Multinational Firms and the Structure of International Trade

76 Pages·2014·1.37 MB·English

by  Pol Antràs

22
CHAPTER
Multinational Firms and the Structure
∗
of International Trade
PolAntràs*,†,‡ andStephenR.Yeaple†,§
*HarvardUniversity,Cambridge,MA,USA
†NationalBureauofEconomicResearch,Cambridge,MA,USA
‡CentreforEconomicPolicyResearch,London,UK
§PennsylvaniaStateUniversity,UniversityPark,PA,USA
Abstract
Thischapterreviewsthestateoftheinternationaltradeliteratureonmultinationalfirms.Thisliterature
addressesthreemainquestions.First,whydosomefirmsoperateinmorethanonecountrywhile
othersdonot?Second,whatdeterminesinwhichcountriesproductionfacilitiesarelocated?Finally,
whydofirmsownforeignfacilitiesratherthansimplycontractwithlocalproducersordistributors?We
organizeourexpositionofthetradeliteratureonmultinationalfirmsaroundtheworkhorsemonopo-
listiccompetitionmodelwithconstant-elasticity-of-substitution(CES)preferences.Onthetheoretical
side,wereviewalternativewaystointroducemultinationalactivityintothisunifyingframework,illus-
tratingsomekeymechanismsemphasizedintheliterature.Ontheempiricalside,wediscussthekey
studiesandprovideupdatedempiricalresultsandfurtherrobustnesstestsusingnewsourcesofdata.
Keywords
Multinationals, Foreign direct investment, Vertical FDI, Horizontal FDI, Complex FDI, Internalization,
Offshoring,Outsourcing,Relatedpartytrade,Cross-borderacquisitions,GreenfieldFDI
JELclassificationcodes
F23,F12,F2,F1,F61,D21,D23,D22,D2,L2
1. INTRODUCTION
Over the last two decades,international trade theory has undergone a steady transfor-
mation that has placed firms rather than countries or industries as the central unit of
∗
Thestatisticalanalysisoffirm-leveldataonU.S.multinationalcorporationsreportedinthisstudywasconductedat
theU.S.BureauofEconomicAnalysisunderarrangementsthatmaintainedlegalconfidentialityrequirements.Views
expressedarethoseoftheauthorsanddonotnecessarilyreflectthoseoftheBureauofEconomicAnalysis.Weare
gratefultoourdiscussants,JohnMcLarenandEstebanRossi-Hansbergfortheirinsightfulandincisivecommentsat
thehandbookconferenceheldinCambridgeinSeptemberof2012.Wealsobenefittedfromvaluablefeedbackfrom
theeditor,ElhananHelpman.WealsothankRuiqingCaoand YangDuforoutstandingresearchassistance,andDavin
Chor,FedericoDíez,WilliKohler,NathanNunn,NataliaRamondo,MarcelSmolka,andDanTreflerfortheirhelp
withdatasources.TheOnlineAppendixmentionedinthetextisavailableintheNBERWorkingPaperversionof
thischapter.
HandbookofInternationalEconomics,Volume4 ©2014ElsevierB.V.
ISSN1573-4404,http://dx.doi.org/10.1016/B978-0-444-54314-1.00002-1 Allrightsreserved. 55
56 PolAntràsandStephenR.Yeaple
analysis.This transformation has been fueled by micro-level empirical studies that have
showninternationalactivitytobeconcentratedwithinahandfulofverylargefirmsthat
produce in multiple countries and multiple industries. In 2000,for instance,the top 1%
U.S. exporters accounted for 81% of U.S. exports (Bernard et al.,2009).The involve-
mentoftheselargefirmsintheworldeconomygoeswellbeyondthemereactofselling
domestically produced goods to foreign consumers. According to 2009 data from the
U.S. Bureau of EconomicAnalysis,the sales of domestically produced goods to foreign
customersaccountforonly25%ofthesalesoflargeAmericanfirms.Theremaining75%
(nearly U.S. $5 trillion) is accounted for by the sales of foreign affiliates of American
multinationals (Yeaple,2013). Furthermore,data from the U.S. Census Bureau indicates
that roughly 90% of U.S. exports and imports flow through multinational firms,with
closetoone-halfofU.S.importstransactedwithintheboundariesofmultinationalfirms
rather than across unaffiliated parties (Bernard et al.,2009).
