Exporting, Global Sourcing, and Multinational Activity: Theory and Evidence from the United States

Multinational firms (MNEs) dominate trade flows, yet their global production decisions are often ignored in firm-level studies of exporting and importing. Using newly merged data on US firms’ trade and multinational activity by country, we show that MNEs are more likely to trade not only with countries in which they have affiliates, but also with other countries within their affiliates’ region. We rationalize these patterns with a new source of firm-level scale economies that arises when country-specific fixed costs to source from, or sell in, a market are shared across all the MNE’s plants. These shared fixed costs create interdependencies between a firm’s production and trade locations that generate third-market responses to bilateral trade policy changes.