International Fragmentation of Production and the Intrafirm Trade of U.S. Multinational Companies

An aspect of globalization that has attracted increased attention in recent years is trade in intermediate inputs associated with the fragmentation of production across national borders. This trade takes the form of intrafirm transactions when production stages in different countries are performed by vertically integrated units of a multinational firm. Using firm-level data on U.S. multinational companies collected by the U.S. Bureau of Economic Analysis, this paper examines intrafirm shipments of intermediate inputs from U.S. parent companies to their foreign manufacturing affiliates. We relate the propensity of affiliates to source intermediate inputs from their parents to characteristics of the parent company, of the affiliate, and of the affiliate’s host country and industry that we hypothesize will influence the volume of intrafirm trade associated with fragmentation. Our results indicate that this trade is positively related to industry and affiliate characteristics that suggest fragmented production, to host-country characteristics that offer cost advantages, and to parent and affiliate characteristics that favor internalized transactions and the active coordination of different stages of the production process. The signs on the coefficients for a number of variables suggest a division of labor between higher-skilled, or more technologically advanced, activities performed by the parent and lower-skilled, or more rudimentary, activities performed by the affiliate.