Foreign Affiliate Sales Research Articles

Intangible trade: Understanding the relationship between trade barriers and mode of supply in services sectors

AbstractIn recent years, increased availability of services trade data and measures of non‐tariff barriers has enabled more detailed analysis of trade patterns, including the relationship between different modes of service delivery across international borders. This paper uses a detailed, sector‐level structural gravity model to shed light on the question of whether services trade via foreign affiliate sales (also known as mode 3 trade) is a complement or substitute for cross‐border services trade (modes 1, 2, and 4) in 13 services sectors. In 9 of the 13 sectors considered, there is a negative and significant relationship between trade policies that limit foreign affiliate sales and cross‐border trade, indicating a complementary relationship between the two types of trade flows. This suggests that when services firms export, they rely on multiple modes of supply to deliver their products, considering factors such as the degree of service tradability over the internet, levels of customer interaction, and complexity of particular tasks.

Firm heterogeneity in services trade: Micro‐level evidence from eight OECD countries

AbstractThis paper shows that smaller and less productive firms, as well as first‐time exporters, are overproportionally affected by services trade barriers using micro‐data from Belgium, Finland, Germany, Italy, Japan, Sweden, the United Kingdom and the United States. For these firms, both the propensity to export and export volumes to less restrictive destinations are significantly higher than to more restrictive destinations. In contrast, policy barriers measured by the OECD Services Trade Restrictiveness Index (STRI) do not affect export decisions of the largest, most productive and experience services firms. The pattern holds for two major modes of supply, cross‐border services exports and foreign affiliate sales of services firms. The findings are consistent with firm sorting mechanisms in trade models with heterogeneous firms and hysteresis of export participation in the presence of sunk export costs.

Multinational production in value-added terms

ABSTRACT Micro-level evidence has emphasised that firms that produce across countries are responsible for a large share of international exchanges of goods, services, capital and knowledge. At the aggregate level, quantitative studies that look at multinational production generally rely on the concept of sales of foreign affiliates, which is a gross concept that includes the value of intermediate inputs. In the case of trade, the literature has recently shifted to a value-added approach that can distinguish in exports the contribution of the different economies supplying inputs. In this paper, we propose a framework that decomposes value-added in domestic sales in order to trace its origin and remove any double-counting. We find that an intercountry input–output table split on ownership can yield an analysis of activities of foreign affiliates of multinational firms in value-added terms.

Multinational production and comparative advantage

This paper shows analytically and quantitatively how omitting the striking sectoral heterogeneity of multinational production (MP) and its relationship with countries' comparative advantage leads to understate the gains from MP and openness. By construction, one-sector models of trade and MP, ignore the conflicting effects that a reduction in MP frictions has on the sectoral dispersion of MP and trade shares. On the one hand, freer MP increases the dispersion of MP shares across sectors, and with it, the gains from MP. On the other hand, it reduces the heterogeneity of trade shares, since MP erodes sectoral level Ricardian comparative advantage, diminishing therefore gains from trade. These effects are driven by the disproportional allocation of MP in industries where local firms are relatively less productive, which generates an uneven productivity boost favoring comparative disadvantage sectors, lowering the differences in observed sectoral productivities. To assess the welfare implications of this mechanism, this paper assembles a novel industry-level dataset of bilateral foreign affiliate sales for 32 countries, 9 tradable sectors and 4 non-tradeble sectors.

Sectoral determinants of foreign affiliate sales employing European data

AbstractWe test theories on sectoral determinants of foreign affiliate sales employing European foreign affiliate sales statistics (FATS). On the one hand, we test hypotheses that foreign affiliate sales are less likely in sectors with complex tasks and more likely in sectors where communication with customers is important. On the other hand, we test the hypothesis that the force of gravity is stronger in more complex sectors. Employing Poisson and negative binomial estimators, we find support for the first hypotheses and contradict the second hypothesis. We show that the interaction effect between distance and complexity changes sign from negative to positive when complexity is included as a separate regressor. We propose an explanation to reconcile our findings with the basic assertion in the second hypothesis that the force of gravity is stronger in more complex sectors, based on a composition effect between horizontal and vertical affiliate sales.

