Study on the Role of Foreign Affiliates in GVCs Trade

This study investigates the multinational affiliates play an important role in explaining the international trade and investment. It analyzes both the self-selective effect which explains why some firms operate in more than one country while others do not and the learning-by effect which explains why firms use vertical supply chains rather than simply use own foreign facilities. Our empirical results are: First, the high productivity of firms increases FDI. Second, the integration increases foreign affiliates. Third, value-added trade within global value chains increases the profits of both exporters and foreign affiliates. Fourth, intra-firm trade decreases the profits of exporters and foreign affiliates. Key implications stand out: One is that the higher productivity of firms can increase the network of FDI-international trade. The other is that global value chained trade can increase the profits more than interiorization of one firm. This study suggests that it could be more benefits for high productive firms to increase GVCs free trade.