Superstar Manufacturers in International Trade: Theory and Microdata Evidence on the Welfare Effects of Distribution Foreign Direct Investment

• Applicant: Professor Frank Pisch, Ph.D.
• Subject Area: Economic Policy, Applied Economics
• Term: since 2024
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 542757200

Manufacturers trade with their international customers either directly through exporting or indirectly via a trade intermediary. The second, indirect mode accounts for up to half of total international trade and improves welfare by reducing search or information frictions; at least according to the prevailing consensus. In this project, I will challenge this view and explore the consequences of my new findings. To start, I will employ confidential and highly detailed data for the universe of French companies and their worldwide business groups between 1995 and 2016. I will document three empirical facts. First, some of the biggest French importers classified as intermediaries in the data (wholesalers and retailers) are in fact local affiliates of multinational groups that undertake substantial manufacturing activity elsewhere. Preliminary evidence suggests that they accounted for a fifth of total French imports and nearly half of ‘intermediated’ imports in 2015. Second, these ‘intermediaries’ act as importers and sellers, but also offer ancillary services, such as maintenance and repair, customization, after-sales, etc. Third, they face a lower elasticity of demand and charge higher mark-ups and prices compared to true intermediaries. In sum, I will show that many intermediaries are in fact local sales presences of powerful multinational manufacturing companies that provide customers with ancillary services to extract rents – a market access mode I label “Distribution-Foreign Direct Investment” (Distribution FDI). In the next step, I will evaluate the welfare consequences of these findings. This is especially interesting, because the net effect of Distribution FDI is a priori ambiguous: customers pay distorted prices, but at the same time value ancillary services. I will therefore propose and quantify a novel model of market access choice and service provision with the following main features. Manufacturers can serve foreign customers either via true intermediaries, through direct exports, or via Distribution FDI, with increasing upfront and fixed expenses across these modes. While the quality of services offered in the first two modes is low and intermediation fees, if applicable, are high, Distribution FDI implies higher prices due to better service. The model generates a pecking order, where the least productive firms export indirectly, mid-level firms export directly, and superstar multinationals engage in Distribution FDI. To gauge the net welfare effects of Distribution FDI, I will structurally estimate the parameters of the model and conduct counterfactual evaluations where this market access option is not available. The project proposed will shed a new light on the role of intermediaries in international commerce and explain how multinational superstar manufacturers govern global value chains to increase their market power.

• DFG Programme: Research Grants
• International Connection: France
• Co-Investigator: Professorin Claudia Steinwender, Ph.D.
• Cooperation Partner: Professor Giuseppe Berlingieri, Ph.D.