Quantifying the Impact of FTAs on Canada's Financial Services Sector

The infrastructure for services trade analysis has improved considerably with the development of databases on services trade for modelling purposes by the World Bank in its Trade in Services Database; on Mode 3 commercial presence trade in the form of foreign affiliate sales (FAS) data sets; on the prevalence of services trade barriers in the OECD’s and World bank’s Services Trade Restrictiveness Index (STRI) databases; new work at the OECD measuring uncertainty of market access in the form of a GATS Trade Restrictiveness Index, (GTRI) which measures bound commitments and can be used to derive “water” in the bindings, a measure of the extent to which existing market access restrictions could be increased without violating WTO commitments; and relatively comprehensive measures of the ad valorem equivalents (AVEs) of services trade barriers. We exploit these resources to develop estimates of the impact of liberalization of both cross-border and commercial presence trade in financial services on Canada’s financial services sector, taking into account both the extent of liberalization that is likely under a model, high-quality financial services chapter of an FTA and the effect of the FTA on binding existing market access commitments.

Time Zones Matter: The Impact of Distance and Time Zones on Services Trade

AbstractGiven the need for proximity in the provision of many services, factors such as geographical distance place a higher cost burden on the delivery of services in foreign markets as compared to goods trade. In addition, differences in time zones add significantly to the costs of service transactions. Decomposing the impact of distance into a longitudinal and latitudinal component and accounting for differences in time zones, it is possible to identify in detail the factors driving the impact of increasing coordination costs on the delivery of services through foreign affiliates. Working with a bilateral US data set on foreign affiliate sales in services this paper examines the impact of time zone differences and east–west and north–south distance on US outward affiliate sales, by employing a Hausman–Taylor model for services trade by foreign affiliates. Both distance components as well as time zone differences have a significant positive effect on foreign affiliate sales. By decomposing the effect of distance the results show that increasing east–west or north–south distance by 100 km raises affiliates sales by 2 per cent. Regarding time zone differences, the findings suggest that affiliate sales increase as hourly time zone differences get larger.

Foreign affiliate sales and the measurement of trade in both goods and services

There is an incompatibility between measures of trade in goods and services. The measures of goods trade reflecting GATT are restricted to trade that crosses borders. Service trade, however, under GATS includes both cross-border delivery and foreign affiliate sales within borders. We propose that for comparability the trade component of foreign affiliate sales in goods should be included in goods trade or affiliate sales should be removed from the service trade data. We make modifications to reported goods and services trade for specific countries by using data on affiliate sales to produce more consistently measured cross country estimates of trade flows.

Modelling the Trade in Services Agreement: Preliminary Estimates of Mode 1 and Mode 3 Liberalization

This paper quantifies the economic implications of reducing barriers to services trade in the context of the Trade in International Services Agreement (TISA) using an extension of the GTAP model which incorporates a dynamic mechanism, a MONASH-style investment function, and disaggregated foreign-owned service sectors. By directly representing foreign direct investment in services sectors, the model allows estimates of both mode 1 (cross-border) and mode 3 (commercial presence) trade impacts and thus the interaction between trade and foreign affiliate sales. The impact of liberalization of mode 3 services trade is assessed based on a phantom tax which captures the implicit cost imposed by FDI restrictions on the inflow of foreign capital. A gravity model is established to estimate the elasticity of FDI restrictiveness on foreign capital supply. We apply the model to estimate the impact of full liberalization of services barriers as evaluated by the OECD’s services trade restrictiveness indexes in order to provide a measure of the potential scale of impacts; this represents an upper bound on the likely outcome of the negotiation which build on the limited progress achieved in the stalled Doha Round and the actual level of liberalization achieved under the most ambitious preferential agreements amongst the parties. We estimate welfare gains from the TISA on the order of US$96 billion in 2030 for the participants and about US$82 billion for the world overall level welfare (which reflects losses for non-participants on the order of US$14 billion due to trade diversion given the preferential nature of the TISA).

Cultural distance in international business and management: from mean-based to variance-based measures

Extant practice in international management is to measure cultural distance as a nation-to-nation comparison of country means on cultural values, thereby ignoring the cultural variation that exists within countries. We argue that these traditional mean-based measures of cultural distance should take within-country cultural variation into account. Therefore, we propose the use of variance-based measures of cultural distance. To illustrate our argument, we examine total US foreign affiliate sales in more than 40 host countries over the 1983–2008 period, complemented with data from the World Values Survey. We analyze the effects of three cultural distance measures: the Kogut and Singh (1988) mean-based index of cultural distance, the Kogut and Singh (1988) index conditioned by host-country cultural variation and a variance-based measure that takes into account both home- and host-country cultural variation. Our findings indicate that, when within-country cultural variation is taken into account, the explanatory power of the Kogut and Singh (1988) index is substantially decreased. In addition, our variance-based measure of cultural distance outperforms the Kogut and Singh (1988) measure in the explanation of foreign US sales. We therefore suggest to move from mean-based to variance-based measures of cultural distance, thereby taking the cultural variation within countries into account.

