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Intra-industry trade with multinational firms


Egger, H; Egger, P; Greenaway, D (2007). Intra-industry trade with multinational firms. European Economic Review, 51(8):1959-1984.

Abstract

Recent developments, including the analysis of firm-level adjustment to falling trade costs, have contributed to a revival of interest in intra-industry trade (IIT). Most empirical work still relies on the standard Grubel–Lloyd measure. This however refers only to international trade, disregarding income flows stimulated by repatriated profits of multinational firms. Given the overwhelming importance of the latter, this is a major shortcoming. This paper provides a guide to measurement and estimation of the determinants of bilateral IIT shares from the perspective of new trade theory with multinational firms. We develop an analytically solvable general equilibrium model to investigate the impact of investment costs, multinational activities and income flows from repatriated profits. We also discuss and quantify the bias of the Grubel–Lloyd index associated with repatriated profit flows of multinationals. Using bias-corrected versions of the Grubel–Lloyd index as the dependent variable, we demonstrate that the determinants motivated by our theoretical analysis offer important insights into variations in IIT shares.

Abstract

Recent developments, including the analysis of firm-level adjustment to falling trade costs, have contributed to a revival of interest in intra-industry trade (IIT). Most empirical work still relies on the standard Grubel–Lloyd measure. This however refers only to international trade, disregarding income flows stimulated by repatriated profits of multinational firms. Given the overwhelming importance of the latter, this is a major shortcoming. This paper provides a guide to measurement and estimation of the determinants of bilateral IIT shares from the perspective of new trade theory with multinational firms. We develop an analytically solvable general equilibrium model to investigate the impact of investment costs, multinational activities and income flows from repatriated profits. We also discuss and quantify the bias of the Grubel–Lloyd index associated with repatriated profit flows of multinationals. Using bias-corrected versions of the Grubel–Lloyd index as the dependent variable, we demonstrate that the determinants motivated by our theoretical analysis offer important insights into variations in IIT shares.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Language:English
Date:2007
Deposited On:06 May 2008 10:18
Last Modified:21 Nov 2017 13:26
Publisher:Elsevier
ISSN:0014-2921
Publisher DOI:https://doi.org/10.1016/j.euroecorev.2007.01.004

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