Working Paper: CEPR ID: DP6341
Authors: Dalia Marin; Thierry Verdier
Abstract: Recent theories of the multinational corporation introduce the property rights model of the firm and examine whether to integrate our outsource firm activities locally or to a foreign country. This paper focus instead on the internal organization of the multinational corporation by examining the power allocation between headquarters and subsidiaries. We provide a framework to analyse the interaction between the decision to serve the local market by exporting or FDI, market access and the optimal mode of organization of the multinational corporation. We find that subsidiary managers are given most autonomy in their decision how to run the firm at intermediate levels of local competition. We then provide comparative statistics for changes in fixed FDI entry costs and trade costs, information technology, the number of local competitors, and in the size of the local market.
Keywords: foreign direct investment; international organization of production; power allocation in the firm
JEL Codes: D23; F1; F2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Local competition increases (L13) | Subsidiary managers are given more autonomy in decision-making (L22) |
| Subsidiary managers are given more autonomy in decision-making (L22) | Increased initiative in project selection (O22) |
| Low trade costs (F19) | Centralized decision-making process (p-multinational) (F23) |
| Intermediate levels of trade costs and local competition (F12) | Decentralized structure (a-multinational) becomes preferred (L22) |
| High levels of local competition (L13) | Organizational structure may revert to omultinational configuration (L22) |