Trade in Cultural Goods: A Case of the Korean Wave in Asia

(ProQuest: ... denotes non-US-ASCII text omitted.)(ProQuest: ... denotes formulae omitted.)(ProQuest: ... denotes text missing in the original.)I. IntroductionCulture and cultural industries can be defined in many ways. According to the information in Wikipedia on Economics of the arts and literature, most of cultural art works such as books, recordings, and movies are reproducible and they are characterized by uncertainty on value, infinite variety, high concentration in trade products, short life cycle, and high fixed cost.Traditional theories on international trade have been mostly concerned with trade in general products while ignoring the unique features of cultural products such as intangible aspects, minimal transportation cost, and preference selection. Only recently did some economists start to pay attention to the trade in non-traditional goods, particularly to trade in services.Since trade in services and trade in cultural goods share in part common features, it is worth mentioning a few studies on service trade. Grunfeld and Moxnes (2003) study the determinants of service trade and foreign affiliate sales using a gravity model and data from OECD. Their results found that the general pattern of the gravity model effects also applies to services. Economic size of the two countries is positively related and the distance between them are negatively related.Kimura and Lee (2004) also apply the standard gravity framework to services trade. They found that compared with goods trade, distance between countries is more important in services trade. Lejour and de Paiva Verheijden (2004)'s comparison between goods and service trade between Canada and EU shows that distance is less important for services compared to goods.The number of studies on cultural trade is very small and they have been limited to theoretical aspects of cultural identity. Janeba (2004) studies the effects of trade liberalization on cultural identity and shows that cultural diversity in the home market is not always beneficial in the case of free trade.Rauch and Trindate (2005) study the consumption aspect of trade utilizing consumption network externalities. The concept of network externalities originated from the IT industry and it has been widely incorporated in economic modeling after the pioneering work of Kats and Shapiro (1985). Rauch and Trindate (2005) combine both the home market effect model of Helpman and Krugman (1985) in the supply side and consumption network externalities in the demand side to explain why some cultural goods dominate in other cultures. An interesting example is the clothing style of the tropical region. Because of Western cultural influence, we witness millions of necktie-wearing tropical businessmen and office workers despite the inappropriate weather condition.The above mentioned research papers are purely concerned with theoretical modeling while Felbermayr and Toubal (2010) focus more on the empirical relationship between cultural proximity and international trade. In their research paper, Felbermayr and Toubal use the Eurovision Song Contest (ESC) as a proxy for cultural ties. The Eurovision Song Contest (ESC) is a big pan-European televised show in which each artist from a participating country performs a song. The other countries grade those songs and the winner is selected accordingly. The paper suggests that the results of the ESC significantly reflect how closely each country feels toward other European countries. After setting the ESC as a proxy cultural tie, they found that there is indeed a significant relationship between ESC scores and international trade. Whereas their research highlights the importance of cultural proximity in international trade, it does not deal with either trade in cultural products or the dynamic change of preferences.Blum and Goldfarb (2006) analyze data on Internet activities by US consumers on non-US websites. …

Networked FDI: Sales and Sourcing Patterns of Japanese Foreign Affiliates

AbstractThis paper applies a novel empirical approach to characterising the horizontal‐ness and vertical‐ness of affiliates based on Yeaple's complex FDI concept. In its simplest form, horizontal‐ness is measured as affiliates’ local sales share while their vertical‐ness is measures as their share of non‐local sourcing of intermediates. Japanese affiliates in most sectors and nations are partly vertical and partly horizontal, but those in North American are far more ‘horizontal’ than those in the EU and Asia. Affiliates became more vertical between 1996 and 2005. A four‐way sales and sourcing split (host, home, regional and RoW) suggests that affiliates act as nodes in regional production networks – especially in Asia. We posit several hypotheses that could be tested with our empirical approach.

Shouldn't Physical Capital Also Matter for Multinational Enterprise Activity?

AbstractThe foreign direct investment (FDI) literature has generally failed to find strong systematic evidence of “vertical” motivations in bilateral aggregate FDI and foreign affiliate sales (FAS) data, despite recent evidence of vertical FDI in firm‐level data. Moreover, a Bayesian analysis of the empirical determinants of FDI (and FAS) flows reveals that the parent country's physical capital per worker has a strong positive effect on FDI alongside typical gravity‐equation variables; however, this variable is ignored in the knowledge‐capital (KC) model and most empirical work. We address these two puzzles by introducing relative factor endowment differences into the three‐factor, three‐country knowledge and physical capital extension of the 2 × 2 × 2 KC model. Using a numerical version of our model, we show that horizontal and vertical multinational enterprises' (MNEs') headquarters surface in different parts of the Edgeworth box relating the parent country's skilled labor share relative to its physical capital share (of the parent's and host's endowments). The key economic insight is that horizontal MNE headquarters will be relatively more abundant than vertical MNE headquarters in countries that are abundant in physical capital relative to skilled labor, because of the multi‐plant (single‐plant) structure of horizontal (vertical) MNEs—assuming plants (headquarters) use physical capital (skilled labor) relatively intensively in their setups. The theoretical relationships suggest augmenting empirical FAS gravity equations with (polynomials of) the parent's skilled labor share alongside the parent's physical capital share to explain in aggregate bilateral data the coexistence of horizontal and vertical FAS. The theoretical and empirical results shed light on the positive effect of parent's physical capital share on FAS flows, but also suggest that MNE headquarters may be prominent in parent countries with relatively high and low skilled labor shares—once physical capital is accounted for—a result not suggested by the two‐factor KC model.

