Économie et Statistique n° 435-436 - Internationalization of French Business Firms
Imports of Intermediate Goods and Organizational Choices by French Multinational Firms
We analyze the international subcontracting decisions of French multinational groups, using a theoretical model of the importing decision with heterogeneous firms inspired by Antràs and Helpman. Our model enlarges the theory of international trade to corporate organization strategies. When they import intermediate goods, firms are faced with the organizational choice between producing in-house in one of their foreign subsidiaries or subcontracting production to a foreign supplier. The choice depends on two factors. The first is productivity. According to Antràs and Helpman, only the most productive firms have subsidiaries abroad and import their inputs in-house. Our model focuses on multinational firms. The crucial determinant of their imports, therefore, is not the cost of setting up the subsidiary but the fixed cost of production organization. We show that the more productive firms outsource intermediate-goods production if their organizational costs when outsourcing exceed those of vertical integration. The second factor influencing the decision is the nature of inputs traded between the supplier and the multinational firm. Some inputs require investments to adjust to the specificity of the final good produced by the firm. Controlling the production process through integration limits the risk of under-investment. The choice of organizational form is guided by a trade-off between organizational-cost gains and income-sharing gains. Our estimates indicate that the most productive multinationals tend to outsource the production of intermediate goods. We also show that physical- and human-capital intensity favours integration.