What do multinationals do? The structure of multinational firms’ international activities

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AbstractAnalyses of multinational enterprises have generally shifted from a capital‐market perspective to viewing them as real production units. Yet, we still have difficulties in answering a basic question: What do multinational enterprises do? Here, we seek some broad, general answers about the structure of multinational firms’ international activities. By structure, we include (a) the geographic distribution of a firm's activities, (b) activities performed by various branches, (c) where do foreign affiliates sell their outputs and purchase their inputs and (d) interactions among establishments. Much of our analysis relates to which of two archetypes is dominant: (1) horizontal structures in which foreign affiliates replicate the firm's core activities and serve local and regional markets and (2) vertical structures in which foreign affiliates perform different activities and act as links in a global production chain. Examining this from a variety of perspectives, we find that horizontal replication dominates vertical fragmentation. The final section of the paper discusses intangible assets and other service flows between parents and affiliates. Smoking‐gun evidence suggests that these are large, particularly compared to intra‐firm trade in goods. Despite this, their importance is undervalued, likely due to severe measurement difficulties.