Empirical Evidence on the Global Operations of Multinational Firms

National Bureau Of Economic Research Inc, Cambridge MA

Investigators

Abstract

Recent research on multinational firms leaves some important questions unanswered. One is how to reconcile the view that most foreign direct investment is market seeking with the fact that world trade is increasingly composed of intermediate inputs as part of what seem to be global outsourcing networks. Such networks appear to be based on finding the lowest cost destination to produce a specific good. A second question is how multinational firms produce and deploy their intellectual property and other knowledge capital. Knowledge capital is central to the existence of multinational enterprises, but has been the subject of little empirical research. This research will offer new empirical evidence on the activities of multinational firms. Rather than use aggregate data on foreign direct investment, as most previous studies have done, the project will make use of data on individual U.S. parent firms and their foreign affiliates. This will make it possible to examine the detailed mix of activities that multinational enterprises perform. The project has access to data on U.S. multinational firms for the period 1977 to 1999 from the U.S. Bureau of Economic Analysis. Using standard statistical techniques, the research will show how choices by foreign affiliates of U.S. multinational firms over specific inputs, including host-country labor and capital, imports from U.S. parent firms for further processing, and imports from U.S. parent firms of knowledge-capital service, are influenced by host-country factor prices, tax rates, trade policies, and other variables. This will yield estimates of the sensitivity of input choices by foreign affiliates to host-country costs and policies. These results will in turn reveal how factor prices and trade barriers influence both the relative intensity of market-seeking versus cost-seeking foreign direct investment and the foreign demand for services derived from the knowledge capital of U.S. parent firms.