Exports x FDI in Heterogenous Firms Ana Carolina Gama Fatoumata Diallo Mohamed Kabakibi TD – Commerce International

Exports x FDI in Heterogenous Firms Article: Export versus FDI with Heterogeneous Firms Autors: Elhanan Helpman, Marc J. Melitz and Stephen R. Yeaple Published by: American Economic Association (The American Economic Review) Year: 2004

Exports x FDI in Heterogenous Firms Methodology and Data Methodology used Data will be better explained throughout the presentation

Exports x FDI in Heterogenous Firms Motivation Focus on the firm's choice between exports and "horizontal" foreign direct investment (FDI). The model highlights the important role of within-sector firm productivity differences in explaining the structure of international trade and investment

Exports x FDI in Heterogenous Firms Introduction Multinational sales have grown at high rates over the last two decades, outpacing the remarkable expansion of trade in manufactures. Using U.S. exports and affiliate sales data that cover 52 manufacturing sectors and 38 countries we show that cross-sectoral differences in firm heterogeneity predict the composition of trade and investment in the manner suggested by their model

Exports x FDI in Heterogenous Firms Theoretical Framework N countries that use labor to produce goods in h+1 sectors. One sector produces a homogeneous product with one unit of labor per unit output, while h sectors produce differentiated product To enter the industry in country i, a firm accepts the fixed costs of entry, measured in labor units. Produce ? Cost : Export ? Cost: FDI ? Cost:

Productivity levels and firm’s decision Profit=0 Domestic market Export FDI (firm exists)

Exports x FDI in Heterogenous Firms Data used Biggest constraint: lack of internationally comparable measures (US is one of handful countries that collects data on multinational affiliate sales). The authors divided the facts into three categories to obtain best results.

Exports x FDI in Heterogenous Firms Data used The Composition of International Commerce Classified by their main line of business Divided the sample of countries in wide (smaller and less developed) and narrow (the largest and most diverse). Proximity-Concentration Trade-off Predicts exports relative to FDI sales as a function of the costs of each activity – costs are not easily quantified 1st - considered unit costs of foreign trade 2nd - proxy the variables freight and tariff 3rd - unit costs of shipping goods and the fixed costs 4th - measures of plant-level fixed costs, such as the number of production workers

Exports x FDI in Heterogenous Firms Data used Firm Level Hetereogeneity Relationship between the degree of intra-industry firm heterogeneity and the prevalence of subsidiary sales relative to export sales. Construction alternative measures of within-industry heterogeneity. The stochastic process that determines firm productivity levels is Pareto, with the shape of the distribution varying across industries. For the construction of the data, it were used information from U.S. Census of Manufacturing and Bureau van Dijck Electronic Publishing (Amadeus).

U.S. based measure of dispersion is positively correlated with the measures of dispersion calculated from the European data, except that this correlation is not as high as the correlations among the four measures of dispersion that were calculated from the European data. There are two reasons to explain it: (1) the method of calculation are different, and (2) aggregation problem;

Exports x FDI in Heterogenous Firms Specifications and Results Estimation of an equation that relates the logarithm of relative sales to our measure of firm-size dispersion, the logarithm of transport and tariff costs, and a set of country dummies Goal: testing whether the central tendencies in the data are consistent with the partial derivatives implied in the equation, and to assessing the economic significance of the magnitudes associated with the estimated coefficients.

Results: Confirms the predications of the proximity-concentration trade-off Industries in which firm size is highly dispersed are associated with relatively more FDI sales relative to exports, just like the model predicts. The impact of tariffs is lower while the impact of returns to scale is higher R &D intensity is not a useful predictor of exports relative to FDI sales, while capital intensity is; more capital intensive sectors export less relative to FDI sales. - A firm’s decision to operate an affiliate in one country, let’s say Belgium, would not be independent from its decision to locate affiliates in other neighboring European countries.

Exports x FDI in Heterogenous Firms Conclusion We have developed in this paper a model of international trade and investment in which Firms can choose to serve their domestic market, to export, or to engage in FDI in order to serve Foreign markets. We therefore conclude that we have identified a new element-namely, within-sectoral heterogeneity that plays an important role in the structure of foreign trade and investment.