The Role of MNEs as Intermediates for Canadian Imports

Abstract

Theories of transactions costs and internalization explain the extent to which activities undertaken by the MNE will take place inside the MNE network (i.e. intra-firm) or in the marketplace (i.e. arm’s length). The mode(s) undertaken by each firm would be the result of careful consideration of the costs and risks involved in the deployment of each mode. Using a unique and confidential dataset on imports into Canada at the firm-shipment-product-level, we separate trade into that which is arm’s-length or intra-firm, and whether shipments come directly from the country of origin, or are first intermediated through the U.S. market. We go beyond the general conclusion that the U.S. is an important source of imports into Canada and show that the U.S. is also an important conduit for imports from the global economy. MNEs are shown to play a relatively large role in intermediating imports into Canada from more distant and difficult markets such as those in Asia, but less so from closer, more familiar and better developed markets such as those in Europe. MNEs located in the U.S. are therefore instrumental in mitigating the challenges of operating in the global economy for Canadian importers.