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The Structure of Multinational Sales under Demand Risk

Author

Listed:
  • Francesco Paolo Conteduca
  • Ekaterina Kazakova
Abstract
This paper analyzes the effects of demand risk on the location and sales structure of multinational firms. We build a structural model of horizontal FDI with firms that are heterogeneous in terms of risk aversion and productivity. Firms decide on the location of their production plants, the set of countries to serve from these plants, and the volume of sales for each plant. These decisions hinge both on the expected demand for each market and the correlation structure of demand realizations across destination markets. Ceteris paribus, markets that offer better hedging opportunities to multinationals induce larger sales and are more attractive locations for production. We use firm-level data for German multinational companies to estimate firm-specific risk aversion coefficients as well as other model parameters. We find that multinationals are heterogeneously risk averse. Finally, in a counterfactual analysis, we show how a reduction in tariffs for goods imported into China changes the trade flows to the other countries, the sign of the change depending on the correlation structure.

Suggested Citation

  • Francesco Paolo Conteduca & Ekaterina Kazakova, 2018. "The Structure of Multinational Sales under Demand Risk," CRC TR 224 Discussion Paper Series crctr224_2018_009, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2018_009
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    File URL: https://www.crctr224.de/research/discussion-papers/archive/dp009
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    Citations

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    Cited by:

    1. Esposito, Federico, 2019. "Demand Risk and Diversification through Trade," MPRA Paper 99875, University Library of Munich, Germany.
    2. Brian Pustilnik, 2024. "Trade Policy and Reallocation: Multinational vs. Single-Country Linkages in the Tire Industry," Working Papers Central Bank of Chile 1009, Central Bank of Chile.
    3. Esposito, Federico, 2022. "Demand risk and diversification through international trade," Journal of International Economics, Elsevier, vol. 135(C).

    More about this item

    Keywords

    FDI; Multinational Enterprise; Demand Risk; Risk Aversion; Export Platform;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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