This chapter reviews the state of the international trade literature on multinational
firms. Before we begin,a few definitions are in order. In his encyclopedic monograph
onthesubject,Caves(2007,p.1)definesamultinationalfirmas“anenterprisethatcon-
trolsandmanagesproductionestablishments—plants—locatedinatleasttwocountries.”
While the corporate structure of multinational firms can be complicated,it is useful to
definetwotypesofentitieswithinamultinationalfirm,theparentandtheaffiliate.Parents
areentitieslocatedinonecountry(thesourcecountry)thatcontrolproductivefacilities,
while affiliates are located in other countries (host countries).The notion of control is a
judgmentalonebutitisoftenassociatedwithownership.Suchownershipistheresultof
foreigndirectinvestments,whichcanalternativelyinvolvetheacquisitionofacontrolling
interestin an existing foreign firm(cross-borderacquisitions)or theestablishmentof an
entirely new facility in a foreign country (greenfield investment).
The positive theory of the multinational firm revolves around three main questions.
First,whydosomefirmsfinditoptimaltooperateinmorethanonecountrywhileothers
donot?Second,whatdeterminesinwhichcountriesproductionfacilitiesarelocatedand
in which they are not? Finally,why do firms own foreign facilities rather than simply
contract with local producers or distributors?
Themodernliterature’sfocusonthefirmcontrastssharplywiththetraditionaltheory
thatmadelittledistinctionbetweenforeigndirectinvestmentandinternationalportfolio
investment flows.According to the traditional theory,multinational firms were simply
arbitrageursthatmovedcapitalfromcountrieswherereturnswerelowtocountrieswhere
returns were high.1 The genesis of the modern approach was Hymer’s (1960) seminal
Ph.D.thesis.Hymerpointedoutthatthetraditionalinternational-financeapproachwas
inconsistentwithseveralfeaturesofforeigndirectinvestment(FDI)data.Heproposeda
new,industrial-organization approach based on the notion that some firms own special
assetsthatconferastrategicadvantageoverindigenousfirmsinforeignmarkets.Insome
1Thisinterpretationisimplicit,forinstance,inMundell(1957).
MultinationalFirmsandtheStructureofInternationalTrade 57
cases,marketimperfectionsprecludetheuseoftheseassetsbyforeignunaffiliatedentities,
therebygeneratingtheneedforadirectinvolvementoftheassetowner.Insum,Hymer
envisionedaworldinwhichreal(notfinancial)factorsshapethelocationofmultinational
activityandfinancialflowsareamereconsequenceofthefinancialstructuredecisionsof
multinational firms.
Hymer’sapproachwaslaterrefinedbyseveralauthors,including Kindleberger(1969),
Caves (1971), Buckley and Casson (1976), and Rugman (1981), and culminated with
Dunning’s (1981) eclectic OLI framework,where OLI is an acronym for Ownership,
Location,andInternalization.Putsuccinctly,theemergenceofthemultinationalfirmis
explainedbyanOwnershipadvantagestemmingfromfirm-specificassetsthatallowfirms
to compete in unfamiliar environments,a Location advantage that makes it efficient to
exploitthefirmassetsinproductionfacilitiesinmultiplecountries,andanInternalization
advantagethatmakesthewithin-firmexploitationofassetsdominateexploitationatarm’s
length.Themainstreaminterpretationoftheownershipadvantagerelatesittoapropri-
etary technology or reputation that provides its owner with some market power or cost
advantageoverindigenousproducers.Thelocationadvantageisoftenassociatedwiththe
idea that the development of these assets (tangible or intangible) entails significant fixed
costs,buttheseassetscanthenbeusedindifferentlocationssimultaneouslyinanonrival
manner.This allows economies of scale to be exploited efficiently within multinational
firms,especially when trade frictions inhibit such exploitation via exporting. Another
branchoftheliteraturehasrelatedlocationadvantagestosituationsinwhichproduction
is amenable to geographical fragmentation,thus allowing different parts of the produc-
tion process to be undertaken in the location where it is most cost-effective to do so.
Finally, the internalization advantage is attributed to market failures in the transfer of
technology—related to the partial nonexcludable,nonrival,and noncodifiable nature of
technology—andtoinefficienciesassociatedwithmarketexchangesofhighlycustomized
intermediate inputs.
