Intra-firm Trade Research Articles

Attractive target for tax avoidance: trade liberalization and entry mode

AbstractGrowing foreign direct investments (FDIs) have been observed in parallel to the development of tax avoidance by multinational enterprises; however, empirical evidence indicates the asymmetric effects of trade costs on a firm’s entry decision. To give a new rationale and insights into the impacts of transfer pricing and trade liberalization on a firm’s global activities, this study incorporates transfer pricing and investigates a foreign firm’s entry decision: exports, greenfield FDI (GFDI), or cross-border mergers and acquisitions (CM&As). We show that CM&A is the equilibrium entry mode when transfer pricing regulation is loose, whereas the choice between exports and GFDI depends on the fixed costs of GFDI. Moreover, trade liberalization increases the likelihood of CM&A but decreases that of exports because a reduction in trade costs enhances tax-avoidance efficiency due to more intrafirm trade, implying that tax avoidance in the form of CM&A becomes crucial as globalization progresses. Our welfare analysis shows that regulating CM&A based on consumers’ benefits may result in welfare reduction because profit shifting is most effective under CM&A and a host country’s tax revenue from the foreign firm increases. The results imply the importance of considering the link between international tax and antitrust policies.

The impact of transfer pricing laws on import mis-pricing – Evidence from Denmark

Many countries have recently introduced transfer pricing regulations to constrain multinational profit shifting from high-tax to lower-tax affiliates through strategic mis-pricing of intra-firm trade. We rely on rich administrative firm-level trade data for Denmark to show that tighter transfer pricing rules effectively reduce tax-motivated trade mis-pricing.

An Analysis between Foreign Direct Investment and Intra-Industry Trade in Turkey: A VECM Approach

The stylized world of identical technologies between countries, perfect competition and homogeneous products in the markets, and inactivity of production factors/inputs between countries is no longer valid. Knowledge economy, imperfect competition, differentiation, industrial clusters, new economic geography, transportation and transaction costs are among the factors that create the transformation in international trade. However, there is a specific literature that highlights the existence of examples of firms that are competitors or interconnected as parts of a single supply chain in the international economy, and spread of production activities to the world geography as an extension of the global transformation in production processes. In this context, since multinational firms mostly produce differentiated goods and a large part of intra-industry trade (IIT) is based on intra-firm trade of these firms, the linkage between foreign direct investment (FDI) and IIT is important. This connection is also supported by the fact that FDI is among the country-specific determinants of IIT in the literature. For this purpose, in this study, IIT index values for the period 1995-2020 in Turkey are calculated based on the distribution of exports and imports according to BEC classification. And FDI values related to industrial sectors in the same period are taken as basis. The relationship between the series is examined by cointegration analysis and the direction of the relationship is revealed by causality analysis based on vector error correction model (VECM). In the results of the study, it has been determined a one-way causal relationship from FDI to IIT for capital goods; and from IIT (total) to FDI. This is consistent with the result of the existence of a significant and positive relationship between technology intensity and IIT thanks to FDI in the literature.

Parent-Affiliate Coordination and Intra-firm Trade

Parent-Affiliate Coordination and Intra-firm Trade

Networked FDI and third-country intra-firm trade

Foreign direct investment (FDI) is networked. This is beyond vertical and horizontal FDIs. Affiliates locate across multiple countries and trade among them. This paper investigates the FDI networks, using the Japanese foreign affiliate data. First, we investigate location patterns and industry patterns of foreign affiliates and find the network structure of FDI. Then, third-country intra-firm trade is explored. The third-country sales and sourcing within the firm boundary (third-country intra-firm trade) is active, but only large firms tend to construct production networks and engage third-country intra-firm trade. Firm size (size of parent and affiliates and the number of affiliates) is crucial in understanding third-country intra-firm trade.

