Multinational production and comparative advantage

Available from: 
October 2013
Paper author(s): 
Vanessa Alviarez (University of Michigan)
Topic: 
Globalization - Trade
Year: 
2013


In this paper I analyze how multinational production affects the patterns of comparative advantage in an economy with local and foreign producers. I assemble a unique industry-level data set of bilateral foreign affiliates sales to show analytically and quantitatively that multinational production weakens a country’s comparative advantage. This result is explained by the fact that, on average, multinational production is disproportionately allocated in industries where local producers exhibit comparative disadvantage. I develop a general equilibrium model of trade and multinational production to estimate the state of technology parameters for every country-industry pair, along with bilateral trade cost and barriers to international production at the industry level. I use the fully calibrated model to measure the extent of technology transfer across countries and to quantify the welfare effects of multinational production and trade after accounting for the impact of multinational production on relative technology differences across sectors. The calibrated model highlights an additional channel trough which multinational production affects the gains in welfare associated to a change in trade cost. The mechanism relies on the fact that multinational production shapes the comparative advantage of the recipient economy changing its trade patterns and therefore the gains it derives from trade.

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Research section: 
Lacea 2013 annual meeting
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