Regional Trade Integration and Multinational Firm Strategies
This paper analyzes the effects of the formation of a regional trade agreement on the level and nature of multinational firm activity. We examine aggregate data that captures the response of U.S. multinational firms to the formation of the ASEAN free trade agreement. Observed patterns guide the development of a model in which heterogeneous firms from a source country decide how to serve two foreign markets. Following a reduction in tariffs on trade between the two foreign countries, the model predicts growth in the number of source-country firms engaging in foreign direct investment, growth in the size of affiliates that are active in reforming countries both before and after the tariff reduction, and an increase in the extent to which the sales of affiliates in reforming countries are directed towards other reforming countries. Analysis of firm-level responses to the creation of the ASEAN free trade agreement yields results that are consistent with these predictions.
This paper was prepared for the Workshop on "Quantifying the Costs and Benefits of Regional Economic Integration," held on January 19-20, 2009 in Hong Kong. The statistical analysis of firm-level data on U.S. multinational companies was conducted at the Bureau of Economic Analysis, U.S. Department of Commerce under arrangements that maintain legal confidentiality requirements. The views expressed are those of the authors and do not reflect official positions of the U.S. Department of Commerce. We are grateful to Eduardo Morales for superb research assistance and to Robert Barro, Elhanan Helpman, Jong-Wha Lee, Emanuel Ornelas, Bill Zeile, and seminar participants at Harvard and the Asian Development Bank for helpful suggestions. Foley thanks the Division of Research of the Harvard Business School for financial support. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Antràs, Pol, and Fritz C Foley. 2011. Regional Trade Integration and Multinational Firm Strategies. In Costs and Benefits of Economic Integration in Asia, Robert J Barro and Lee, Jong-Wha, Ch. 8. Oxford, New York: Oxford University Press. DOI:10.1093/acprof:oso/9780199753987.001.0001