The role of foreign affiliate productivity in the integration strategies of multinational firms

Abstract

We study the role of foreign affiliate productivity in the operations of multinational firms. We use the panel data of Multinational Corporations (MNCs) headquartered in South Korea during 2006-2013 and exploit the significant variation in affiliate productivity and its operation. With other variables held constant, including the parent firm or affiliate fixed effects, we find that a more (less) productive affiliate exports less (more) to the parent and sells more (less) to other unaffiliated entities. We then provide a possible theoretical scenario that is based on the MNC's optimal integration strategy literature. By allowing foreign affiliates to have varying productivity levels, the model bears predictions consistent with the empirical findings.