Journal of Political Economy
In this paper we provide a quantitative analytical framework for analyzing trade and multinational production (MP), consistent with a set of stylized facts for trade and MP, among them that both exports and MP adhere to a gravity model. We propose a heterogeneous firm trade model where firms choose endogenously whether to serve foreign markets through MP or exports, where headquarters and affiliates are vertically integrated, and where firms face stochastic entry and demand shocks in each market. Using a unique firm-level data set on production, trade and MP, we establish key regularities about the entry and sales patterns of multinationals that support the model building blocks. We develop a new maximum likelihood estimator that connects the theory directly to the data and that allows us to identify key parameters of the model, explore its plausibility and implications. Our main result is that intra-firm trade plays a crucial role in shaping the geography of MP. This conclusion is robust to any geographical distribution of fixed costs.
Irarrazabal, Alfonso; Moxnes, Andreas; and Opromolla, Luca David, "The Margins of Multinational Production and the Role of Intrafirm Trade" (2010). Open Dartmouth: Faculty Open Access Articles. 1767.