Working Paper: CEPR ID: DP4477
Authors: Gene Grossman; Elhanan Helpman; Adam Szeidl
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; Intrafirm trade; Multinational corporations; Vertical integration
JEL Codes: F12; F23; L22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Productivity levels (O49) | FDI in assembly operations (F23) |
| Fixed costs of foreign subsidiaries (F23) | Fraction of firms choosing to perform assembly abroad (F23) |
| Transport costs for final goods (L91) | Likelihood of firms choosing to produce intermediate goods in the same location as assembly operations (L23) |
| Regional composition of the consumer market (R22) | Optimal integration strategies (C61) |
| Productivity levels, Fixed costs of foreign subsidiaries, Transport costs for final goods, Regional composition of the consumer market (F12) | Integration choices (F15) |