DP7553 The Gravity of Knowledge

Author(s): Wolfgang Keller, Stephen R Yeaple
Publication Date: November 2009
Date Revised: February 2012
Keyword(s): communication, foreign direct investment, intra-firm trade, Multinational firms, noncodified knowledge, offshoring, technology transfer, vertical production sharing
JEL(s): F1, F2, O23
Programme Areas: Industrial Organization, International Trade and Regional Economics, Development Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7553

How large are spatial barriers to transferring knowledge? We analyze the international operations of multinational firms to answer this fundamental question. In our model firms can transfer bits of knowledge to their foreign a¢ liates in either embodied (traded intermediates) or disembodied form (direct communication). Knowledge transfer costs interact with the knowledge intensity of production to determine the geographic structure of multinationals' input sourcing as well as its competitiveness in foreign markets. The model shows how data on observable trade costs and features of multinationals' global operations reveal the size and nature of knowledge transfer costs. Our empirical analysis confirms the model's predictions using firm-level data, quantifies the aggregate implications of the model for the structure of multinationals' operations, and demonstrates that transfer costs shape the knowledge content of intra-firm trade flows.