As insightful as the OLI literature is,it took some time before it was absorbed by
international trade theory because a widely accepted general-equilibrium modeling of
increasing returns to scale,product differentiation,and imperfect competition did not
becomeavailableuntilthelate1970sandearly1980s,andbecausecontracttheorywasstill
initsinfancyinthe1970s.Themodelingofproductdifferentiationandmarketstructure
originally developed by Dixit and Stiglitz (1977) and later adopted by Krugman (1979,
1980) served the important role of providing a common language for researchers in the
field to communicate among themselves, and opened the door to formally modeling
multinational firms within general-equilibrium analysis.2
2Althoughtheheavyuseofspecificfunctionalformsforpreferencesandtechnologywasviewedwithsomereservation
bytheoldguardinthefield,thepublicationofthelandmarkmanuscriptbyHelpmanandKrugman(1985)established
thegeneralityofmostoftheinsightsfromKrugman’sworkandshowedhowthenewfeaturesofNewTradeTheory
couldbeembeddedintoNeoclassicalTradeTheory.
58 PolAntràsandStephenR.Yeaple
Following this tradition,we will organize our exposition of the trade literature on
multinationalfirmsaroundtheclassicalKrugman(1980)modelwithconstant-elasticity-
of-substitution (CES) preferences,and the seminal variant of the model incorporating
firm heterogeneity developed by Melitz (2003). On the theoretical side,we will review
alternative ways to introduce multinational activity into the framework,while trying to
illustrate some of the key mechanisms emphasized in the literature, even when these
weredevelopedunderdifferentmodelingassumptions.Althoughsomeimportantpapers
in the trade literature on multinational firms adopt alternative modeling approaches to
imperfectcompetition(mostnotably,Markusen,1984;HorstmannandMarkusen,1987a;
Markusen andVenables,1998) or make less restrictive assumptions on technology and
preferences(e.g.,Helpman,1984),wethinkthattheadvantageofacommonframework
outweighs the benefits of comprehensivenessand generality.
Given the space constraint,we will impose several limits on the scope of our review.
First,we will not review in great detail certain branches of the literature that,although
beingassociatedwithaspectsofmultinationalactivity,donotmodelmultinationalfirms
explicitly.Second,wewillfocusalmostexclusivelyonpositiveissuesrelatedtotheratio-
naleformultinationalactivityandwillthusnotdiscusstheeffectsofmultinationalfirms
ongoodsandfactormarketsorthepolicyimplicationsoftheseeffects.Theonlyexcep-
tion to this rule is our brief discussion of the effects of vertical fragmentation on labor
marketsinSection5.2.Third,ouremphasiswillbeonqualitativeanalysis,thoughwewill
brieflyreviewrecentadvancesinquantitativeanalysisinSection6.Fourth,althoughwe
willsometimesrefertotheinternalizationdecisionofmultinationalfirmsasanorganiza-
tionaldecision,wewillnotreviewthebroaderliteratureontheinternationalorganization
ofproduction,whichisconcernednotonlywithmultinationalfirmboundaries,butalso
with incentive provision,delegation,and hierarchical structure within and across firms
in the global economy.3 Fifth, we will restrict ourselves to discussing the operational
decisionsofmultinationalfirms(suchasthoserelatedtoemployment,productionlevels,
location,andownership),thusomittingatreatmentofthefinancialaspectsofthesefirms,
which are important for understanding the relationship between multinational activity
and FDI flows.4 For more encyclopedic treatments of multinational firms,we refer the
reader to the monographs by Caves (2007),Markusen (2002),and Barba-Navaretti and
Venables(2004),whileanoverviewoftheliteratureontheinternationalorganizationof
production can be found inAntràs and Rossi-Hansberg (2009).5
Bylimitingourfocus,wewillbeabletotakeoursurveybeyondasimpleenumeration
ofthevarioustheoreticalandempiricalresultsintheliterature.Onthetheoreticalside,we
3 Forrecentworkinthisarea,seeGrossmanandHelpman(2004)onincentiveprovision,MarinandVerdier(2009)
and Puga andTrefler (2010) on delegation,andAntràs et al. (2006) and Caliendo and Rossi-Hansberg (2012) on
hierarchicalstructure.
4 SeeKleinetal.(2002),Desaietal.(2004),andAntràsetal.(2009)forworkonfinancialaspectsofmultinational
activity.
5SeeHelpman(2006)andSpencer(2005)forrecentalternativereviewsofthisliterature.
