Multinational firms (MNEs) accounted for 42 percent of US manufacturing employment, 87 percent of US imports, and 84 of US exports in 2007. Despite their disproportionate share of global trade, MNEs' input sourcing and final-good production decisions are often studied separately. Using newly merged data on firms' trade and FDI activity by country, we show that US MNEs are more likely to import not only from the countries in which they have affiliates, but also from other countries within their affiliates' region. We rationalize these patterns in a unified framework in which firms jointly determine the countries in which to produce final goods, and the countries from which to source inputs. The model generates a new source of scale economies that arises because a firm incurs a country specific fixed cost that allows all its assembly plants to source inputs from that country. This shared fixed cost across plants creates interdependencies between firms' assembly and sourcing locations, and leads to non-monotonic responses in third markets to bilateral trade cost changes.
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THE MARGINS OF GLOBAL SOURCING: THEORY AND EVIDENCE FROM U.S. FIRMS
December 2014
Working Paper Number:
CES-14-47
This paper studies the extensive and intensive margins of firms' global sourcing decisions. We develop a quantifiable multi-country sourcing model in which heterogeneous firms self-select into importing based on their productivity and country-specific variables. The model delivers a simple closed-form solution for firm profits as a function of the countries from which a firm imports, as well as those countries' characteristics. In contrast to canonical models of exporting in which firm profits are additively separable across exporting markets, we show that global sourcing decisions naturally interact through the firm's cost function. In particular, the marginal change in profits from adding a country to the firm's set of potential sourcing locations depends on the number and characteristics of other countries in the set. Still, under plausible parametric restrictions, selection into importing features complementarity across markets and firms' sourcing strategies follow a hierarchical structure analogous to the one predicted by exporting models. Our quantitative analysis exploits these complementarities to distinguish between a country's potential as a marginal cost-reducing source of inputs and the fixed cost associated with sourcing from this country. Counterfactual exercises suggest that a shock to the potential benefits of sourcing from a country leads to significant and heterogeneous changes in sourcing across both countries and firms.
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How Wide Is the Firm Border?
January 2017
Working Paper Number:
CES-17-35
We quantify the normally unobservable forces that determine the boundary of the firm; that is, which transactions are mediated by ownership control as opposed to contracts or markets. To do so, we examine the shipment decisions of tens of thousands of establishments that produce and distribute a variety of products throughout the goods-producing sector. We examine how a firm's willingness to ship over distance varies with whether the recipient is owned by the firm. Because shipping costs increase with distance for many reasons, a greater volume of internal transactions at any given distance reveals the size of the firm's perceived net cost advantage of internal transactions. We find that the firm boundary is notably wide. Having one more vertically integrated downstream establishment in a location has the same effect on transaction volumes to that location as does a 40 percent reduction in distance between sender and destination. We further characterize how this 'internal advantage' varies with observable attributes of the transaction or product being shipped. Finally, we conduct a calibration of a multi-sector general equilibrium trade model and find that costs associated with transacting across firm boundaries also have discernible economy-wide implications.
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Trade Within Multinational Boundaries
July 2025
Working Paper Number:
CES-25-46
We leverage newly linked data from the U.S. Census Bureau and the U.S. Bureau of Economic Analysis to study transactions within U.S. multinational enterprises (MNEs). We show that using administrative data on intrafirm trade allows us to correct for measurement error in survey data and to identify the positive relationship between input-output (IO) linkages and the probability of trade between U.S. parents and their foreign affiliates. We also document the prevalence of intrafirm trade: more than half (three-quarters) of affiliates worldwide (in North America) export to or import from their U.S. parent. Our findings provide strong empirical support for traditional theories of firm boundaries that predict trade between vertically linked units of the same firm, and underscore the importance of accounting for the trade frictions that shape MNEs' regional supply chains.
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Factoryless Goods Producers in the US
September 2013
Working Paper Number:
CES-13-46
This paper documents the extent and characteristics of plants and firms in the US that are outside the manufacturing sector according to official government statistics but nonetheless are heavily involved in activities related to the production of manufactured goods. Using new data on establishment activities in the Census of Wholesale Trade conducted by the US Bureau of the Census in 2002 and 2007, this paper provides evidence on so-called 'factoryless goods producers' (FGPs) in the US economy. FGPs are formally in the wholesale sector but, unlike traditional wholesale establishments, FGPs design the goods they sell and coordinate the production activities. This paper documents the extent of FGPs in the wholesale sector and how they differ from traditional wholesalers in terms of their employment, wages, productivity and output. Reclassifying FGP establishments to the manufacturing sector using our definition would have shifted at least 595,000 workers to as many as 1,311,000 workers from wholesale to manufacturing sectors in 2002 and at least 431,000 workers to as many as 1,934,000 workers in 2007.
