Multinational Firms and Impacts on Employment, Trade, and Technology: New Perspectives for a New Century

By Robert E. Lipsey; Jean-Louis Mucchielli | Go to book overview

4

INTRA-FIRM TRADE AND FOREIGN DIRECT INVESTMENT *

An empirical analysis of French firms

Séverine Chédor, Jean-Louis Mucchielli and Isabelle Soubaya


4.1.

Introduction

The great importance given to foreign direct investment (FDI) is part of a general interest in internationalization. Apart from the relative regular increase in the international trade to GDP ratio, the growing importance of production and distribution of affiliates is a tangible proof of the globalization process. Since the exceptional increase in FDI 1 during the past ten years, trade and FDI have become the two ways - sometimes interpreted as substitute or complementary - to serve foreign markets. Indeed, several studies discuss the substitution-complementarity relationship between FDI and exports. Theoretical approaches generally tend to conclude a substitution relationship, contrary to empirical studies.

Moreover, international trade is increasingly dominated by multinational firms. Actually, intra-firm trade (i.e. trade between a parent company and its affiliates) represents, in 1998 (UNTCAD 1999), 30 per cent of world trade and also 30 per cent of total French trade 2 (Mathieu 1998). In that context, it seems necessary to divide global trade into two classes: intra-firm and inter-firm trade (or arm's length transactions). The relationship between FDI and each of these categories of trade has to be tested in order to highlight the potential impact of establishment of affiliates abroad on trade. Our paper deals with this concern for French intra-firm trade, which has never been explored in these terms. Indeed, individual databases for French multinational firms are exploited here for the first time.

In this paper, we discuss our results on FDI/trade relationships according to the type of trade (intra-firm or arm's length trade). Therefore, we try to see to what extent the volume exchanged in arm's length trade is more a complement or substitute to FDI than the volume of intra-firm trade. At the same time, we study

*This paper received support from the Commissariat Général au Plan, convention no. 4-98.

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