An Empirical Assessment of the Proximity-Concentration Tradeoff between Multinational Sales and Trade / S. Lael Brainard.

By:

Brainard, S. Lael

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w4580.Publication details: Cambridge, Mass. National Bureau of Economic Research 1993.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: This paper empirically investigates the role of transport costs, trade and investment barriers, production scale economies, and firm- specific advantages in determining the use of overseas production relative to exports. The proximity-concentration hypothesis is robust in explaining the share of total sales accounted for by affiliate sales: this share is greater the higher are transport costs and trade barriers and the lower are plant scale economies and investment barriers. Although strictly speaking, the proximity-concentration hypothesis applies to the shares of affiliate sales and exports rather than the levels, the effects of trade and investment barriers on the levels are similar to their effects on the shares, controlling for simultaneity, and so is that of freight factors in the trade estimates. The elasticity of inward and outward net affiliate sales with respect to tariffs is around 0.45, and that with respect to NTBs is an additional 0.17. The elasticity of both imports and exports with respect to freight factors is -1. However, the effect of freight factors on the level of affiliate sales is not robust, and the probability of observing any affiliate sales is increasing in proximity. The overall complementarity between trade and affiliate sales arises in part because relative income and intellectual property intensity increase both. In contrast, affiliate sales and trade move in opposite directions with increases in advertising intensity, suggesting that advertising-intensive products require a local presence.

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Previous	nber w4577 Evidence on Macroeconomic Complementarities /	nber w4578 The Dynamics of High Inflation /	nber w4579 The Effect of Equity Barriers on Foreign Investment in Developing Countries /	nber w4580 An Empirical Assessment of the Proximity-Concentration Tradeoff between Multinational Sales and Trade /	nber w4581 Tax Evasion and the Allocation of Capital /	nber w4582 Energy Taxes: Traditional Efficiency Effects and Environmental Implications /	nber w4583 An Empirical Assessment of the Factor Proportions Explanation of Multi-National Sales /	Next

December 1993.

This paper empirically investigates the role of transport costs, trade and investment barriers, production scale economies, and firm- specific advantages in determining the use of overseas production relative to exports. The proximity-concentration hypothesis is robust in explaining the share of total sales accounted for by affiliate sales: this share is greater the higher are transport costs and trade barriers and the lower are plant scale economies and investment barriers. Although strictly speaking, the proximity-concentration hypothesis applies to the shares of affiliate sales and exports rather than the levels, the effects of trade and investment barriers on the levels are similar to their effects on the shares, controlling for simultaneity, and so is that of freight factors in the trade estimates. The elasticity of inward and outward net affiliate sales with respect to tariffs is around 0.45, and that with respect to NTBs is an additional 0.17. The elasticity of both imports and exports with respect to freight factors is -1. However, the effect of freight factors on the level of affiliate sales is not robust, and the probability of observing any affiliate sales is increasing in proximity. The overall complementarity between trade and affiliate sales arises in part because relative income and intellectual property intensity increase both. In contrast, affiliate sales and trade move in opposite directions with increases in advertising intensity, suggesting that advertising-intensive products require a local presence.