Interdependence in Multinational Production Networks

The majority of multinational firms today operate a multilateral production network. Most existing empirical analyses have, however, focused on firms' choice between producing at home and investing overseas and assumed that a firm's decision to invest in a foreign country is independent of its locations in third countries. This paper examines the effect of existing production network on multinationals' entry decision. Using detailed French multinational subsidiary level data, the paper finds strong evidence of horizontal and vertical interdependence across multinationals' foreign production locations. There is, however, little evidence of horizontal interdependence between home-country production and foreign investment when the third-country effects are taken into account, constituting a sharp contrast to the conventional emphasis. This result is robust to the various specifications and sensitivity analyses undertaken in the paper, and highlights the importance of investigating the causes and effects of foreign direct investment in the context of multinational production network.multinational firm, production network, interdependence, entry decision, trade cost, input-output linkage

Interdependence in Multinational Production Networks

Most multinational firms today operate multilateral production networks. Most existing empirical analyses, however, have focused on firms' choice between producing at home and investing overseas. This paper uses detailed French multinational subsidiary data to examine the effect of existing production networks on multinationals' entry decisions. The paper finds strong horizontal and vertical interdependence across multinationals' foreign production locations, but little interdependence between home and foreign production when third-country effects are taken into account. This result constitutes a sharp contrast to the conventional emphasis, and highlights the importance of investigating foreign direct investment in the context of multinational production networks.multinational firm, production network, interdependence, entry decision, trade cost, input-output linkage

The Matching of Heterogeneous Firms and Politicians

We use a unique Chinese firm-director panel dataset and a simple assignment model to examine the matching mechanism of heterogeneous firms and politicians. Based on 36,308 detailed biographies, we identify directors that previously held bureaucratic positions and classify the rank of each position in the Chinese political hierarchy. We address three questions using this direct measure of political capital: First, how do firms with heterogeneous productivity match with politicians with different political ability? Second, what determines the price of political capital? Finally, is there significant short-term return from political investment? Our results indicate that more productive firms are more likely to hire politically endowed individuals. The incentive increases in the dependence on external financing and decreases in the extent of foreign ownership. Conditional on the probability of being hired, individuals with greater political ability receive more compensation than their co-workers. One-step increase in political ladder from municipal to provincial level is equivalent to an annual pay increase of US$17,359. Education attainment, on the other hand, has little effect. The estimated return of political investment is sensitive to the control of matching, stressing the importance of taking into account the endogeneity of politician recruitment.Firm heterogeneity, politician, political hierarchy, matching

Third Country Effects in Multinational Production Networks

The majority of multinational firms today operate a multilateral production network. Most existing empirical analyses have, however, focused on firms' choice between producing at home and investing overseas and assumed a firm's decision to invest in a foreign country is independent of its locations in third countries. This paper extends the literature by examining the effect of existing production network on multinationals' entry decision. Using detailed French multinational subsidiary-level data, the paper finds strong evidence of horizontal and vertical interdependence across multinationals' foreign production locations. There is, however, little evidence of horizontal interdependence between home-country production and foreign investment when the third-country effects are taken into account, constituting a sharp contrast to the conventional emphasis. This result is robust to the various specifications and sensitivity analyses undertaken in the paper, and suggests the importance of investigating the causes and effects of foreign direct investment in the context of multinational production networkmultinational firm, production network, interdependence, entry decision, trade cost, input-output linkage

Regional Economic Integration and Geographic Concentration of Multinational Firms

A number of theoretical studies have predicted that preferential trade agreements (PTAs) raise outside multinationalsí incentive to invest in the participating countries, especially in those that are integrated with larger markets and have lower production costs. The hypothesis has however not been tested empirically. This paper addresses the issue by estimating the impact of PTAs on countriesí ability to attract multinationals. The evidence is broadly consistent with expectations. The formation of PTAs leads to an increase in FDI by outside multinationals, but the e§ect varies sharply with the size of integrated markets and countriesí comparative advantage. Countries integrated with larger markets experience a greater increase in total and export-platform FDI. Those with a higher labor endowment also attract more FDI especially in labor-intensive industries, but at the expense of their labor-scarce PTA partners.regional economic integration, multinational Örms, geographic concentration, market potential, comparative advantage

Third-Country Effects on the Formation of Free Trade Agreements

The recent proliferation of free trade agreements (FTAs) has resulted in an increasingly complex network of preferential trading relationships. The economics literature has generally examined the formation of FTAs as a function of the participating countries' economic characteristics alone. In this paper, we show both theoretically and empirically that the decision to enter into an FTA is also crucially dependent on the participating countries' existing FTA relationships with third countries. Accounting for the interdependence of FTAs helps to explain a significant fraction of FTA formations that would not otherwise be predicted by countries' economic characteristics.free trade agreements, third-country effect, loss sharing, concession erosion

Regionalism in standards - good or bad for trade?

Regional agreements on standards have been largely ignored by economists and unconditionally blessed by multilateral trade rules. The authors find, theoretically and empirically, that such agreements increase trade between participating countries but not necessarily with the rest of the world. Adopting a common standard in a region-that is, harmonization-boosts exports of excluded industrial countries to the region. But it reduces exports of excluded developing countries, possibly because developing country firms are hurt more by an increase in the stringency of standards and benefit less from economies of scale in integrated markets. Mutual recognition agreements are more uniformly trade promoting unless they contain restrictive rules of origin, in which case intra-regional trade increases at the expense of trade with other, especially developing, countries. The authors propose a modification of international trade rules to strike a better balance between the interests of integrating and excluded countries.Labor Policies,Economic Theory&Research,Trade Policy,Environmental Economics&Policies,Health Economics&Finance,Environmental Economics&Policies,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Trade and Regional Integration,Economic Theory&Research,Health Economics&Finance

Third-Country Effects on the Formation of Free Trade Agreements

The recent proliferation of free trade agreements (FTAs) has resulted in an in- creasingly complex network of preferential trading relationships. The economics literature has generally examined the formation of FTAs as a function of the par- ticipating countries' economic characteristics alone. In this paper, we show both theoretically and empirically that the decision to enter into an FTA is also crucially dependent on the participating countries' existing FTA relationships with third countries. Accounting for the interdependence of FTAs helps to explain a significant fraction of FTA formations that would not otherwise be predicted by countries' economic characteristics.free trade agreements, third-country e§ect, loss sharing, concession erosion

Regionalism in Standards: Good or Bad for Trade?

Regional agreements on standards have been largely ignored by economists and blessed by multilateral trade rules. Using a constructed panel data that identifies the different types of agreements at the industry level, we find that such agreements increase the trade between participating countries but not necessarily with the rest of the world. Harmonization of standards may reduce the exports of excluded countries, especially in markets that have raised the stringency of standards. Mutual Recognition Agreements are more uniformly trade promoting unless they contain restrictive rules of origin, in which case intraregional trade increases at the expense of imports from other countries.regionalism, standard, harmonization, MRA, rules of origin

Location decision of heterogeneous multinational firms

We examine how multinational firms with heterogeneous total factor productivity (TFP) self-select into different host countries. Both aggregate- and firm-level estimates suggest that more productive French firms are more likely than their less efficient competitors to invest in relatively tough host countries. Countries with a smaller market potential, higher fixed costs of investment or lower import tariffs tend to have higher cutoff productivities and attract a greater proportion of productive multinationals. This self-selection mechanism remains largely robust when we control for unobserved firm and country heterogeneity and address the potential TFP endogeneity.multinational firm, location decision, firm heterogeneity, productivity