Working Paper: NBER ID: w7163
Authors: Robert Lipsey; Irving Kravis; Magnus Blomstrom
Abstract: An important component of Robert Lipsey's work has been his research on multinational firms, and his careful documentation of their behavior in terms of production and intra-firm trade. In this paper, we extend recent theory referred to as the knowledge-capital model', which simultaneously generates motives for both horizontal and vertical multinational production. We use this model to derive predictions about foreign affiliates' pattern of production for local markets versus production for exports as functions of country characteristics such as market sizes, size differences, and relative endowment differences. These predictions are then taken to data on affiliate production and trade. Results confirm several hypotheses. The ratio of production for export sales to production for local sale by affiliates of foreign multinationals depends negatively on market size, investment and trade costs in the host country, and positively on the relative skilled-labor abundance of the parent country (skilled-labor scarcity of the host country).
Keywords: Foreign Direct Investment; Trade; Multinational Enterprises; Market Size; Skilled Labor
JEL Codes: F21; F23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Market Size (L25) | Local Sales of Foreign Affiliates (F23) |
| Trade Costs (F19) | Local Sales of Foreign Affiliates (F23) |
| Skilled Labor Endowments (J24) | Local Sales of Foreign Affiliates (F23) |
| Skilled Labor Endowments (J24) | Export Sales (F10) |
| Market Size (L25) | Export Sales (F10) |
| Trade Costs (F19) | Export Sales (F10) |
| Investment Barriers (F21) | Local Sales of Foreign Affiliates (F23) |
| Investment Barriers (F21) | Export Sales (F10) |