Exporting, Global Sourcing, and Multinational Activity: Theory and Evidence from the United States

Multinational firms (MNEs) dominate trade flows, yet their foreign production decisions are often ignored in firm-level studies of exporting and importing. Using newly merged data on US firms' trade and global production, we show that MNEs are more likely to trade with countries that are proximate to their affiliates. We rationalize these patterns with a new source of firm-level scale economies that arises when fixed costs to source from, or sell in, a market are shared across the MNE's plants. These shared fixed costs create interdependencies between firms' production and trade locations that generate third-market responses to trade policy changes.