MultinationalFirmsandtheStructureofInternationalTrade 59
willexplicitlyderiveaseriesofanalyticalresultswithinaunifiedframework.Whilemost
oftheseresultsarenotnew,somehadonlybeenillustratednumericallyandinsomewhat
disjointedframeworks.Ontheempiricalside,ourreviewwillprovideupdatedempirical
results and further robustness tests using new sources of data.
The remainder of this chapter is organized as follows. Section 2 briefly describes
the data available to analyze the global operations of multinational firms and provides a
list of“stylized”facts about the multinational firm. Section 3 introduces the benchmark
modelthatwewillusetoguideouroverviewofthetheoreticalliterature.Sections4and5
focusontheintegrationofthemultinationalfirmsintoourbenchmarkmodelsandcover
the relevant empirical literature that both informs the design of these models and tests
these models’predictions. Section 6 outlines the approaches taken by a recent literature
that explores the global structure of trade in multinational production in multicountry
models.The internalization advantage of multinationals is taken as given in Sections 4
through6,butisexplicitlymodeledandempiricallyassessedinSection7.Section8offers
concluding remarks.
2. STYLIZEDFACTS
In this section,we develop six stylized facts that describe broad features of the structure
of multinationals’ global operations.We do so using three types of data. First, we use
foreign direct investment data from the balance of payments. Foreign direct investment
(FDI) occurs when a firm from one country obtains an operating stake (usually 10%)
in an enterprise in another country or when a financial flow occurs between parties
thatareresidentindifferentlocationsbutrelatedbyownership.Second,weusegovern-
mentsurveydatathatdistinguishbetweennationalfirmsandtheparentsandaffiliatesof
multinational firms.We rely particularly on census data on U.S. parents and their for-
eignaffiliatescollectedbytheBureauofEconomicAnalysis(BEA)oftheUnitedStates.
Finally,we use U.S. Related PartyTrade data collected by the U.S. Bureau of Customs
and Border Protection.This source provides data on related and nonrelated party U.S.
imports and exports at the six-digit Harmonized System (HS) classification and at the
origin/destination country level.6
WefirstdocumentregularitiesinthecountriesthatarethesourceofFDIandcoun-
tries that are the destination of this FDI. FDI flows measure changes in the holdings
of controlling interests in equity capital between countries. By aggregating flows over
timebycountryonecanobtaincrudemeasuresofhowimportantcountriesareashosts
to parent firm operations (outward stocks) and as hosts to affiliate operations (inward
stocks).
6Relatedpartytrademeansaminimumownershipstakebetweentradingpartiesof6%forimportsand10%forexports.
60 PolAntràsandStephenR.Yeaple
2 2
HKG LBR HKG
log (Outward FDI Stock / GDP) ———————763015421 LBBDRNICEMARMFWMGDRGILIGBNWNIFTABAZBLCKBMSEEGDCSONBNDIEKVCNNHMPMYGPSMNNREARLAMGITCMKBIGNDCHUPDAMIPWNVHYDNFMGBVUDLGJNLSPGSOAATITKMAERJYSMRRYLEAOOGNRWBUMGROALKCZJYEZMDRATHABCCTHMZPNLIAUHUAZOABEZRBMSCANLKVERRMKFRAMEBBBPLUABDRMMINGZNWBALGTURACLOEEYRANUNVSRRYAHLMXSBHRATPRGELHRUOUSSUSBSVCLTSAPTVNMHISYOSGURZTKKRVNCLMROEECOEITRTTNJZFUSINGYRFCAPSDLBRACRSPUyAPDIIBNLEENNRUA2=WAUNRC=UAULLLS—NTBK(KEDHRS 110RWN4.S.AEE04.NO20G6T347RP)Q+L1(A0U.T2.1X0069x) log (Inward FDI Stock / GDP) ———————765432101 ZAREBRDINICESMAMRLMFTEWAEOMGCGHDRFTGIZNOLITOGBUHGWNNPIIMFTTGTALBAZBZMLACGKBMSAEPEGDHCSSONBGNDAIETTKVKSCMNJNPHMKPGDLMKYGBPSIMNNRAZNRERALAUMGIOTVCMKBIGZNINDRBCHUAPDMMQCIPWNHVYTDNFMGOBVUODLGJNLSPGSBOATGAITKNMAERJYTSMRRLEAOOGNYNRWBSUMGROALLKCZJYEVZMMTDRATHABCKLDCHDZMTPNLIACUMHAUOVZOVABEGZBMASCACNRMLKVDERRRMKFRTAEMMBDPBBLUPABDRMMINKGZNBWALLGTUARACLONEEYWRNAUNSVRRYAHLMXSABHRATPRGELHRUOUSSUSBSVCLTSAPTVNMHISOYSUGRZTKKRVNCLMRBOEECEOTIRTTNJZGFHUSNIGYRFCAPSDLBRARNCSySPUAPDIIBNLEENN2URA=WQAU=NRCUAULL—LSN(TBK0KE2D0HRS.RW..N0S9A4EE8N8M8OGT753ARP)+QCL0(A0.U2T.01X594x)
—8 MOHZTI SLV —8
KGZ GNQ
—9 —9
5.5 6.5 7.5 8.5 9.5 10.5 11.5 5.5 6.5 7.5 8.5 9.5 10.5 11.5
log (Real GDP Per Capita) log (Real GDP Per Capita)
Sources: UNCTAD and World Bank
Figure2.1 AggregateFDIStocksandDevelopment
Figure 2.1 presents outward and inward FDI stocks for a large number of countries.
