Production Patterns of Heterogeneous Multinational Firms:Theory and Empirics

IDE Research Bulletin

March 2019

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The primary purpose of this research project was to analyze how the three types of strategy to have access to foreign market, i.e., (1) exporting commodities produced in the home country where the headquarters of the firm is located, (2) producing commodities at affiliate plants built in a foreign country for local sales by horizontal FDI, and (3) producing commodities at affiliate plants built in a foreign country for exports to the third countries, are chosen in a certain economic environment by firms that are heterogeneous with respect to productivity level. To achieve this objective, a numerical simulation model was planned to be developed in order to manage the complexity of the subject of our investigation, and empirically tested to examine its validity. We started with trying to introduce firm heterogeneity a la Melitz (2003) into the extended knowledge-capital model, which was an extension of the model originally developed by Markusen (1997) and fully utilized as a workhorse during our past research projects. However, we eventually found that there is a problem with the affinity between firm heterogeneity and the knowledge-capital model. Thus, we changed our policy to extend another theoretical model presented by Helpman, Melitz, and Yeaple (2004), which managed to introduce horizontal FDI in the trade model with heterogeneous firms developed by Melitz (2003), instead of introducing firm heterogeneity in a FDI-related model. Then, we faced second problem that it is not easy to calibrate parameter values from a real dataset within the designated range assumed by the base theory. While Oyamada held seminars on this issue in several international conferences and discussed with many specialists in several international conferences, a useful solution has not yet been found at this moment. Considering the fact that there still are many unclear points left in the behavioral characteristics of the Melitz-type model, we finally decided to dig down deeply into the basic trade model with monopolistic competition to know better the analytical tool. On the other hand, we performed empirical examinations on the extended knowledge-capital model again, since we found very good data for testing that enable us independently correspond to every mode of FDI.