CEPII, Recherche et Expertise sur l'economie mondiale
Brands in Motion: How frictions shape multinational production

Keith Head
Thierry Mayer

 Highlights :
  • We develop a new version of the Multinational Production model and apply it to extremely rich data on car assembly
  • The model delivers four estimating equations, that keep the simple structure of the gravity equation
  • Structural estimation of the four equations yields the complete set of parameters
  • We then conduct three counterfactual experiments of large change in regional agreements

 Abstract :
We use disaggregated data on car assembly and trade to estimate a model of multinational production. Our framework delineates four theory-based specifications under which all frictions relevant  to multinational production can be structurally estimated. In addition to the trade costs and multinational production frictions emphasized in past work, we incorporate a third friction: regardless of production origin, it is more difficult to make sales in  markets that are geographically separated from the brand's headquarters. The estimation transparently recovers internally consistent estimates of each type of friction cost. With structural parameters in hand, we investigate the consequences of three trade integration experiments: TPP, TTIP,  and Brexit. We show that each type of friction makes a qualitative and quantitative difference in the reallocation of production caused by economic integration.

 Keywords : Multinational Production | Gravity | Structural Estimation

 JEL : F1
CEPII Working Paper
N°2015-26, December 2015

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