November.
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