In the left-hand panel, the logarithm of FDI stocks held by the sending country and
normalizedbythesendingcountry’sGDPisplottedagainstthelogarithmofthesending
country’sGDPpercapita.Intheright-handpanelthestocksofinwardFDIbydestination
country,normalized by destination country GDP,are plotted against the logarithm of
GDPpercapitabydestinationcountry.Inbothpanelsthebestlinearpredictorisdisplayed
as a line with the associated coefficients shown in the bottom right-hand corner.
These data show that developed countries are more engaged in both outward and
inward flows than less developed countries,but the positive relationship is much more
pronounced for outward flows.The outliers in both figures illustrate some of the defi-
ciencies of FDI data as a measure of real production activity. For instance,Hong Kong,
Singapore,Luxembourg,and Liberia have high levels of both inward and outward FDI
stocks which reflect in part firms’efforts to park ownership of global assets in low-tax
and weak-regulation countries.
Figure 2.1 suggests that there must be substantial two-way flows between countries.
The extent of these two-way flows can be measured by Grubel-Lloyd indices
(cid:2) (cid:3) (cid:3)(cid:4)
(cid:3)S −S (cid:3)
GL = 100× 1− ij ji ,
ij S +S
ij ji
where S is the stock of foreign direct investment owned by country i firms in country
ij
j.This index takes on a value of 100 when S = S and a value of 0 when the stock is
ij ji
one-way. High values of GL are associated with high levels of two-way flows.When
ij
computedforOECDdata,GL amongdevelopedcountrypartnersrangesfrom45to50,
indicating a high level of two-way FDI,while the average GL between developed and
developing countries tends to be only one-half as large.
ThepatternsofmultinationalproductionrevealedbytheFDIdatacanbecorroborated
by less comprehensive data on real activity from the United States. Most of the sales of
MultinationalFirmsandtheStructureofInternationalTrade 61
U.S. affiliates are made in developed countries while most of the affiliates active in the
United States are owned by parents located in developed countries. Furthermore,U.S.
related party trade data reveal that most of the trade between affiliates and their parents
into and out of the United States occurs between developed rather than developing
countries.We summarize these empirical regularities as the following fact:
Fact One:Multinational activity is primarily concentrated in developed countries
whereitismostlytwo-way.Developingcountriesaremorelikelytobethedestination
of multinational activity than the source.
We now turn from patterns in aggregate multinational activity to patterns across
industries. There is substantial variation across industries in the share of real activity
contributedbymultinationalfirms.Forinstance,datafromtheOECDrevealthatforeign
affiliates account for approximately a quarter of French manufacturing employment;
however,theemploymentshareiswelloverathirdincapitalintensiveandR&Dintensive
industrieslikeChemicalsandMachinery,whileitislessthanone-eighthinlabor-intensive
Food andTextile industries.This pattern repeats itself across developed countries.
