Discussion Paper Details

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Title: Optimal Integration: Strategies for the Multinational Firm

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

Publication Date: July 2004

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

Programme Area(s): International Trade and Regional Economics

Abstract: 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.

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Bibliographic Reference

Grossman, G, Helpman, E and Szeidl, A. 2004. 'Optimal Integration: Strategies for the Multinational Firm'. London, Centre for Economic Policy Research.