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Interdependence in Multinational Production Networks


  • Chen, Maggie


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

Suggested Citation

  • Chen, Maggie, 2009. "Interdependence in Multinational Production Networks," MPRA Paper 23506, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:23506

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    References listed on IDEAS

    1. Markusen, James R. & Venables, Anthony J., 2000. "The theory of endowment, intra-industry and multi-national trade," Journal of International Economics, Elsevier, vol. 52(2), pages 209-234, December.
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    6. Puga, Diego & Venables, Anthony J., 1997. "Preferential trading arrangements and industrial location," Journal of International Economics, Elsevier, vol. 43(3-4), pages 347-368, November.
    7. Bruce Blonigen, 2005. "A Review of the Empirical Literature on FDI Determinants," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 33(4), pages 383-403, December.
    8. Motta, Massimo & Norman, George, 1996. "Does Economic Integration Cause Foreign Direct Investment?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(4), pages 757-783, November.
    9. Baltagi, Badi H. & Egger, Peter & Pfaffermayr, Michael, 2007. "Estimating models of complex FDI: Are there third-country effects?," Journal of Econometrics, Elsevier, vol. 140(1), pages 260-281, September.
    10. Krugman, Paul & Venables, Anthony J., 1996. "Integration, specialization, and adjustment," European Economic Review, Elsevier, vol. 40(3-5), pages 959-967, April.
    11. Gordon H. Hanson & Raymond J. Mataloni & Matthew J. Slaughter, 2005. "Vertical Production Networks in Multinational Firms," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 664-678, November.
    12. 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.
    13. Venables, Anthony J, 1996. "Equilibrium Locations of Vertically Linked Industries," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(2), pages 341-359, May.
    14. Chen, Maggie X., 2009. "Regional economic integration and geographic concentration of multinational firms," European Economic Review, Elsevier, vol. 53(3), pages 355-375, April.
    15. Stephen Ross Yeaple, 2003. "The Role of Skill Endowments in the Structure of U.S. Outward Foreign Direct Investment," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 726-734, August.
    16. 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.
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    Cited by:

    1. Debaere, Peter & Lee, Hongshik & Lee, Joonhyung, 2013. "Language, ethnicity and intrafirm trade," Journal of Development Economics, Elsevier, vol. 103(C), pages 244-253.
    2. Alfaro, Laura & Chen, Maggie Xiaoyang, 2014. "The global agglomeration of multinational firms," Journal of International Economics, Elsevier, vol. 94(2), pages 263-276.
    3. Laura Alfaro & Maggie X. Chen, 2017. "Transportation Cost and the Geography of Foreign Investment," Harvard Business School Working Papers 17-061, Harvard Business School.
    4. Fillat, José L. & Garetto, Stefania & Oldenski, Lindsay, 2015. "Diversification, cost structure, and the risk premium of multinational corporations," Journal of International Economics, Elsevier, vol. 96(1), pages 37-54.
    5. repec:bla:worlde:v:39:y:2016:i:12:p:2046-2073 is not listed on IDEAS

    More about this item


    multinational firm; production network; interdependence; entry decision; trade cost; input-output linkage;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business


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