Working Paper: CEPR ID: DP7145
Authors: Alfonso Irarrazabal; Andreas Moxnes; Luca David Opromolla
Abstract: In this paper we ask why the gravity model of international trade also work well for foreign direct investment (FDI) flows or multinational production (MP). We propose a model of trade and horizontal FDI, where the subsidiary is allowed to source inputs from the headquarters. Under certain parameter values, the model will generate gravity relationships for both exports and MP. Matching the model with data using a unique firm-level dataset of both exports and MP reveals the following results. First, intra-firm trade appears to play a crucial role in shaping the geography of MP. Our conclusions are robust to any geographical distribution of fixed costs. Second, counterfactual experiments show that impeding FDI leads to reduced domestic labor demand by the headquarters, suggesting that outwards FDI may have positive effects on home employment.
Keywords: Export; FDI; Gravity; Intrafirm Trade; Multinational Production
JEL Codes: F10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| intrafirm trade (F12) | geography of multinational production (MP) (F23) |
| impeding FDI (F23) | reduced domestic labor demand by headquarters (J29) |
| outward FDI (F23) | home employment (D13) |
| fixed costs of exporting (F10) | distance (R12) |
| fixed costs of conducting FDI (F23) | distance (R12) |
| reducing barriers to FDI (F23) | domestic labor market (J49) |
| barriers to FDI (F23) | home employment (D13) |