Working Paper: CEPR ID: DP9029
Authors: Peter Debaere; Hongshik Lee; Joonhyung Lee
Abstract: We study the significant variation in intrafirm versus arm?s-length trade with micro data. Exploiting the fact that Korean is an uncommon second language and that Korean culture is relatively homogenous, we show how intrafirm sourcing by South Korean affiliates abroad increases with their share of South Korean employees. This positive association is pervasive and nontrivial. Parsing the data more carefully, we find that South Korean employees are primarily high skilled, and that their presence matters for internal trade, not for trade with South Korea per se. The share of South Koreans is also higher in affiliates from nonroutine sectors in host countries that are culturally distant from South Korea. Our empirical evidence thus supports especially Costinot, Oldenski and Rauch (2011)?s view of multinational in-house production for nonroutine activities that require adaptation and internal communication.
Keywords: intrafirm trade; multinationals
JEL Codes: F1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Intrafirm sourcing (L14) | Internal communication and problem-solving (O36) |
| Internal communication and problem-solving (O36) | Likelihood of intrafirm transactions (L14) |
| Share of South Korean employees (J31) | Internal communication and problem-solving (O36) |
| Share of South Korean employees (J31) | Intrafirm sourcing (L14) |
| Share of South Korean employees (J31) | Intrafirm sourcing (in less routine sectors) (L14) |
| Share of South Korean employees (J31) | Intrafirm sourcing (in culturally distant environments) (L22) |