Third Country Effects in Multinational Production Networks

The majority of multinational firms today operate a multilateral production network. Most existing empirical analyses have, however, focused on firms' choice between producing at home and investing overseas and assumed a firm's decision to invest in a foreign country is independent of its locations in third countries. This paper extends the literature by examining the effect of existing production network on multinationals' entry decision. Using detailed French multinational subsidiary-level data, the paper finds strong evidence of horizontal and vertical interdependence across multinationals' foreign production locations. There is, however, little evidence of horizontal interdependence between home-country production and foreign investment when the third-country effects are taken into account, constituting a sharp contrast to the conventional emphasis. This result is robust to the various specifications and sensitivity analyses undertaken in the paper, and suggests the importance of investigating the causes and effects of foreign direct investment in the context of multinational production network