The Vertical Multinational Enterprise and International Trade

This paper analyzes an endogenous vertical multinational enterprise by explicitly modeling a distortion in the intermediate goods sector. Firms invest abroad to lower the cost of multistage production. The implications for international trade and investment differ markedly from the conventional wisdom of multinationals. Particularly, intrafirm trade in intermediates implies vertical investment complements rather than substitutes for trade. The decision to become a multinational depends on the level on foreign factor prices, the nature of the competition with foreign suppliers, transport, tariffs, and subsidiary plant costs. Marginal change in tariff may result in unintended welfare jumps as firm configuration shifts.     

Intrafirm trade and the developing countries: an assessment of the data

The state of general empirical knowledge of the extent of and trends in intrafirm international trade are surveyed with attention concentrated on United States and Canadian data sources. Focus is on conceptual and definitional distinctions, U.S. trade with U.S. majority-owned foreign affiliates, U.S. related-party imports, international subcontracting and value added tariffs, aggregative data from individual developing countries, and customs documents as micro-level data soruces. In this effort to outline the reasons for the growing concern with the phenomenon of intrafirm trade and to summarize the most readily available data on its nature and growth, the following were among the important points made: 1) it is essential to arrive at clear and uniform definitions as to what is meant by "intrafirm trade"; 2) the share of U.S. non-petroleum imports from developing countries which originates in majority-owned foreign affiliates of U.S. firms is declining; 3) very high proportions of some U.S. imports from developing countries originate with "related parties," and there are frequently large differences between import unit values in related-party trade and those in non-related-party trade; 4) international subcontracting, as indicated by the usage of value added tariff provisions, continues to be a rapidly growing element in manufactured goods trade between the U.S. and developing countries; and 5) further data should be collected and empirical research conducted.     

Tax-motivated transfer pricing and US intrafirm trade prices

This paper analyzes monthly data on US international trade prices between 1997 and 1999 in order to investigate the impact of tax influences on intrafirm trade prices. Results indicate that there is substantial evidence of tax-motivated transfer pricing in US intrafirm trade prices. There is a strong and statistically significant relationship between countries’ tax rates and the prices of intrafirm transactions. Controlling for other variables that affect trade prices, as country tax rates are lower, US intrafirm export prices are lower, and US intrafirm import prices are higher. This finding is consistent with theoretical predictions regarding tax-motivated income shifting behavior.     

Commercial Policy Towards Multinational Corporations Under Imperfect Information*

This paper examines host country government (HCG) commercial policy towards imports resulting from intrafirm trade conducted by a multinational corporation (MNC). the effectiveness of the HCG's commercial policy is impaired by its limited information about the MNC's cost of production. the commercial policy consists of restrictions on intrafirm transactions. We construct and characterize the optimal commercial policy under imperfect information and find that under imperfect information the optimal policy entails a distorted transfer price and a lower level of intrafirm trade relative to the full information case. Welfare implications of commercial policy under imperfect information are also examined.     

Partisan Cycles in Offshore Outsourcing: Evidence from U.S. Imports

The wage and employment effects of offshoring roil politics in the United States and around the world. Firms that offshore either outsource their activities to unaffiliated businesses, or internalize production by establishing subsidiaries from which they import intrafirm. We argue that the political environment in trade partner countries influences U.S. offshoring patterns in ways that have been ignored in the extant literature. Drawing on the political business cycle literature, we expect higher production costs and lower profits for firms in capital (labor) intensive sectors when the Left (Right) is in power. These partisan cycles, in turn, shape the sectoral composition of exports from the partner to the United States, and the degree to which trade is conducted intrafirm. Under a Left‐ (Right‐) leaning government in a partner country, U.S. intrafirm imports of capital‐ (labor‐) goods increase relative to total imports in these industries. Examining highly disaggregated U.S. import data, we find strong support for our argument. Our results indicate that the effect of partisan governments on offshore outsourcing depends on factor intensities of production, which vary across industries. The degree of internalization in global sourcing is shaped in part by the distributional objectives of partisan governments, and not by economic factors alone.     

The demand for tax haven operations

What types of firms establish tax haven operations, and what purposes do these operations serve? Analysis of affiliate-level data for American firms indicates that larger, more international firms, and those with extensive intrafirm trade and high R and D intensities, are the most likely to use tax havens. Tax haven operations facilitate tax avoidance both by permitting firms to allocate taxable income away from high-tax jurisdictions and by reducing the burden of home country taxation of foreign income. The evidence suggests that the primary use of affiliates in larger tax haven countries is to reallocate taxable income, whereas the primary use of affiliates in smaller tax haven countries is to facilitate deferral of U.S. taxation of foreign income. Firms with sizeable foreign operations benefit the most from using tax havens, an effect that can be evaluated by using foreign economic growth rates as instruments for firm-level growth of foreign investment outside of tax havens. One percent greater sales and investment growth in nearby non-haven countries is associated with a 1.5 to 2% greater likelihood of establishing a tax haven operation.     

