Regional Trade Integration and Multinational Firm Strategies Antràs and Foley (2009) Presented by Tomasa Rodrigo López UC3M December 12, 2012 Presented by T.Rodrigo (UC3M) Antràs and Foley (2009) December 12, 2012 1 / 17
Introduction and motivation Regional trade agreements have an important impact on the structure of international trade ows. The aim of this paper is to analyze the e ects of the formation of a regional trade agreement on the level and nature of multinational rm activity. Example Response of U.S. multinational rms to the formation of the ASEAN free trade agreement (AFTA). AFTA=) Agreement created to increase ASEAN s competitiveness and to attract foreign direct investment (FDI). Signed in 1992 by: f Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand g Additional incorporations: Vietnam 1995, Laos 1997 f Myanmar 1997, Cambodia 1999 g Presented by T.Rodrigo (UC3M) Antràs and Foley (2009) December 12, 2012 2 / 17
Literature review 1 Krueger (1999): literature s review on preferential trade agreements. 2 Chen (2008): test for the e ects of regional trade agreements on FDI from countries outside the region. 3 Desai, Foley, and Hines (2008): increases in FDI in response to a regional trade agreement bene t countries outside the region. This paper : It focuses on the behavior of U.S. multinational rms in 1989 and 1994 to study the AFTA s e ects. It generates predictions of how lower regional trade costs a ect to the intensive and extensive margins of FDI. Presented by T.Rodrigo (UC3M) Antràs and Foley (2009) December 12, 2012 3 / 17
Data Panel of data on the characteristics of U.S. multinational rms operating abroad =) obtained from the Bureau of Economic Analysis (BEA) benchmark surveys of U.S. Direct Investment Abroad. The survey 8provides information on 9 the level of a liate sales to < The host country = persons in : The U.S. : ; Third countries De nition A U.S. multinational entity is the combination of a single U.S. legal entity that has made the direct investment (U.S. parent) and at least one foreign business enterprise(foreign a liate). Presented by T.Rodrigo (UC3M) Antràs and Foley (2009) December 12, 2012 4 / 17
Main results from the Data U.S. multinational aggregate activity in ASEAN and other Asian countries in 1989 and 1994 Presented by T.Rodrigo (UC3M) Antràs and Foley (2009) December 12, 2012 5 / 17
Main results from the Data Direction of sales of a liates in ASEAN and other Asian countries in 1989 and 1994 Presented by T.Rodrigo (UC3M) Antràs and Foley (2009) December 12, 2012 6 / 17
Main results from the Data Direction of sales of a liates in ASEAN and other Asian countries in 1989 and 1994 Presented by T.Rodrigo (UC3M) Antràs and Foley (2009) December 12, 2012 7 / 17
Model It is built on the work of Helpman, Melitz and Yeaple (2004). Three-countries world: the West, the East and the South. It studies the optimal international organization of production from the point of view of rms based in the West. Firms own the technology to produce a di erentiated good with demand y = A j p σ where j = W, E, S. Cumulative distribution function of productivity: G (ϕ) There are two types of labor force: skilled and unskilled labor. Presented by T.Rodrigo (UC3M) Antràs and Foley (2009) December 12, 2012 8 / 17
Model Unit variable cost of production for a rm with productivity ϕ producing in country ϱ = W, E, S : c ϱ (ϕ) = 1 ϕ (w ϱ s ) β (w ϱ u ) 1 β Fixed cost of production in terms of skilled labor: f E = f S = f > 0 Variable costs on trade: τ >τ τ between the West and each of the two other countries τ between the East and South Assumptions: wu W = wu E > wu S ws W = ws E = ws S = 1 w E 1 β τ > u Presented by T.Rodrigo (UC3M) Antràs and Foley (2009) December 12, 2012 9 / 17 w S u
