Affiliating Versus Subcontracting: The Case Of Multinationals
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Overview: This paper aims at determining factors of the trade-off faced by multinationals between affiliating and subcontracting a relocated segment of production or distribution, using microdata on intra- and extra-firm bilateral trade of affiliates located in France. First, a microeconomic model is developed. The idea is to compare the profit made by a multinational if trade occurs within it with that made if trade occurs with another firm. On the one hand internalization may generate additive fixed costs, on the other it may enable the multinational to keep its comparative advantage gained through the development of firm-specific assets.