Vertical foreign direct investment: Make,buy, and sell

According to conventional wisdom, multinational enterprises (MNEs) undertake vertical FDI to take advantage of cross‐border factor cost differences and source inputs from abroad at better terms. However, recent empirical studies document many instances in which intrafirm trade between parent firms and their vertically related foreign affiliates is absent. We provide theoretical support for these findings, demonstrating that a firm can engage in vertical FDI to exploit its intangible assets in another country and improve its input sourcing terms domestically by enhancing its cross‐threat. Furthermore, we show that the welfare implications of vertical FDI on the home and host country are neither always positive nor aligned.     

Self‐protection? Antidumping Duties,Collusion, and FDI*

It is well established that the threat of antidumping duties can help sustain collusion between a foreign firm and its domestic counterpart. However, when the foreign firm is a multinational with a subsidiary in the domestic country, that subsidiary can undermine efforts for protection, thereby diminishing the threat of duties that would otherwise sustain collusion. Accordingly, we show that the multinational may choose to submit to a tariff even under collusion since evidence indicates that duties are more difficult to remove than initiate. In this way, it is possible to obtain a greater degree of commitment, although it comes at a cost. Nevertheless, we prove that this can be a more profitable strategy than those previously explored. Thus, a parent firm may instruct its subsidiary to support duties against the parent. In fact, we find several cases where subsidiaries of multinationals have indeed filed for protection from their own parents.     

Buyer investment, export variety, and intrafirm trade

This paper studies a model of buyer investment and its effect on the variety and vertical structure of international trade. A distinction is made between two types of buyer investment: “Flexible” and “specific”, which differ in the ability of a buyer to match with a seller. The interaction of buyer investment with the entry and pricing incentives of suppliers are analyzed. It is shown that (i) there can be multiple equilibria in the variety of products traded, and (ii) less product variety is associated with more intrafirm trade. The possibility of multiple equilibria is consistent with the observation that some similar economies, such as Taiwan and South Korea, differ substantially in their export varieties to the U.S. A cross-country empirical analysis confirms the negative correlation between export variety and intrafirm trade.     

Firm heterogeneity in sources of total factor productivity growth for Japanese manufacturing firms

We investigate firm heterogeneity in productivity sources across technology sectors for Japanese manufacturers. Firm heterogeneity in productivity sources conveys more information about firm-specific differences in productivity. In this regard, large firms are more productive, largely because they are more innovative, despite being slow to catch up during booms or operating at a less-than-efficient scale. We find that the beneficial impact of exports on productivity is most evident when firms become exporters, and intrafirm trade causes enough inefficiency to offset the salutary effects of trade after a certain threshold. Notably, firm heterogeneity in productivity varies considerably across the technology sectors.     

Strategic Foreign Direct Investment and Exchange‐Rate Uncertainty

We investigate how exchange‐rate uncertainty affects the foreign direct investment decision of a risk‐neutral multinational firm (MNF). We assume the firm can open plants, each with decreasing average costs, in two different countries. Under certainty, the MNF would open only one plant. We demonstrate that with sufficient exchange‐rate volatility, the firm can increase expected profits by opening several plants. We also show that if the MNF faces a competitor in the foreign market, the exchange risk, by inducing the MNF to open plants in both markets, may prevent entry by the local competitor.     

Host country's strategic policies and multinational firm's choice of entry mode

This paper examines the effects of contract enforceability and market structure on a firm's choice between licensing and foreign direct investment. Clearly, the firm's choice impacts upon social welfare in the host country. Therefore, the government of the host country is likely to set contract enforceability for inducing the multinational firm (MNF) to choose a desirable mode of entry. The paper takes into account two different cases. In the first case, the host country does not have an incumbent that can compete with the MNF, and in the second case, it has one incumbent that can compete. The paper shows that the government's choice of contract enforceability is crucially dependent upon the domestic market structure and the domestic capacity to absorb the advanced technology of the MNF.     

Optimal Tariff Policy on Imports from Multinationals*

Using partial equilibrium analysis, it is shown that for small countries there is an optimal tariff on imports from a monopolistic multinational. There is also (under specified circumstances) a tariff at which the multinational finds subsidiary production more profitable than exports: the switchover tariff. The interaction between the optimal and switchover tariffs is analyzed from the small country's welfare standpoint. The conclusion is that there is not one, but a variety of possible optimal policies for the country: trade at the optimal tariff, with or without prohibition of subsidiary production, or tariff-protected subsidiary production.     

National Border Effects: Location, Not Nationality, Matters

A recent literature documents the downward impact of national borders on trade. This paper probes the relative importance of two potential sources of border effects: (1) pure locational factors, such as transport costs and tariffs; and (2) an inherent disadvantage for a firm selling in a foreign market. I am able to make this decomposition by using data on the local sales of foreign affiliates of US multinational enterprises, on US bilateral exports, and on domestic sales by host‐country firms. The “border effect” arises almost entirely from locational factors. If a firm establishes and sells from a subsidiary located in the foreign country, its local sales are about on a par with those of domestic firms in that market.     

