Optimal Integration: Strategies for the Multinational Firm

39 Pages Posted: 11 Aug 2004

See all articles by Gene M. Grossman

Gene M. Grossman

Princeton University - Woodrow Wilson School of Public and International Affairs; Princeton University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Elhanan Helpman

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

Adam Szeidl

Central European University

Multiple version iconThere are 3 versions of this paper

Date Written: July 2004

Abstract

We examine integration strategies of multinational firms that face a rich array of choices of international organization. Each firm in an industry must provide headquarter services from its home country, but can produce its intermediate inputs and conduct assembly operations in one or more of three locations. We study the equilibrium choices of firms that differ in productivity levels, focusing on the role that industry characteristics, such as the fixed costs of foreign subsidiaries, the cost of transporting intermediate and final goods, and the regional composition of the consumer market play in determining the optimal integration strategies. In the process, we identify three distinct 'complementarities' that link firms' foreign investment decisions for different stages of production.

Keywords: Direct foreign investment, multinational corporations, intra-firm trade, vertical integration

JEL Classification: F12, F23, L22

Suggested Citation

Grossman, Gene M. and Helpman, Elhanan and Szeidl, Adam, Optimal Integration: Strategies for the Multinational Firm (July 2004). CEPR Discussion Paper No. 4477. Available at SSRN: https://ssrn.com/abstract=575005

Gene M. Grossman (Contact Author)

Princeton University - Woodrow Wilson School of Public and International Affairs ( email )

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Elhanan Helpman

Harvard University - Department of Economics ( email )

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Adam Szeidl

Central European University ( email )

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