DP4477 Optimal Integration: Strategies for the Multinational Firm

Author(s): Gene Grossman , Elhanan Helpman , Adam Szeidl

Publication Date: July 2004

Keyword(s): direct foreign investment , multinational corporations , intra-firm trade , vertical integration

JEL(s): F12 , F23 , L22

Programme Areas: International Trade and Regional Economics

Link to this Page: www.cepr.org/pubs/dps/DP4477.asp

We examine integration strategies of multinational firms that face a rich array of choices of international organization. Each firm in an industry must provide headquarter services from its home country, but can produce its intermediate inputs and conduct assembly operations in one or more of three locations. We study the equilibrium choices of firms that differ in productivity levels, focusing on the role that industry characteristics such as the fixed costs of foreign subsidiaries, the cost of transporting intermediate and final goods, and the regional composition of the consumer market play in determining the optimal integration strategies. In the process, we identify three distinct ‘complementarities’ that link firms’ foreign investment decisions for different stages of production.