Input Sourcing and Multinational Production
of imports and the degree of differentiation across inputs in a sector, for which I find strong support in the data. Moreover, imperfect competition establishes a link between FDI liberalization and optimal pricing: suppliers find optimal to reduce their prices in response to the possibility of insourced production (the “pro-competition effect” of multinationals). As a result, there is complementarity between trade and foreign investment. The model is calibrated to match aggregate U.S. trade data, and used to quantify the gains arising from vertical multinational production and intrafirm trade. The computed gains are small (about 1% of consumption per capita) but the model shows that further liberalization can increase them substantially.
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