Intra-Industry Trade with Multinational Firms: Theory, Measurement and Determinants

University of Nottingham Research Paper No. 2004/10

55 Pages Posted: 6 May 2005

See all articles by Hartmut Egger

Hartmut Egger

University of Zurich - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

David Greenaway

University of Nottingham - School of Economics

Peter H. Egger

Ifo Institute for Economic Research - International Trade and Foreign Direct Investment; ETH Zürich; Ludwig-Maximilians University of Munich; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: 2004

Abstract

A number of recent developments, including the analysis of firm level adjustment to falling trade costs, have contributed to a revival of interest in intra-industry trade. Most empirical work still relies on the standard Grubel-Lloyd measure. This however refers only to international trade, disregarding income flows stimulated by repatriated profits. Given the overwhelming importance of the latter, this is a major shortcoming. We provide a guide to measurement and estimation of the determinants of bilateral intra-industry trade shares from the perspective of new trade theory with multinational firms. We develop an analytically solvable general equilibrium model to investigate investment costs, multinational activities and income flows from repatriated profits. The robustness of our findings are investigated in five simulation analyses. We also discuss and quantify biases of different Grubel-Lloyd indices in an empirical assessment of intra-industry trade shares and identify repatriated profit flows of multinationals as a key determinant of biased measurement. To overcome this, we provide several alternative, bias-corrected versions of the Grubel-Lloyd index. Finally, we demonstrate that the determinants motivated by our theoretical analysis offer important insights into variations in the Grubel-Lloyd index. Our new specification outperforms any other previously estimated model as illustrated in regressions on numerically generated data.

Keywords: Intra-industry trade,multinationals

JEL Classification: F12, F23

Suggested Citation

Egger, Hartmut and Greenaway, David and Egger, Peter H., Intra-Industry Trade with Multinational Firms: Theory, Measurement and Determinants (2004). University of Nottingham Research Paper No. 2004/10, Available at SSRN: https://ssrn.com/abstract=715967 or http://dx.doi.org/10.2139/ssrn.715967

Hartmut Egger (Contact Author)

University of Zurich - Department of Economics ( email )

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CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

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David Greenaway

University of Nottingham - School of Economics ( email )

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+44 115 951 5469 (Phone)
+44 115 951 4159 (Fax)

Peter H. Egger

Ifo Institute for Economic Research - International Trade and Foreign Direct Investment ( email )

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Munich, DE-81679
Germany
+49 0 89 9224 1238 (Phone)
+49 0 89 985369 (Fax)

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ETH Zürich ( email )

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Switzerland

Ludwig-Maximilians University of Munich

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Munich, 80539
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany