Keith Head

Estimating The Knowledge-Capital Model of the Multinational Enterprise: Comment

What we term the firm includes three principal assumptions. First, services of knowledge-based and knowledge-generating activities, such as R&D, can be geographically separated from production and supplied to production facilities at low cost. Second, these knowledge-intensive activities are skilled-labor intensive relative to production. These characteristics give rise to vertical multinationals, which fragment production and locate activities according to factor prices and market size. Third, knowledge-based services have a (partial) joint-input characteristic that they can be supplied to additional production facilities at low cost. This characteristic gives rise to horizontal multinationals, which produce the same goods or services in multiple locations. In this paper, we note how this model predicts relationships between affiliate sales and country characteristics. We then subject these predictions to empirical tests.

The Puzzling Persistence of the Distance Effect on Bilateral Trade

One of the best-established empirical results in international economics is that bilateral trade decreases with distance. Although well known, this result has not been systematically analyzed before. We examine 1,467 distance effects estimated in 103 papers. Information collected on each estimate allows us to test hypotheses about the causes of variation in the estimates. Our most interesting finding is that the estimated negative impact of distance on trade rose around the middle of the century and has remained persistently high since then. This result holds even after controlling for many important differences in samples and methods.

Immigration and Trade Creation: Econometric Evidence from Canada

Immigrants may expand trade with their country of origin, owing to superior knowledge of, or preferential access to, market opportunities. The authors test this proposition using Canadian trade data with 136 partners from 1980 to 1992. In an augmented gravity equation, they find that a 10 percent increase in immigrants is associated with a 1 percent increase in Canadian exports to the immigrants home country and a 3 percent increase in imports. They also find that, among the primary categories of immigrants, independents have the greater influence on trade. Immigration via the entrepreneur class appears to have less impact on trade than all other classes except refugees.

The Empirics of Agglomeration and Trade

This chapter examines empirical strategies that have been or could be used to evaluate the importance of agglomeration and trade models. This theoretical approach, widely known as “New Economic Geography” (NEG), emphasizes the interaction between transport costs and firm-level scale economies as a source of agglomeration. NEG focuses on forward and backward trade linkages as causes of observed spatial concentration of economic activity. We survey the existing literature, organizing the papers we discuss under the rubric of five interesting and testable hypotheses that emerge from NEG theory. We conclude the chapter with an overall assessment of the empirical support for NEG and suggest some directions for future research.

Non-Europe: The Magnitude and Causes of Market Fragmentation in the EU

Non-Europe: The Magnitude and Causes of Market Fragmentation in the EU. — In 1985 the European Commission diagnosed its member states as suffering from excessive market fragmentation, later referred to as “Non-Europe.” The authors examine the empirical basis for the Commission’s diagnosis using a trade model derived from monopolistic competition. They then investigate the links between the initial size and subsequent evolution of border effects within the EU. The findings support the view that European consumers act as if imports from other members were subject to high nontariff barriers. However, there appears to be almost no relationship between market fragmentation and the barriers that were identified and removed by Europe’s Single Market Programme.Zusammenfassung“Non-Europe”: Grö\e und Ursachen von Marktzersplitterung in der EU. — Im Jahre 1985 stellte die EuropÄische Kommission fest, dass ihre Mitgliedstaaten unter erheblicher Marktzersplitterung litten, spÄter auch “Non-Europe” genannt. Die Verfasser überprüfen die empirische Grundlage für die Diagnose der Kommission und benutzen dazu ein Handelsmodell, das aus monopolistischer Konkurrenz abgeleitet ist. Sie untersuchen für die EU-LÄnder, wieviel auslÄndische Güter die Verbraucher im VerhÄltnis zu inlÄndischen Gütern bei gleicher Entfernung von den Produktionsstandorten nachgefragt haben und wie sich dieses VerhÄltnis im Laufe der Zeit verÄndert hat. Ihre Ergebnisse stützen die Ansicht, dass die europÄischen Verbraucher sich so verhalten, als seien die Importe aus anderen Mitgliedstaaten hohen nichttarifÄren Handelshemmnissen unterworfen. Allerdings scheint so gut wie keine Beziehung zwischen der Marktzersplitterung und den Hemmnissen zu bestehen, die durch Europas Programm des Einheitlichen Binnenmarktes identifiziert und beseitigt wurden.

Gravity Equations: Workhorse, Toolkit, and Cookbook

This chapter focuses on the estimation and interpretation of gravity equations for bilateral trade. This necessarily involves a careful consideration of the theoretical underpinnings since it has become clear that naive approaches to estimation lead to biased and frequently misinterpreted results. There are now several theory-consistent estimation methods and we argue against sole reliance on any one method and instead advocate a toolkit approach. One estimator may be preferred for certain types of data or research questions but more often the methods should be used in concert to establish robustness. In recent years, estimation has become just a first step before a deeper analysis of the implications of the results, notably in terms of welfare. We try to facilitatediffusion of best-practice methods by illustrating their application in a step-by-step cookbook mode of exposition.

Offshore production and skill upgrading by Japanese manufacturing firms

Abstract We investigate the influence of offshore production by Japanese multinationals on domestic skill intensity. Identifying relationships based on within variation in a panel of 1070 firms, we find that additional foreign affiliate employment in low-income countries raises skill intensity. The positive effect of FDI on domestic skill intensity, however, diminishes as investment shifts towards high-income countries. Increases in affiliate employment in low-income countries also raise a firm’s reliance on finished goods purchases, suggesting that overseas employment affects domestic skill intensity because imports of final goods from foreign affiliates displace domestic production.

FDI as an Outcome of the Market for Corporate Control: Theory and Evidence

Much foreign direct investment (FDI) takes the form of mergers and acquisitions (M&A). It is commonplace in finance to view acquisitions as manifestations of the market for corporate control. Following on that insight we propose a model of FDI in which headquarters bid to control overseas assets. We derive an equation for bilateral FDI stocks that resembles the recently developed fixed effects approach to modelling bilateral trade flows. We estimate the model and use its parameters to construct benchmarks for evaluating multilateral inward and outward FDI.

Rationalization effects of tariff reductions

Abstract We analyze a panel of 230 Canadian manufacturing industries to investigate whether trade liberalization promotes efficiency through increased scale. During the six years following the Free Trade Agreement with the United States, Canadian manufacturing exhibited substantial rationalization – a decline in the number of plants accompanied by increases in output per plant. We find that the bilateral tariff reductions had opposing effects on scale. Contraction induced by lower Canadian tariffs largely offset the 10% scale increase caused by U.S. tariff cuts. The observed increase in scale arose due to currency depreciation, compositional shifts towards high-scale industries, and undercounting of small establishments.

International Mergers and Welfare under Decentralized Competition Policy

In this paper, the authors investigate the welfare consequences of horizontal mergers and other production relationships between firms based in different nations. They specify the critical share of consumption a nation must represent to veto mergers that raise price and reduce world welfare. The authors show that, when mergers do not generate costs saving, it will be in the national interest for existing competition agencies to block most world welfare-reducing combinations. When mergers generate cost savings, national welfare-maximizing regulators cannot be relied upon to prevent mergers that lower world welfare.