Pro ts of the di erent organizational strategies of a rm in the West Firm in the West only has one plant located in the West : σ 1 (σ 1)ϕ τ 1 σ (A E + A S ) π X (ϕ) = 1 σ σ (wu W )(1 β)(σ 1) Presented by T.Rodrigo (UC3M) Antràs and Foley (2009) December 12, 2012 10 / 17
Pro ts of the di erent organizational strategies of a rm in the West Firm in the West only has one plant located in the West : σ 1 (σ 1)ϕ τ 1 σ (A E + A S ) π X (ϕ) = 1 σ σ (wu W )(1 β)(σ 1) Firm in the West decides to open one plant in the East : π I _E (ϕ) = 1 σ (σ 1)ϕ σ σ 1 A E + τ 1 σ A S (w E u ) (1 β)(σ 1) f Presented by T.Rodrigo (UC3M) Antràs and Foley (2009) December 12, 2012 10 / 17
Pro ts of the di erent organizational strategies of a rm in the West Firm in the West only has one plant located in the West : σ 1 (σ 1)ϕ τ 1 σ (A E + A S ) π X (ϕ) = 1 σ σ (wu W )(1 β)(σ 1) Firm in the West decides to open one plant in the East : π I _E (ϕ) = 1 σ (σ 1)ϕ σ σ 1 A E + τ 1 σ A S (w E u ) (1 β)(σ 1) f Firm in the West decides to open one plant in the South : π I _S (ϕ) = 1 σ (σ 1)ϕ σ σ 1 τ 1 σ A E + A S (w S u ) (1 β)(σ 1) f Presented by T.Rodrigo (UC3M) Antràs and Foley (2009) December 12, 2012 10 / 17
Pro ts of the di erent organizational strategies of a rm in the West Firm in the West decides to open a plant in the East and the South : π I _ES (ϕ) = 1 σ (σ 1)ϕ σ σ Pro t functions can be expressed as : 1 A E A + S (wu E ) (1 β)(σ 1) (wu S ) (1 β)(σ 1) π k (ϕ) = ψ k ϕ σ 1 f k where kɛ fx, I _E, I _S, I _ESg Investing only in the East dominates investing only in the South if: A E + τ 1 σ A S w τ 1 σ A E + A > E u S w S u (1 β)(σ 1) Using previous equations: n o n o ψ I _ES > max ψ I _E, ψ I _S > min ψ I _E, ψ I _S > ψ X f I _ES = 2f > f I _E = f I _S = f > f X = 0 Presented by T.Rodrigo (UC3M) Antràs and Foley (2009) December 12, 2012 11 / 17 2f
Analysis Presented by T.Rodrigo (UC3M) Antràs and Foley (2009) December 12, 2012 12 / 17
Results from the Model Prediction 1. An FTA between the East and the South increases the number of Western rms engaging in FDI in the South-East area. Prediction 2. An FTA between East and South generates gross entry and gross exit of Western a liates in the South-East area. When rm productivity follows a Pareto distribution, the FTA generates a net increase in the number of Western a liates in the South-East area. Prediction 3. An FTA between the East and the South increases the share of a liate sales going to third countries. Presented by T.Rodrigo (UC3M) Antràs and Foley (2009) December 12, 2012 13 / 17
Econometric Evidence Descriptive statistics for the variables used in the regression analysis Presented by T.Rodrigo (UC3M) Antràs and Foley (2009) December 12, 2012 14 / 17
Econometric Evidence A liate Level Responses Presented by T.Rodrigo (UC3M) Antràs and Foley (2009) December 12, 2012 15 / 17
Ecometric Evidence Country/Industry Level Responses Presented by T.Rodrigo (UC3M) Antràs and Foley (2009) December 12, 2012 16 / 17
Concluding Remarks From the aggregate data and rm-level analysis =) U.S. multinational activity increase at the time AFTA is created. Findings are consistent with the model s predictions: High levels of growth in third-country sales for a liates that are active before and after the formation of AFTA. New a liates in ASEAN countries direct a larger share of their sales to third countries than new a liates elsewhere in Asia. Limitations: 1 Empirical tests focus on the formation of a single free trade agreement =) esponse to this reform may not be repreentative 2 There haven t been found any asymmetries in the e ects on FDI across countries. Presented by T.Rodrigo (UC3M) Antràs and Foley (2009) December 12, 2012 17 / 17