The impact of home–host cultural distance on foreign affiliate sales: The moderating role of cultural variation within host countries

Research on how multinational firms deal with home–host cultural differences argues that cultural differences are minimized and assumes that foreign cultures are homogenous. In this paper we relax the cultural homogeneity assumption. In the presence of cultural variation in host countries the minimization of cultural differences leads existing mean-based indices of cultural differences to overestimate the actual cultural differences these firms have to deal with. We test this argument in a 25-year panel analysis of total US multinationals' foreign sales in 54 host countries. At the sample average of cultural variation, the use of mean cultural difference indices yields a 74% overestimate of the actual cultural difference effect. This suggests that home–host cultural differences are a substantially smaller barrier to multinational sales than hitherto assumed. The assumption of cultural homogeneity leads to conclusions in which a too large role is attributed to cultural differences.

Correlation between Sales of Foreign Affiliates and Productivity of Multinational Firms: Evidence from Korean Firm-Level Data

Correlation between Sales of Foreign Affiliates and Productivity of Multinational Firms: Evidence from Korean Firm-Level Data-Foreign Direct Investment, Multinationals, Firm Productivity, Location Decision

The Proximity-Concentration Tradeoff under Uncertainty

In this paper, we analyze the firm’s choice between serving a foreign market through exports or through foreign affiliate sales in an environment characterized by country-specific shocks to the cost of production. Our model predicts that country pairs with less-correlated output fluctuations trade more, relative to affiliate sales, while countries with more-volatile fluctuations are served relatively more by exporters than by foreign affiliates selling abroad. Using detailed data on trade and affiliate sales, we find empirical support for our model’s predictions.

Cross‐border and Foreign Affiliate Sales of Services: Evidence from German Microdata

AbstractWe merge German balance‐of‐payments and foreign‐affiliate‐trade statistics to obtain data about trade in commercial services at the firm level. We use these data to study export market participation and the choice of export mode: cross‐border versus foreign affiliate sales. We find that for firms in our sample productivity is both a statistically significant and economically important determinant of the export participation and export mode choice. We also identify the role of industry‐ and country‐specific determinants.

Trade in Services and TFP: The Role of Regulation

AbstractWhat determines total factor productivity (TFP) growth in services: is it services trade or services–trade regulation? To respond to this question, we use four indicators of international trade in services since 1990 to 2005, namely foreign direct investment (FDI) inward stock, services imports, domestic sales of foreign affiliates (FATS) and FDI inflows, to examine what type of services trade forms a direct determinant. Subsequently, we analyse what type of sector‐specific regulation has played an inhibiting effect on services TFP growth. Such analysis contrasts with former studies in which mainly factor inputs and economy‐wide regulation are used to explain services TFP. This paper provides evidence that neither trade nor entry barriers are robust determinants to explain cross‐country differences. Instead, regulations on operational procedures affecting the variables costs structure of the firm seem to play a more important role in explaining TFP growth between countries, particularly in combination with information and communication technology (ICT) capital.

Cross Border and Foreign-Affiliate Sales of Services: Evidence from German Micro-Data

We merge German balance-of-payments and foreign-affiliate-trade statistics to obtain data about trade in commercial services at the firm level. We use these data to study export market participation and the choice of export mode: cross-border versus foreign-affiliate sales. We find that for firms in our sample productivity is both a statistically significant and economically important determinant of the export participation and export mode choice. We also identify the role of industry- and country-specific determinants.

Cross-Border and Foreign Affiliate Sales of Services: Evidence from German Micro-Data

We merge German balance-of-payments and foreign-affiliate-trade statistics to obtain data about trade in commercial services at the firm level. We use these data to study export market participation and the choice of export mode: cross-border versus foreign affiliate sales. We find that for firms in our sample productivity is both a statistically significant and economically important determinant of the export participation and export mode choice. We also identify the role of industry- and country-specific determinants.