Multinational operational flexibility, within-network redundancy, and downside risks and divestment rates of international investments

This study takes the multinational operational flexibility perspective anchored in real options theory to examine how intra-firm connectedness and switchability affect the performance and longevity of international investments. We postulate that more extensive intra-firm trade connectedness, along with multinationality, reduces downside risks and divestment rates. Through an empirical examination of a large sample of Korean multinational corporations, we find that more extensive trade ties within the same MNC network are negatively associated with downside risks. We also find that decreased downside risks decrease divestment rates. Furthermore, we observe that these impacts of intra-firm trade ties are more salient when more in-network manufacturing subsidiaries produce the same product type and operate in negatively correlated countries in terms of labor costs. These findings indicate how the flexible configurations of international investments influence their performance and longevity.

Intrafirm trade, input–output linkage, and contractual frictions: evidence from Japanese affiliate-level data

This paper revisits how vertical linkages between overseas affiliates and their parents are related to intrafirm trade by shedding light on variations in contractibility across sectors in the case of Japanese multinational enterprises based on affiliate-level data. We confirm that intrafirm trade is observed only in a limited fraction of affiliates. To include a large number of affiliates with zero intrafirm trade into our regressions, we estimate our model by Poisson Pseudo Maximum Likelihood. We find that Japanese multinational affiliates tend to export relatively more to their parents in vertically linked sectors especially if they trade goods with low contractibility. This relationship is evident for affiliates located in developing countries. This result indicates that input–output linkage is a significant determinant of intrafirm trade when the trade is affected by contractual frictions. We also confirm the robustness of the results regardless of the definition of contractibility indices by previous studies.

Which intermediate import source is best for innovation in MNEs?

PurposeThis paper explores the importance of the importing intensity for different intermediate inputs depending on their source (internal sourcing or intra-firm trade versus external sourcing or foreign suppliers) for different types of innovation (product and process innovation) and applied to MNEs (foreign versus domestic).Design/methodology/approachThe sample contains 2,448 firm-year observations (2006–2016) of firms located in Spain that belong to an MNE group. The authors applied a conditional mixed process to a panel recursive bivariate probit model with robust standard errors.Findings The authors obtained three key results. First, intermediate imports do not always contribute to improving innovation, since their effects vary depending on their source. Second, intermediate imports from foreign suppliers (external source) are more advantageous for product innovation than those from intra-firm trade (internal source). Third, intermediate imports from intra-firm trade are more important for process innovation than those from foreign suppliers. Thus, the impact of importing intermediate inputs on innovation is contingent on the source of the imports, the ownership of the MNE and the type of innovation.Originality/valueThe paper contributes to this topic with new insights and results for MNEs. It identifies which import source is best for innovation depending on the type of innovative result expected. Moreover, it helps to uncover simultaneity and causal relationships between product and process innovation, issues which have not previously been considered in the literature.

Income shifting and U.S. international trade in goods statistics

Intrafirm trade represents greater than one-third of total U.S. international trade in goods. Since these are not arm’s-length transactions, trade policymakers have voiced concerns that income shifting may distort international trade in goods statistics through the manipulation of transfer prices. Using country-level data on intrafirm exports and imports, we estimate a path analysis that simultaneously tests how and to what extent tax-motivated transfer pricing and real investment decisions affect intrafirm trade in goods statistics. Contrary to speculation, we do not find an economically significant relation between transfer pricing and intrafirm trade in goods statistics. In contrast, we find that tax-motivated location decisions create a 21 (20) percent or $819.7 ($927.1) million difference in mean intrafirm exports (imports) between the U.S. and a low- and high-tax country. This study provides trade policymakers with relevant information about the extent to which real investment decisions and accounting manipulations affect intrafirm trade in goods statistics and contributes to the international trade and income shifting literatures.

Economic policy uncertainty, contracting frictions and imports sourcing decisions

This paper studies whether economic policy uncertainty could interact with contracting frictions to jointly affect importers’ choice to source from integrated parties or external parties. Using Related Party Trade dataset for the US, Economic Policy Uncertainty dataset by Baker et al. (2016) and contract intensity constructed by Nunn (2007), we find that US importers in high contract intensity industries would respond to increased economic policy uncertainty by increasing intra-firm trade share. Particularly, the intra-firm imports share would increase by 4.87% compared to the mean when the EPU and the contract intensity both rise from 10th to 90th percentile. In addition, we find that this effect is more pronounced for developing countries.

