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The Global FirmLecture 5

Expansion Strategies of U.S. MNEs

Paul Deng

March 8, 2011

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Big Picture

Big Picture

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Hanson-Slaughter (2001), Expansion Strategies of US MNEs

Highlights of HS paper:

Using recent data, documented vertical FDI is more common than previous research suggests (Table 1 in the paper).

MNE’s activities are more diverse than simply gaining market access or exploring factor cost differences.

Host country’s characteristics play a great role in MNE’s decision making (e.g., size, trade barrier, and tax rates).

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BEA Data

A dataset of US MNEs from BEA (same in Yeaple paper, but more recent and with multiple years: 1982,1989, 1994, 1998)

Publicly available, check BEA website. For a good description of the data, see the data appendix in HS paper.

Aggregated firm-level data into industry level. Firm-level data only available upon request, but with user restrictions.

I will soon compile a list of FDI database on sitescape for your research reference.

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Expansion Strategies of US MNEs

Rather than look at HFDI vs. VFDI, HS look at three overlapping foreign activities of US MNEs: Export platform

foreign affiliate’s export vs. local sales

Global outsourcing Import of factor inputs for further processing

Wholesale trading Production FDI vs. Distribution FDI – but few in coexistence.

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Expansion Strategies of US MNEs

Export platform Traditional HFDI only considers market access to host country

But production facility could be used as a platform to export to other countries, other than sales in the host country.

Or MNEs can do both: local sales and export platform. The local sales part is the same as HFDI, but the export platform part is new.

So what determines the relative share of export (to other countries) vs. local sales in US foreign affiliate’ total sales? --- The research question.

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Export Platform

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Export Platform

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Export vs. Local Sales

Estimation equation:

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What do you expect the sign of the each coefficient to be?

Export vs. Local Sales: estimation results

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Expansion Strategies of US MNEs

Global outsourcing: HS consider only outsourcing in manufacturing sectors

Manufacturing outsourcing involves movement of inputs for the next-stage production to a different country – it’s another way of saying VFDI.

HS use affiliate imports for further processing as the dependent variable. One could also potentially use affiliate exports for further processing ---the other side of the same coin.

So what determines the import volume of factor inputs of a host country? --- The research question.

Since global outsourcing (in production) can be thought of HFDI, so our previous analysis on what determines HFDI applies here too.

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Expansion Strategies of US MNEs

I will skip the discussion of empirical results on global outsourcing, please refer to Table 8 in HS paper

On wholesale trading, it’s an interesting phenonenon and little research have been done. Refer to section 5 of HS paper for detailed discussions.

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Some Further Thoughts

Hanson-Slaughter offered a more sophiscated analysis than the simple choice model of either HFDI or VFDI. Indeed, same MNE often engages in both activities.

And even within HFDI or VFDI itself, the activities are quite diverse, e.g., export platform vs. simple HFDI.

Host country’s characteristics are vastly important A country with large market size and cheap factor cost could be both H and V

FDI destinations for MNEs

So far, the research we’ve seen only focus on the ”treated” group – i.e., the countries which have received FDIs. Will the analysis suffer selection bias problem?

I’d like to see a model that captures MNE’s decision among four choices (0, 1, 2, 3). 0 – not picked for FDI destination; 1- picked for HFDI; 2- picked for VFDI; 3 – Picked for both H and V FDI.

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Next time...

Read Pol Antras, 2009, “MNEs, FDI Flows, and Imperfect Capital Markets.” QJE, 124(1).

And in exercise session, we will have the first group presentations.

Bernard, Redding and Schott, 2010. ”Intra-Firm Trade and Product Contractibility.” NBER, w15881.

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