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Multinational Production and Intra-firm Trade

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dc.description.abstract A salient empirical regularity of multinational production (MP) is that foreign affiliate sales are decreasing in trade costs. As a response, intra-firm trade, from parents to foreign affiliates, as been combined with standard models of horizontal MP to generate complementarities between trade and multinational activity that deliver gravity-style predictions for foreign affiliates' sales. However, intra-firm trade is not common across foreign affiliates but rather concentrated among a small set of large multinational firms (Ramondo et al., 2014). In addition, we document that not only firms in the upper-tail of the firm's size distribution, which are more likely to conduct intra-firm transactions, are subject to gravity forces; but also sales of relatively small foreign affiliates are significantly affected by geographical barriers. Two puzzles emerge: (i) why intra-firm trade is concentrated among the largest multinational firms? and (ii) what are the mechanisms that drive affiliates' sales in the lower tail of the distribution to obey gravity forces, even in the absence of intra-firm trade? In this paper we deliver a framework to explain theses two phenomenas. An affiliate's marginal cost is affected by the parent decision regarding the method of knowledge transfer. Exporting intermediate inputs embodying knowledge to an affiliate is subject to the standard iceberg-type trade costs and fixed costs of intra-firm trade. The costs of direct knowledge transfer are also increasing with geographical barriers but rises less than the costs of exporting intermediate inputs. Because of the fixed costs of intra-firm trade, only the most productive multinational firms choose to export to its affiliates. Moreover, the share of imported intermediate inputs to the affiliate's total costs is increasing with firm's productivity. We show that, in equilibrium and taking into account both the intensive and the extensive margins, foreign affiliates' sales for both the affiliates who import and do not import from parents suffer from gravity forces. en
dc.title Multinational Production and Intra-firm Trade en
dc.contributor.author Alviarez, Vanessa
dc.contributor.author Saad, Ayhab
dc.date.accessioned 2018-02-26T17:07:30Z
dc.date.available 2018-02-26T17:07:30Z
dc.date.issued 2018-02-26
dc.identifier.uri http://lacer.lacea.org/handle/123456789/64803
lacea.language.supported en
dc.description Working paper
dc.language.iso en
dc.subject Intra-firm Trade
dc.subject Multinational Production
dc.type Working Paper


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