Working Paper: CEPR ID: DP2827
Authors: Salvador Barrios; Holger Grg; Eric Strobl
Abstract: According to the ?convergence hypothesis?, multinational companies will tend to displace national firms and trade as total market size increases and as countries converge in relative size, factor endowments, and production costs. Using a recent model developed by Markusen and Venables (1998) as a theoretical framework, we explicitly develop and address the properties of empirical measures to proxy displacement of national by multinational firms between two countries. These empirical measures are then used to test the convergence hypothesis for a panel of data of country pairs over the years 1985-96. Our results provide some empirical support for the convergence hypothesis.
Keywords: convergence; multinational enterprises; new trade theory
JEL Codes: F21; F23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| total market size increases (D40) | MNEs displace national firms (F23) |
| countries converge in relative size (R12) | MNEs displace national firms (F23) |
| factor endowments converge (F62) | MNEs displace national firms (F23) |
| R&D intensity increases (O32) | bilateral MNE activity increases (F23) |
| transportation costs increase (R41) | bilateral MNE activity decreases (F23) |
| common language increases (F36) | MNEs displace national firms (F23) |
| greater distances between capitals increase (R12) | MNEs displace national firms decrease (F23) |
| differences in relative endowments (D29) | MNE activity impact is mixed (F69) |