Working Paper: NBER ID: w14891
Authors: Pol Antràs; C. Fritz Foley
Abstract: This paper analyzes the effects of the formation of a regional trade agreement on the level and nature of multinational firm activity. We examine aggregate data that captures the response of U.S. multinational firms to the formation of the ASEAN free trade agreement. Observed patterns guide the development of a model in which heterogeneous firms from a source country decide how to serve two foreign markets. Following a reduction in tariffs on trade between the two foreign countries, the model predicts growth in the number of source-country firms engaging in foreign direct investment, growth in the size of affiliates that are active in reforming countries both before and after the tariff reduction, and an increase in the extent to which the sales of affiliates in reforming countries are directed towards other reforming countries. Analysis of firm-level responses to the creation of the ASEAN free trade agreement yields results that are consistent with these predictions.
Keywords: regional trade agreements; foreign direct investment; multinational firms; ASEAN Free Trade Agreement
JEL Codes: F13; F21; F23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lower trade barriers (F19) | increase in number of Western firms operating in Southeast Asia (F23) |
| gross entry and exit of Western affiliates (F29) | net increase in number of affiliates (G29) |
| formation of AFTA (F15) | increase in number of U.S. firms engaging in foreign direct investment (F23) |
| formation of AFTA (F15) | growth in sales, assets, employment, and compensation of existing affiliates (L25) |
| formation of AFTA (F15) | increase in share of sales directed towards third countries (F10) |