Size, Geography, and Multinational Production

Natalia Ramondo

No 472, 2006 Meeting Papers from Society for Economic Dynamics

Abstract: This paper analyzes the cross-country allocation and volume of multinational production, quantifies its barriers, and assesses its impact on welfare. From the patterns of multinational production across countries, three facts stand out: a small fraction of country-pairs engages in multinational activities with each other; geography remains a significant impediment to the expansion of such activities; and country size matters. I introduce multinational production in a competitive, multi-country, general equilibrium model with bilateral fixed costs that qualitatively reproduces these facts. The model delivers an equation for sales of foreign affiliates that predicts zero as well as positive volumes between country-pairs, and where positive flows are related to technology, size, and barriers. Using data on bilateral sales of affiliates, for OECD and non-OECD countries, I estimate barriers to multinational activities using an indirect inference procedure. Estimates suggest that distance remains a significant impediment, with countries twice as distant facing a 50% higher cost; policy variables, such as preferential treaties and taxes, have small effects. Finally, welfare calculations show that there are large, unrealized gains of removing bilateral barriers to multinational production

Keywords: multinaional firms; Foreign Direct Investment; gravity (search for similar items in EconPapers)
JEL-codes: F1 F2 (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (8)

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