Estimating the Scope Elasticity of Multinational Firms: An Empirical Assessment

This paper offers an empirical assessment of the scope elasticity of multinational activity at the world level. By scope elasticity, we refer to the relationship between the productivity of the parent firm and the probability of operating in a given foreign market through subsidiaries with the same main activity. Elasticities are estimated for a baseline cross-section of 36 countries that represent 74% of total outward FDI investment at the world level. At the aggregate level, results indicate quite consistently, through various estimation methods, that a 10% increase in productivity of the parent firm increases the probability in a range between 0.8-1.5%. Elasticities for manufacturing more than double the elasticities for the service sector. The paper also explores the heterogeneity of scope elasticities across home countries and sectors. This heterogeneity is related to differences across bilateral home-host country characteristics such as the size of the potential host market, bilateral distance, average tariff, institutional quality of host countries and other factors. The signs attached to these factors are in general consistent with the predictions of models of firm heterogeneity and FDI activity. Once heterogeneity and survey biases are controlled, scope elasticities reduce somewhat.