The tendency of multinational activity to be concentrated in certain industries is
also evident in the share of international trade that occurs between parties related by
ownership.TheleftpanelofFigure2.2isconstructedusingtheU.S.related-partydataand
measuresofphysicalcapitalintensityfromtheNBERManufacturingdatabase.Itshows
thattheshareofU.S.importsthatoccurswithintheboundariesofmultinationalfirmsis
highlycorrelatedwiththelogarithmofthecapital–laborratiointhatindustry.Importsof
labor-intensiveproducts,suchasapparel(NorthAmericanIndustryClassificationSystem
(NAICS)3159)orfootwear(NAICS3162),aretransactedmostlyatarm’s-length,while
importsof heavilycapital-intensiveproducts,suchas motor vehicles(NAICS3361) and
pharmaceuticals (NAICS 3254),are traded within firm boundaries.The right panel of
Figure 2.2 depicts a similar strong positive correlation between the share of intrafirm
trade and R&D intensity,despite the existence of some notable outliers,such as motor
vehicle manufacturing (NAICS 3361).7
Another indication of the concentration of FDI in certain industries is the intra-
industrynatureofthetwo-wayFDIflowsobservedwithaggregatedata.Whencomputing
Grubel-Lloyd indices of intraindustry FDI into and out of the United States for four-
digitU.S.NAICSindustriesin2010,onefindsindicesthatgenerallyexceedone-halfand
are of a similar order of magnitude to those computed with trade data.We summarize
the evidence concerning the cross industry structure of the magnitude of FDI as the
following fact:
7R&DintensityistheratioofR&Dexpenditurestosales,constructedbyNunnandTrefler(2008)usingOrbisdata.We
excludefromthesampleintherightpanelthoseindustriesforwhichtheratioofR&Dexpenditurestosalesexceeds
one,butthepositiveandstatisticallysignificantcorrelationwithintrafirmtradeisrobusttotheirinclusion.
62 PolAntràsandStephenR.Yeaple
mports by NAICS 4, Average 2000-05 0000000.......13456789 yR=2= −(0 00..1.11824222)+(00..100285x) 32543361 mports by NAICS 4, Average 2000-05 0000000.......13945678 3361 yR=2=(000...309494510)+(00..104222)x 3254
m I m I
Share of Intrafir 00..0123 3315.59 43162 4.5 5 5.5 6 6.5 7 Share of Intrafir 00..012−5 −433.1155692 −4 −3.5 −3 −2.5 −2 −1.5
Log U.S. Capital/Employment by NAICS 4, Average 2000-05 Log (R&D Expenditure/Sales+0.01) by NAICS 4, Average 2000-05
Sources: U.S. Census RelatedParty Trade Database and NBERCES Manufacturing Industry Database Sources: U.S. Census RelatedParty Trade Database and Nunn and Trefler (2008)
Figure2.2 TheShareofIntrafirmImports,CapitalIntensity,andR&DIntensity
FactTwo:The relative importance of multinationals in economic activity is higher
incapital-intensiveandR&Dintensivegoods,andasignificantshareoftwo-wayFDI
flows is intraindustry in nature.
Akeyissueininternationaleconomicsistheroleofgeographyinaffectingthestruc-
tureofinternationalcommerce.Itiswellknownthatagravityequationfitsinternational
tradevolumeswell.Thesameistrueformanyaspectsofmultinationalactivity.Inserving
foreign markets,firms may choose to export their products from their source country
s to a destination country d. Let X be the aggregate value of exports from s to d.An
ds
alternative to exporting their product is to establish a foreign affiliate in country d to
servethelocalmarket.LetAS bethesalesoftheaffiliateslocatedincountryd thatare
ds
owned by parents in country s.The left-hand panel of Figure 2.3 plots the logarithm of
AS normalized by source and destination GDP against the logarithm of the distance
ds
between s and d,while the right-hand panel plots the logarithm of AS /X between
ds ds
the two countries against the logarithm of distance.8
The left-hand panel shows that a 1% increase in distance is associated with 0.57 fall
in affiliate sales.The right-hand panel shows that as distance increases affiliate sales are
falling less rapidly than trade volumes,so while gravity holds for affiliate sales,its effect
on trade volumes is stronger.
Thestrongereffectofdistanceontraderelativetoforeignaffiliateactivityalsoappears
within firms. Parent firms often produce components that are then shipped to foreign
affiliatesforfurtherprocessing.AccordingtoBEAdata,in2009theaggregatevalueadded
ofU.S.manufacturingaffiliateswasU.S.$474.5billionwhiletheimportsofintermediate
inputs by these affiliates from their parents totaled U.S. $104 billion.9 Figure 2.4 shows
8AffiliatesalesdataarefromRamondo(2013).Wethankherforsharingherdatawithus.
9 According to data highlighted by Ramondo et al. (2012) at the affiliate level much of these imports are highly
concentratedinasmallnumberofhighlyintegratedfirms.
