Home Bias in Trade: Location or Foreign-ness?

Abstract

With bias, a consumer differentiates between domestic goods and imports and tends to purchase the domestic variety. A vast number of empirical studies in the international trade literature report the apparent prevalence of a large degree of home bias (the case of the missing trade, the border puzzle). Many theoretical studies, in turn, assume its presence. Despite this wide usage, the origins of home bias remain cloudy. Do customs officials require extensive paper work, thus making imports prohibitively expensive? Is there some inherent distrust of a foreign product? This paper probes the causes of home bias. I ask whether the apparent predilection to purchase domestic goods arises from (1) pure locational factors, such as tariffs or access to a local distribution network, or (2) an inherent preference for domestic goods per se. I am able to make this decomposition through the use of data on the local sales of foreign affiliates of U.S. multinational enterprises, in addition to data on U.S. bilateral exports and domestic sales by host-country firms. I find that the apparent tendency to purchase domestic goods rather than imports arises almost entirely from pure locational factors. The ad valorem tariff-equivalent of producing at home and shipping to a different country ranges between 51 percent and 105 percent across industries. However, if a firm establishes and sells from a subsidiary located in the foreign country, its local sales are nearly on a par with those of domestic firms in that market. Foreign-ness in and of itself does not appear to impede purchases of imported goods.