Scale, scope, and the international expansion strategies of multiproduct firms

Abstract

A growing literature seeks to understand how the characteristics of firms shape the manner in which they serve foreign markets. We consider an environment in which multiproduct firms can sell their products in multiple countries from multiple locations. We show that there are strong empirical regularities in the expansion strategies of U.S. multinational firms and that simple extensions of standard models do not explain these regularities. We augment these models by introducing a framework in which organizational capital is a scarce input within the firm that has to be allocated to particular products and production locations and show that the standard model, so amended, is consistent with the data. We then use the model to analyze the productivity effect of changes in international frictions both within and across firms.

Testing an Extended Knowledge-Capital Model of Foreign Direct Investment

“…30 The direction of causation from national productivity averages to the FDI decision is not a priori clear. Productivity could be interpreted as a proxy for national capabilities for process invention and organizational innovation (Burstein and Monge-Naranjo, 2009;Yeaple, 2023).…”

“…Burstein and Monge-Naranjo (2009) argue that the international mobility of managerial know-how constitutes the kernel of firmembedded productivity' of multinational companies. 10 In the same vein, Yeaple (2023) stresses the role of the multinational's organizational capacity --that is fixed in its institutional structure, corporate culture, and established routines--as the basis for multinational production. All three approaches have in common that the firm is studied more or less as an island, independent of its surroundings.…”