The Proximity-Concentration Tradeoff Under Uncertainty

41 Pages Posted: 7 Jul 2010 Last revised: 21 Aug 2011

See all articles by Natalia Ramondo

Natalia Ramondo

University of California, San Diego (UCSD) - Graduate School of International Relations and Pacific Studies (IRPS)

Kim Ruhl

University of Minnesota - Twin Cities - Department of Economics

Veronica Rappoport

London School of Economics & Political Science (LSE)

Date Written: May 6, 2010

Abstract

This paper analyzes the firm's choice between serving a foreign market through exports or foreign affiliate sales in an environment characterized by country speci c shocks to the cost of production. Our model predicts that country pairs with less correlated output fluctuations trade more, relative to affiliate sales, and countries with more volatile fluctuations are served relatively more by exporters than by foreign affiliates selling abroad. Using detailed data on trade and affiliate sales from the Bureau of Economic Analysis, we find empirical support for these predictions of the model.

Keywords: multinational production, country risk, proximity-concentration tradeoff

JEL Classification: F12, F23, F41

Suggested Citation

Ramondo, Natalia and Ruhl, Kim and Rappoport, Veronica, The Proximity-Concentration Tradeoff Under Uncertainty (May 6, 2010). Available at SSRN: https://ssrn.com/abstract=1635461 or http://dx.doi.org/10.2139/ssrn.1635461

Natalia Ramondo

University of California, San Diego (UCSD) - Graduate School of International Relations and Pacific Studies (IRPS) ( email )

9500 Gilman Drive
La Jolla, CA 92093-0519
United States

Kim Ruhl

University of Minnesota - Twin Cities - Department of Economics ( email )

271 19th Avenue South
Minneapolis, MN 55455
United States

Veronica Rappoport (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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