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Distance costs and Multinationals' foreign activities

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  • Kleinert, Jörn
  • Toubal, Farid

Abstract

We derive a gravity equation from two general equilibrium models with multinational firms: a symmetric firm model where foreign affiliates rely on specific intermediate goods and a heterogenous firms model with country-specific fixed costs. Although the reduced form gravity equation is the same, the structural models behind it differ. In the heterogenous firm model less (but larger) firms enter more distant markets which yields lower aggregate sales. In the symmetric firm intermediate input model, in contrast, lower aggregate sales result from lower sales per foreign affiliate. We use the gravity equation to discriminate between the two models. Thereby, we find more support for the heterogenous firm model.

Suggested Citation

  • Kleinert, Jörn & Toubal, Farid, 2006. "Distance costs and Multinationals' foreign activities," CEI Working Paper Series 2006-6, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
  • Handle: RePEc:hit:hitcei:2006-6
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    File URL: https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/13510/wp2006-6a.pdf
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    References listed on IDEAS

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    Cited by:

    1. Monika Mrázová & J Peter Neary, 2019. "Selection Effects with Heterogeneous Firms," Journal of the European Economic Association, European Economic Association, vol. 17(4), pages 1294-1334.
    2. Neary, J. Peter, 2009. "Trade costs and foreign direct investment," International Review of Economics & Finance, Elsevier, vol. 18(2), pages 207-218, March.
    3. Alfonso Irarrazabal & Andreas Moxnes & Luca David Opromolla, 2013. "The Margins of Multinational Production and the Role of Intrafirm Trade," Journal of Political Economy, University of Chicago Press, vol. 121(1), pages 74-126.

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    More about this item

    Keywords

    Gravity equation; multinational firms; distance costs;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models

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