Abstract
High-performance firms typically have two features in common: i) they produce in more than one country and ii) they produce more than one product. In this paper, we analyze the internationalization strategies of multi-product firms at the product-level. We find that the most productive firms sell core varieties via foreign direct investment (FDI) and export products with intermediate productivity. Shocks to trade costs and technology affect the endogenous decision to export or produce abroad at the product-level and, in turn, the relative productivity between parents and affiliates.
Highlights
In international economics, one striking pattern emerges: internationalisation is for the few.1 Many empirical studies show that international activity is concentrated in a small share of very large firms
This result is in line with evidence from Spanish firm-level data, where we find that the share of firms with international engagement via both foreign direct investment (FDI) and exporting is increasing in firm productivity
As a direct implication from our analysis, we find that any shock that affects the endogenous FDI/export decision changes the productivities of both affiliate and parent firms
Summary
One striking pattern emerges: internationalisation is for the few. Many empirical studies show that international activity is concentrated in a small share of very large firms. Since FDI is only profitable for core varieties, plant-level productivity is higher in the foreign affiliate As another difference compared to the model in Helpman et al (2004), in our model the most productive firms rely on both strategies, that is they both export and invest abroad. Our paper contributes to the literature that analyses firm’s optimal mode of foreign market access, distinguishing between multinational production and exporting as two different choices based on the so-called proximity-concentration trade-off (see, for example, Horstmann and Markusen (1992), Brainard (1993, 1997), Markusen and Venables (2000), Markusen and Maskus (2002), Helpman et al (2004)).
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