Japanese multinational corporations and corporate tax change

This paper examines the impact of the recent changes in Japanese taxation polices before and after the shift from a global taxation system to a territorial taxation system in 2009 on the income shifting activities of Japanese multinationals. The study aims to investigate whether the territorial taxation system accelerated aggressive transfer pricing and shifting of domestic income overseas, in line with recent studies. Moreover, this research identifies the factors that encouraged intrafirm trade within listed Japanese non-financial transnational corporations and their income shifting behaviour in response to various taxation policies in different jurisdictions. The two-stage least squares random estimation techniques are used to examine the level of income shifting behaviour before and after the taxation system reform, using a pooled sample of 460 foreign affiliates of Japanese manufacturing corporations during the period of 2000 to 2016. The empirical results provide evidence supporting the hypothesis of that income shifting between territorial jurisdictions done by Japanese multinationals is more effective in terms of profit repatriation.

Economic system entanglement on intra-firm trade portfolios: the impact of counterparty credit ratings on business-to-business credit dynamics

Economic system entanglement on intra-firm trade portfolios: the impact of counterparty credit ratings on business-to-business credit dynamics

Multinationals, intra‐firm trade and employment volatility

AbstractThis paper examines the theoretically ambiguous relationship between the volatility of employment growth and the foreign exposure of firms. We employ unique Japanese firm‐level data during the period of 1994 to 2012. This allows us to investigate any differences in this relationship across multinational firms and trading and non‐trading firms, manufacturing and wholesale trade and intra‐firm and inter‐firm trade. One major finding is that, in manufacturing, employment volatility increases as the share of intra‐firm exports to total sales increases. In contrast, in wholesale trade, employment volatility declines as the share of intra‐firm imports to total imports increases. One possible interpretation of these results is that the transmission of foreign supply and demand shocks could be through not only manufacturing but also wholesale trade firms. Further, a higher share of intra‐firm trade could magnify foreign demand shocks in manufacturing and could mitigate foreign supply shocks in wholesale trade.RésuméMultinationales, commerce intra‐entreprise et volatilité de l’emploi. Cet article analyse le rapport en théorie ambigu entre la volatilité de la croissance de l’emploi et l’exposition des entreprises à l’étranger. Grâce à des données spécifiques recueillies au niveau des entreprises japonaises entre 1994 et 2012, nous pouvons étudier les différences relatives à cette relation pour les entreprises multinationales et les entreprises commerciales et non‐commerciales, le commerce manufacturier et le commerce de gros ainsi que le commerce intra‐entreprise et le commerce inter‐entreprise. L’une des conclusions majeures est que dans le secteur manufacturier, la volatilité de l’emploi diminue à mesure que la part des exportations intra‐entreprise augmente par rapport aux ventes totales. À l’inverse, dans le commerce de gros, la volatilité de l’emploi diminue à mesure que la part des importations intra‐entreprise augmente par rapport aux importations totales. L’une des interprétations possibles de ces résultats est que la transmission des chocs en matière d’offre et de demande étrangère ne passe pas uniquement par les entreprises du secteur manufacturier, mais également par les entreprises du commerce de gros. En outre, une plus grande part de commerce intra‐entreprise pourrait amplifier les chocs en matière de demande étrangère dans le secteur manufacturier, et pourrait atténuer les chocs en matière d’offre étrangère pour le commerce de gros.

Vertical integration without intrafirm trade

This paper shows that a vertically integrated firm has incentives to outsource input production to an equally efficient nonintegrated upstream firm that serves its downstream rival. By outsourcing, it raises both its own and its rivals’ cost and generates softer price competition in the final product market. Both the positive implications of vertical integration on the integrated firm’s profits and its negative implications on consumers and welfare are stronger with outsourcing than with the commonly presumed insourcing.

