Regional Trade Integration and Multinational Firm Strategies

Robert J. Barro and Jong-Wha Lee

in Costs and Benefits of Economic Integration in Asia

Published in print February 2011 | ISBN: 9780199753987
Published online September 2011 | e-ISBN: 9780199896783 | DOI:
Regional Trade Integration and Multinational Firm Strategies

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This chapter analyzes the effects of the formation of a regional trade agreement on the level and nature of multinational firm activity. This chapter examines aggregate data that capture the response of United States (US) multinational firms to the formation of the Association of Southeast Asian Nations (ASEAN) free trade agreement. Observed patterns guide the development of a model in which heterogeneous firms from a source country decide how to serve two foreign markets. Following a reduction in tariffs on trade between the two foreign countries, the model predicts growth in the number of source-country firms engaging in foreign direct investment, growth in the size of affiliates that are active in reforming countries both before and after the tariff reduction, and an increase in the extent to which the sales of affiliates in reforming countries are directed toward other reforming countries. Analysis of firm-level responses to the creation of the ASEAN free trade agreement yields results that are consistent with these predictions.

Keywords: multinational firms; regional integration; trade agreements; heterogeneous firms; regionalism; trade diversion; trade creation; Asia; ASEAN

Chapter.  14791 words.  Illustrated.

Subjects: Business and Management

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