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Determinants of the Firm’s Foreign Internalization Decision

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Globalization

Abstract

This paper empirically investigates predictions of recently developed property-rights theories on the firm’s foreign internalization decision (Antràs and Helpman, Journal of Political Economy, 112(3), 552–580, 2004; Antràs and Helpman, The Organisation of Firms in a Global Economy. Harvard University Press, 2008). Using census data on Swedish manufacturing firms for the 1997–2007 time period, we provide novel and complementary evidence on the topic. In particular, our data enables us to investigate the firm’s foreign internalization decision directly in a sample that is not subject to sample selection bias. Our estimation results provide stark evidence in favor of the predicted impact of firm heterogeneity and foreign contracting enforcement that lies at the heart of the reference theories. Firms in industries with larger within-industry firm variation, as depicted by the variation in TFP levels, are more prone to integrate offshored production. We also provide novel evidence on the interplay of firm heterogeneity and property-rights factors at the firm level. In particular, the estimation results confirm the Antràs and Helpman (2008) prediction that foreign legislative institutions in support of headquarter provision favor the firm’s foreign internalization decision.

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Notes

  1. 1.

    See Antràs and Rossi-Hansberg (2009), Helpman (2006) and Spencer (2005) for surveys of models explaining the firm’s foreign internalization decision.

  2. 2.

    Antràs (2014) provides a recent survey of empirical contributions in the research field.

  3. 3.

    In addition, Federico (2010) and Kohler and Smolka (2009) identifies productivity premia of foreign internalization decisions with reference to Antràs and Helpman’s (2004) model.

  4. 4.

    It can be argued that a cautious empirical interpretation of these two-country models should include firms’ domestic integration and outsourcing decisions. Due to data limitations, the paper follows closely related research in the area and excludes this internalization aspect from the investigation.

  5. 5.

    Our investigation is based on the 2002 version of this classification. Earlier data (up to 2002) is updated using the concordance key provided by statistics Sweden.

  6. 6.

    Even if fewer organizational forms coexist in some of our disaggregated manufacturing industries, we rely on the model implication that the ranking of existing forms remain intact.

  7. 7.

    Firm productivity levels are assumed to be Pareto distributed (as in Melitz (2003)).

  8. 8.

    For three industries that lack producer price indices at the 2-digit level, we approximate index values using simple averages across industries for which price indices are reported in the same 1-digit level industry category.

  9. 9.

    We follow Nunn (2007) in letting the input use in US industries approximate that of industries outside the country, which is consistent with the setup of our reference models.

  10. 10.

    In the few cases when product homogeneity measures are lacking at the 4-digit level, these are approximated by simple averages across corresponding industries at higher levels of aggregation.

  11. 11.

    A detailed description of the basic index is provided by Kaufmann et al. (1999). The index version used in this paper is described in Kaufmann et al. (2009).

  12. 12.

    The discrepant results obtained for some firm specifications may reflect that the firm variation in relationship-specificity in assembly provision differs across industries, yielding results that are sensitive to individual firm productivity measurement.

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Acknowledgements

The author thanks Peter Vikström at Growth Policy Analysis for enabling access to confidential firm-level data and Markus Lindvert at Growth Policy Analysis for assistance in compiling the firm-level data set. Special thanks goes to two anonymous referees for useful comments, Nils-Åke Gustafson for general data assistance and Fredrik Wilhelmsson for empirical advice. Research in this paper is part of the author’s ongoing work on the topic of firm behavior and has in this respect benefited from the close cooperation with colleagues at Department of Economics, Lund University.

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Authors and Affiliations

  1. Institute for European Studies, University of Malta, Msida, Malta

    Susanna Thede

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  1. Susanna Thede
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Correspondence to Susanna Thede .

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Editors and Affiliations

  1. Department of Economics and Business Economics, Aarhus University, Aarhus, Denmark

    Bent Jesper Christensen

  2. The Fletcher School, Tufts University, Medford, Massachusetts, USA

    Carsten Kowalczyk

Appendix

Appendix

Table 3 Descriptive statistics, firm-location sample
Full size table
Table 4 Descriptive statistics, industry-location sample. All variables are transformed with the log-linear specification used in Heckman estimations except for the ACINT and DEV variables (that already are in log form)
Full size table

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Thede, S. (2017). Determinants of the Firm’s Foreign Internalization Decision. In: Christensen, B., Kowalczyk, C. (eds) Globalization. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-49502-5_6

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  • DOI: https://doi.org/10.1007/978-3-662-49502-5_6

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