The Gravity of Knowledge
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 affiliates 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.
An earlier version of this paper circulated under the title "Gravity in the Weightless Economy". We thank four referees, Robert Mo¢ tt and Dirk Krueger as editors, and Nick Bloom, Gene Grossman, Stefania Garetto, Gordon Hanson, Ann Harrison, Pete Klenow, Rod Ludema, Jim Markusen, Marc Melitz, Ulrich Muller, Jim Rauch, Carol Shiue, Eric Verhoogen, Jonathan Vogel, Bill Zeile, as well as seminar participants at the 2008 Philadelphia Fed Trade Conference, the 2009 NBER ITO conference, the 2010 NBER ITI Summer Institute, Colorado, Columbia, Georgetown, George Washington, Hong Kong, Hong Kong Science and Technology, LSE, Paris School of Economics, Stanford, UBC, and Utrecht for useful comments. We also thank Gordon Hanson for providing us with data. The statistical analysis of ...rm-level data on U.S. multinational corporations reported in this study was conducted at U.S. Bureau of Economic Analysis under arrangements that maintained legal confidentiality requirements. Views expressed are those of the authors and do not necessarily reflect those of the Bureau of Economic Analysis, nor of the National Bureau of Economic Research.
Wolfgang Keller & Stephen Ross Yeaple, 2013. "The Gravity of Knowledge," American Economic Review, American Economic Association, vol. 103(4), pages 1414-44, June. citation courtesy of