MultinationalFirmsandtheStructureofInternationalTrade 63
26 4
yy=== −− 2288..1166−−00..557733xx y=− 2.877+0.318x
((00..665588))((00..008800)) (0.636)(0.078)
log(Affiliate Sales/GDP)GDPdsds 333332860428 RR22===00..114444 log(Affiliate Sales/Exports)dsds 3210123 R2=0.052
4
40 5
5 6 7 8 9 10 5 6 7 8 9 10
log (Distance between s and d) log (Distance between s and d)
Sources: Ramondo (2013) and World Development Indicators Sources: Ramondo (2013), Feenstra's trade data and World Development Indicators
Figure2.3 Gravity,FDISales,andTradeFlows
0
d)
e
dd CANMEX HND
e A —1 DOM HPKHGLMYS
u CHE TAI SGP
U.S. / Val —2 VCEONLECU PERIRGLBNBDEFRDELRSNDELBPAKCURAHARLGGRJCPKNFOCIHRNNNINZTLDZHAAAUFS
s from —3 NOSWRPAEITOUARTLUSNGA
ort CHZEUN ISR IDN
p TUR
m —4 PRT
e I
Affiliat —5 Ry2==3(02.1..08470915−)0(.05.93111x)
og ( EGY
l —6
7.5 8 8.5 9 9.5 10
log (Distance from United States)
Sources: Keller and Yeaple (2013)
Figure2.4 AffiliateImportsfromU.S.relativetoLocalValue-Added
that the logarithm of the ratio of the value of imported intermediates to the sum of
local value-added plus imported intermediates is declining in the distance between the
affiliate and the U.S. parent.This suggests that vertical specialization is harder at long
distances,butitisinterestingtonotethattheveryopenAsianeconomiesofHongKong,
Malaysia,the Philippines,Singapore,andTaiwan import large amounts of intermediate
inputs despite their distance from the United States.
64 PolAntràsandStephenR.Yeaple
The effect of distance on the structure of international trade and foreign affiliate
activity is summarized as the following fact:
Fact Three:The production of the foreign affiliates of multinationals falls off in
distance,butataslowerratethaneitheraggregateexportsorparentexportsofinputs
to their affiliates.
Wenowcomparetheperformanceofmultinationalstothatoffirmsthatdonotown
foreign operations. As noted in the introduction there are two distinct entities within
multinational firms,the parents and the affiliates.The BEA and the U.S. Census collect
alargeamountofinformationaboutthestructureoftheoperationsofU.S.-basedfirms.
FromthedataitispossibletocomparetheactivitiesofU.S.-basedparentswithotherfirms
thatareactiveintheUnitedStates.Inmanufacturingsectors,U.S.parentsaccountforless
thanone-halfof1%ofenterprisesbutaccountforover62%ofvalue-addedand58%of
employment(BarefootandMataloni,2011).Thesenumbersimplythatlaborproductivity
ishigherinmultinationalparentsrelativetononmultinationals.Inaddition,theseparents
account for almost three-quarters of private R&D conducted in U.S. manufacturing.
This latter observation is in part accounted for by the fact that many parent firms are
concentrated in R&D intensive industries. Mayer and Ottaviano (2007) provide similar
evidenceonthesuperiorperformanceofparentfirmsinGermany,France,Belgium,and
Norway.
Wenowmakeasimilarcomparisonoftheactivitiesofforeignaffiliateswithotherfirms
in their host country.Table 2.1 shows the share of economic activity (rows) of foreign
affiliates in their host country (columns) in manufacturing industries for a number of
OECD countries.The first row shows that the share of foreign affiliates in the total
number of manufacturing enterprises is typically very small.The share of affiliates in
manufacturing employment,output,and R&D expenditures,shown in the next three
rows,is larger by an order of magnitude.The last line shows that the share of foreign
affiliates in total manufacturing exports is even larger than their share in total sales and
employment.
Table2.1 AffiliatesRelativetoLocalFirms(PercentageAccountedforbyAffiliates)
Finland France Ireland Holland Poland Sweden
Enterprises 1.6 2.0 13.4 3.4 16.0 2.8
Employment 17.2 26.2 48.0 25.1 28.1 32.4
Sales 16.2 31.8 81.1 41.1 45.2 39.9
R&DExpenditure 13.1 27.4 77.3 35.8 20.9 52.0
Exports 17.5 39.5 92.3 60.0 69.1 45.8
Source:OECD(2007).