An Empirical Assessment of the Factor Proportions Explanation of Multi-National Sales

Abstract

This paper provides empirical evidence that challenges the factor proportions explanation of multinational activity. The same tests on intra-industry ratios and total volumes that were used to demonstrate that a substantial part of trade is explained by factor proportions and income similarities rather than differences are applied to affiliate sales with surprisingly similar results. Some support for the factor proportions hypothesis is derived by comparing affiliate production destined for export to the parent's market, which is the category of activity most likely to be motivated by factor proportions considerations, with that destined for sale in the local market. Affiliate production destined for export home is moderately more responsive to factor proportions differences. However, the two types of activity differ more in their responses to transport costs and destination market income. Overall, the evidence suggests that only a small part of multinational activity into and out of the U.S. in the late 1980s can be explained by factor proportions differences.