Foreign exchange rates and the corporate choice of foreign entry mode

This study is the first attempt at examining the effects of foreign exchange (FX) rate and volatility on the corporate choice of foreign entry mode and shareholder wealth. For all worldwide US-related foreign direct investments (FDIs) announcements in 1995, we find evidence that, on average, a stronger home currency is related to a higher propensity to choose a subsidiary and that the change in shareholder wealth around subsidiary announcements is greater when the home currency is stronger for non-US parents. On the effects of host currency volatility, the data support the flexibility option (international diversification) hypothesis for the US (non-US) parents.     

Mergers and Trade Policy under Oligopoly

For an oligopolistic industry, the effects of mergers on the domestic country's optimal trade policy are analyzed. If the domestic country pursues an optimal trade policy then it will always lose as a result of a foreign merger. The optimal domestic response to a foreign merger is to decrease (increase) the tariff if demand is concave (convex) and to increase the production subsidy. The foreign merger reduces foreign welfare when the domestic country pursues its optimal trade policy. The optimal domestic response to a domestic merger is to leave the tariff unchanged and to increase the production subsidy.     

U.S. EXTERNAL ADJUSTMENT: IS IT DISORDERLY? IS IT UNIQUE? WILL IT DISRUPT THE REST OF THE WORLD?

This article focuses on the historical experience with U.S. external adjustment, that is, narrowings of the trade deficit. Using data from the past 35 years, we compare economic performance in episodes during which the U.S. trade balance declined against episodes during which it rose. We find that trade balance adjustment has been generally benign: U.S. real gross domestic product growth tended to fall but not to a statistically significant extent; housing construction slumped; inflation generally rose modestly; and although nominal interest rates tended to rise, real interest rates fell. The article then compares these outcomes to those in foreign industrial economies. We find that the economic performance of the United States during periods of external adjustment is remarkably similar to the foreign experience. Finally, we also examine the performance of the foreign industrial economies during the periods when the U.S. trade deficit widened and narrowed. Contrary to concerns that U.S. adjustment will prove injurious to foreign economies, our analysis suggests that the foreign economies fared reasonably well during past periods when the U.S. trade deficit narrowed. ( JEL F32, F41)     

Welfare‐reducing Domestic Cost Reduction*

We show that cost reduction by a domestic firm may reduce domestic welfare if it changes a foreign firm’s production strategy from foreign direct investment to export. Domestic cost reduction can be welfare reducing when the domestic market is sufficiently small and domestic firm’s marginal cost of production is higher than the foreign firm’s marginal cost of production under foreign direct investment, which is a usual feature of trade between developed and developing countries. So, developing countries with small domestic markets need competent competition policies when encouraging domestic innovation and also trying to attract foreign direct investment.     

国外贸易保护措施对中国制造业出口的影响——来自企业层面的微观证据

当前,以贸易保护主义为主要特征的"逆全球化"思潮涌现,国外的贸易保护措施对中国制造业的出口增长构成严重的威胁.那么,这些贸易保护措施对中国制造业的出口到底产生了怎样的影响?其内在机制是什么?文章采用2009?2011年GTA数据库与中国海关统计数据库的合并数据,从企业这一微观层面定量识别国外贸易保护措施对中国制造业出口的实际影响.研究发现:(1)国外贸易保护措施的实施显著地降低了受影响企业的出口规模,贸易保护措施的数量每增加1次,受影响企业的出口将下降17%左右;贸易保护强度每增加1个单位,受影响企业的出口将下降52%左右.(2)从影响机制看,国外贸易保护措施对制造业出口的抑制效应是通过降低出口的数量和质量来实现的.(3)贸易融资对制造业出口的边际影响最大,而贸易救济措施是对制造业出口整体影响最大的贸易保护措施.(4)国外贸易保护措施对外资企业、同质产品以及中间品出口的抑制作用更明显.文章的研究结论既为理解贸易保护主义的危害提供了经验证据,也为中国在持续推动对外开放背景下如何应对贸易保护壁垒提供了决策依据.     

Restricted origin principle under triangular trade flows: Implications for trade and tax revenues

In this paper we try to show that, even when we allow for the assumptions embodied in the standard literature of border tax adjustments, and furthermore restrict ourselves to the case of uniform as well as general taxes, across products and countries, the choice between origin and destination principles need not be irrelevant. In particular, when a triangular trade flow of products takes place between two states of a federation and foreign countries, unless the same principle of border tax adjustments is adopted on both domestic and foreign trade, part of the state tax base is transferred from one state to the other, leading to an undesirable reallocation of local tax revenues. We found that adoption by the Brazilian states of the restricted origin principle (origin principle applied to interstate trade and destination principle applied to foreign trade) led to a reallocation of local tax revenues from the Northeastern states to the residents of the rest of country. An obvious implication of this analysis is that reallocation of tax revenues due to bilaterally unbalanced trade could be easily adjusted by adoption of the same principle, origin or destination, for both domestic and foreign trade.