Brands in Motion: How Frictions Shape Multinational Production

Abstract

Following the 2016 Leave vote in the referendum on UK membership in the EU and the election of Donald Trump, trade agreements have entered a period of great instability. To predict the impact of possible disruptions to existing arrangements requires counterfactual analysis that takes into account the complex set of factors influencing the production and marketing strategies of multinational corporations. We estimate a model of multinational decision-making in the car industry. This model predicts the production reallocation and consumer surplus consequences of changes in tariffs and non-tariff barriers induced by US-led protectionism, Brexit, transpacific, and transatlantic integration agreements. (JEL F13, F23, L21, L62, M31)After decades in which free trade agreements proliferated and deepened in scope, 2016 appeared to mark a major turning point. The Leave vote in the UK referendum on EU membership and the election of Donald Trump brought long-standing integration arrangements to the brink of disruption. Pure trade models are ill-equipped for predicting the outcomes of regional dis-integration because they omit an increasingly important feature of the world economy: multinational production (MP). The foreign affiliate structures of multinational corporations (MNCs) complicate matters because they introduce new sets of bilateral relationships. In addition to the origin-destination goods flows of standard trade models, MP models feature interactions between headquarters and subsidiary locations. MNCs must decide which of their network of production facilities will serve each market. Furthermore, because MNCs are typically multiproduct firms, they face decisions over which subset of varieties to offer in each of the markets where they choose to operate distribution facilities. Each of these decisions is likely to be influenced by distinct bilateral frictions.

Global Value Chains

“…This added cost can be interpreted as a reduced-form way to capture the costs of importing inputs (Ramondo and Rodríguez-Clare, 2013) or knowledge (Keller and Yeaple, 2013) from the headquarters, or perhaps the costs of adapting production to a foreign and unfamiliar environment. An alternative cost of multinational activity features prominently in the recent work of Head and Mayer (2019), who argue that firms also incur adaptation costs when marketing goods in countries distinct from their origin country, regardless of where those goods are produced. They argue that this is an especially important feature of the car industry, and they estimate an industry equilibrium model in which car makers decide on the optimal sourcing of their car models taking into account where their headquarters are located, where they have assembly plants (which are fixed in their model), and where consumers are.…”

“…Nevertheless, progress has been made by either exploiting survey data on the outward operations of multinational firms, and also by industry-specific studies relying on more granular data for specific sectors, such as the car industry data in Head and Mayer (2019).…”

High-Skill Migration, Multinational Companies and the Location of Economic Activity

“…As an additional contribution, I provide new evidence on the distributional welfare gains of MNE production. Many of the most notable papers in the multinational production literature have focused on quantifying the welfare gains of MNE production by incorporating, among other factors, the interrelations between MNE production and trade, intermediate inputs, innovation, and comparative advantage (Alviarez, 2018;Arkolakis et al, 2018;Head and Mayer, 2018;Ramondo and Rodriguez-Clare, 2013;Tintelnot, 2017). My paper is the first to show how the baseline results found in the literature might be expected to change if we were to incorporate the channel of migration, which would significantly affect the distributional welfare gains of MNE production.…”

Export‐platform foreign direct investment and trade policy uncertainty: Evidence from brexit

“…In these models, FDI entails not necessarily fixed/sunk costs but an efficiency loss compared to home production. Head and Mayer (2019) develop a model of multinational production with export platform combining elements of Melitz (2003) with Eaton and Kortum (2002), and perform simulations for two Brexit scenarios. In the pessimistic scenario, automotive production in the UK falls by 18%, while the reduction is around 4-10% under the optimistic scenario.…”