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THE TRADABILITY OF SERVICES: GEOGRAPHIC CONCENTRATION AND TRADE COSTS
March 2014
Working Paper Number:
CES-14-03
We develop a methodology for estimating the 'tradability' of goods and services using data on U.S. establishments. Our results show that the average service industry is less tradable than the average manufacturing industry. However, there is considerable within-sector variation in estimated tradability and many service industries are as tradable as manufacturing. Tradable service industries account for a significant share of economic activity and workers employed in those industries have relatively high average wages. Counterfactual analysis indicates that the potential welfare gains from policy liberalization in service trade are of the same order of magnitude as liberalization in the manufacturing sector.
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Firms' Exporting Behavior under Quality Constraints
May 2009
Working Paper Number:
CES-09-13
We develop a model of international trade with export quality requirements and two dimensions of firm heterogeneity. In addition to "productivity", firms are also heterogeneous in their "caliber" {the ability to produce quality using fewer fixed inputs. Compared to singleattribute models of firm heterogeneity emphasizing either productivity or the ability to produce quality, our model provides a more nuanced characterization of firms' exporting behavior. In particular, it explains the empirical fact that firm size is not monotonically related with export status: there are small firms that export and large firms that only operate in the domestic market. The model also delivers novel testable predictions. Conditional on size, exporters are predicted to sell products of higher quality and at higher prices, pay higher wages and use capital more intensively. These predictions, although apparently intuitive, cannot be derived from singleattribute models of firm heterogeneity as they imply no variation in export status after size is controlled for. We find strong support for the predictions of our model in manufacturing establishment datasets for India, the U.S., Chile, and Colombia.
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Transfer Pricing by U.S.-Based Multinational Firms
September 2008
Working Paper Number:
CES-08-29
This paper examines how prices set by multinational firms vary across arm's-length and related party customers. Comparing prices within firms, products, destination countries, modes of transport and month, we find that the prices U.S. exporters set for their arm's-length customers are substantially larger than the prices recorded for related-parties. This price wedge is smaller for commodities than for differentiated goods, is increasing in firm size and firm export share, and is greater for goods sent to countries with lower corporate tax rates and higher tariffs. We also find that changes in exchange rates have differential effects on arm's-length and related-party prices; an appreciation of the dollar reduces the difference between the prices.
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Industry Linkages from Joint Production
January 2023
Working Paper Number:
CES-23-02
I develop a theory of joint production to quantify aggregate economies of scope. In US manufacturing data, increased export demand in one industry raises a firm's sales in its other industries that share knowledge inputs like R&D and software. I estimate that knowledge inputs contribute to economies of scope through their scalability and partial non-rivalry within the firm. On average a 10 percent increase in output in one industry lowers prices in other industries by 0.4 percent. Such economies of scope manifest disproportionately among knowledge proximate industries and imply large spillover impacts of recent US-China trade policy on producer prices.
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An Anatomy of U.S. Establishments' Trade Linkages in Global Value Chains
June 2025
Working Paper Number:
CES-25-44
Global value chains (GVC) are a pervasive feature of modern production, but they are hard to measure. Using confidential microdata from the U.S. Census Bureau, we develop novel measures of the linkages between U.S. manufacturing establishments' imports and exports. We find that for every dollar of exports, imported inputs represent 13 cents in 2002 and 20 cents by 2017. Examining GVC trade flows in a gravity framework, we find that these flows are higher within 'round-trip' (input and output market is the same) linkages, regional trade agreements, and multinational firm boundaries. The strong complementarities between input and output markets are muted by the proportionality assumptions embedded in global input-output tables. Finally, with an off-the-shelf model, we show the round-trip results can be obtained when firm-specific sourcing and exporting fixed costs are linked.
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The Role of Cities: Evidence From the Placement of Sales Offices
January 2002
Working Paper Number:
CES-02-02
What is the force of attraction of cities? Leading explanations include the advantages of a con-centrated market and knowledge spillovers. This paper develops a model of firm location decisions in which it is possible to distinguish the importance of the concentrated-market motive from other motives, including knowledge spillovers. A key aspect of the model is that it allows for the firm to choose multiple locations. The theory is applied to study the placement of manufacturing sales offices. The implications of the concentrated-market motive are found to be a salient feature of U.S. Census micro data. The structural parameters of the model are estimated. The concentrated-market motive is found to account for approximately half of the concentration of sales offices in large cities.
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