The Margins of Multinational Production and the Roleof Intra-Firm Trade

66 Pages Posted: 18 Feb 2009

See all articles by Alfonso A. Irarrazabal

Alfonso A. Irarrazabal

New York University (NYU) - Department of Economics

Andreas Moxnes

University of Oslo - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Luca David Opromolla

Bank of Portugal; CEPR; UECE - Research Unit on Complexity in Economics

Date Written: January 2009

Abstract

In this paper we ask why the gravity model of international trade also work well for foreign direct investment (FDI) flows or multinational production (MP). We propose a model of trade and horizontal FDI, where the subsidiary is allowed to source inputs from the headquarters. Under certain parameter values, the model will generate gravity relationships for both exports and MP. Matching the model with data using a unique firm-level dataset of both exports and MP reveals the following results. First, intra-firm trade appears to play a crucial role in shaping the geography of MP. Our conclusions are robust to any geographical distribution of fixed costs. Second, counterfactual experiments show that impeding FDI leads to reduced domestic labor demand by the headquarters, suggesting that outwards FDI may have positive effects on home employment.

Keywords: Export, FDI, Gravity, Intra-firm Trade, Multinational Production

JEL Classification: F10

Suggested Citation

Irarrazabal, Alfonso A. and Moxnes, Andreas and Opromolla, Luca David, The Margins of Multinational Production and the Roleof Intra-Firm Trade (January 2009). CEPR Discussion Paper No. DP7145, Available at SSRN: https://ssrn.com/abstract=1345671

Alfonso A. Irarrazabal (Contact Author)

New York University (NYU) - Department of Economics ( email )

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New York, NY 10011
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Andreas Moxnes

University of Oslo - Department of Economics ( email )

P.O. Box 1095 Blindern
N-0317 Oslo
Norway

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

National Bureau of Economic Research (NBER) ( email )

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Luca David Opromolla

Bank of Portugal ( email )

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Portugal

CEPR ( email )

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United Kingdom

UECE - Research Unit on Complexity in Economics ( email )

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Portugal

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