Innovation, trade and multinational production
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ACDE Seminar
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Multinational production (MP), where multinational firms engage in production outside of their country of origin, has been growing at nearly twice the rate of world exports over the last 20 years. In 2010, the value of MP was nearly double that of world exports. MP tends to utilise factors of production from the host economy as well as internationally sourced components but also the expertise, production methods, and other characteristics of the multinational firm. Loosely describing these multinational firm specific inputs as technology, MP can be seen as a form of technology diffusion whereby the location of production using a particular technology is not restricted to that technology’s country of origin.
I extend the seminal Eaton and Kortum Ricardian model of international trade (Eaton and Kortum, 2002) to include MP as well as endogenous innovation and technology in a general equilibrium framework and use the model to estimate the gains from openness to trade and MP across countries. MP in my model allows for technology developed in one country to be used in production in other countries around the world, allowing for a separation of production and innovation activities, and for each to take place where it is most efficient. The gains from openness to trade and MP implied by the calibrated model are in general much larger than the gains previously reported in the literature, reflecting productivity gains from inward MP, additional profits to multinationals and their affiliates around the world from outward MP, and the benefits of specialisation across production and research activities.
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