The International Trade of Multinational Firms: The Empirical Behaviour of Intrafirm Trade in a Gravity Equation Model. CEPS Working Document No. 147, June 2000

[from introduction] Multinational firms are an increasingly important part of international economic integration. In recent years, foreign direct investment has been increasing at a rate that exceeds both the rate of growth of international trade and that of income. For many countries, the sales of affiliates of multinational firms have long dwarfed the value of trade. For example, in 1997, European Union country firms exported $283 billion in products to the United States. In the same year, affiliates of E.U.-based multinational firms sold $816 billion worth of products in the United States, almost three times the value of exports. Further, multinational firms play an important role in international trade. Intrafirm trade is international trade that occurs between different affiliates of the same multinational firm. Consider figure 1. For the United States, intrafirm trade is approximately 40% of all international trade. In addition, multinational firms also do a great deal of arms-length trade; for the U.S., this accounts for an additional 37% of all international trade. Trade that has nothing whatsoever to do with multinational firms is a mere 23% of the total. Understanding the role of multinational firms in an environment of increasing international economic integration is therefore essential for policy-makers.