Vertical foreign direct investment: Make, buy, and sell

AbstractAccording to conventional wisdom, multinational enterprises (MNEs) undertake vertical FDI to take advantage of cross‐border factor cost differences and source inputs from abroad at better terms. However, recent empirical studies document many instances in which intrafirm trade between parent firms and their vertically related foreign affiliates is absent. We provide theoretical support for these findings, demonstrating that a firm can engage in vertical FDI to exploit its intangible assets in another country and improve its input sourcing terms domestically by enhancing its cross‐threat. Furthermore, we show that the welfare implications of vertical FDI on the home and host country are neither always positive nor aligned.

The global value chain under imperfect capital markets

AbstractThis paper develops a model to study how suppliers' financial constraint interact with suppliers' position in a global value chain. I embed financial frictions into the property‐rights model of the global value chain, as in Antràs and Chor (Econometrica, 2013, 81, 2127), to derive the optimal allocation of ownership rights along the global value chain. The model predicts that multinational firms are more likely to integrate downstream intermediate input suppliers in countries with weak financial institutions when the production process is sequential complements. Using US intrafirm trade data for the years 2000–10, together with a triple‐interaction term between "downstreamness" of an industry, demand elasticity of an industry and financial development of a country, I provide empirical evidence that supports the key prediction of the model.

Externalities from Intra-Firm Trade by U.S. Multinationals

The share of world trade attributed to intra-firm trade is large and fast-growing. This paper offers new information on the welfare outcome of these trends. Two-country evaluations of the gains from international trade were replaced by local welfare measured, not only by the usual per capita income, but also by a newly available index of happiness which incorporates measures for non-economic human welfare. With the aid of large panel data and Hicksian production theory tools, we estimated positive marginal elasticities and a positive elasticity of substitution between intra-firm trade in goods and services. Kernel causality defined in a new R package helped quantify positive externalities from a selected set of 24 variables related to local welfare. Hence, we conclude that multinationals make a positive impact on local welfare.

Japan’s participation in global value chains: splitting the IO table into production for export and domestic sale

This paper examines Japan’s participation in global value chains (GVCs). To this end, we use plant-level data for Japan to split output in each industry in Japan’s manufacturing sector into output for export or domestic sale and create an extended multi-country input–output table (MIOT). We then compute trade in value added (TiVA) indicators to examine the participation of Japanese manufacturing plants in GVCs. Our estimates suggest that Japan’s forward participation in GVCs is lower than suggested by estimates computed from a traditional MIOT. We infer that this result is due to high cross-border production fragmentation as well as the large presence of Japanese multinational companies in global manufacturing and the high volume of intra-firm trade in Japan’s manufacturing sector. We conclude that considering firm heterogeneity in production for export and domestic sale in MIOTs provides a more accurate understanding of global production fragmentation.

A Parent-Firm’s CSR and a Subsidiary’s Intra-Firm Trade: The Mediating Role of Intangible Resources

We examine how corporate social responsibility (CSR) of a multinational enterprise (MNE) influences intra-firm trade in a foreign subsidiary. In particular, we argue that an MNE’s intangible resour...

Asymmetric effects of demand uncertainty on intrafirm trade in durable and non‐durable industries

AbstractThis paper unveils a new empirical regularity regarding the asymmetric patterns of international sourcing modes in the durable and non‐durable industries under uncertainty, and explains the asymmetry based on the traditional lens of the transaction cost economics. Under demand uncertainty, firms face trade‐offs between outsourcing and vertical integration: while outsourcing requires less initial investment and allows easier market entry and exit, vertical integration offers better management and communication systems. In the durable industries, consistent with the transaction cost economics, the relationship between vertical integration and uncertainty is positive. In the nondurable industries, however, such relationship is weaker because inelastic demand and shorter gaps between production and sales mitigate the effect of uncertainty. I show the asymmetric effects of uncertainty based on a simple general equilibrium model and provide consistent empirical evidence using US intrafirm trade and microeconomic uncertainty data.