Determinants of the firm’s foreign internalization decision

Abstract

This paper empirically investigates predictions of recently developed property-rights theories on the firm’s foreign internalization decision (Antràs and Helpman, Journal of Political Economy, 112(3), 552-580, 2004; Antràs and Helpman, The Organisation of Firms in a Global Economy. Harvard University Press, 2008). Using census data on Swedish manufacturing firms for the 1997-2007 time period, we provide novel and complementary evidence on the topic. In particular, our data enables us to investigate the firm’s foreign internalization decision directly in a sample that is not subject to sample selection bias. Our estimation results provide stark evidence in favor of the predicted impact of firm heterogeneity and foreign contracting enforcement that lies at the heart of the reference theories. Firms in industries with larger within-industry firm variation, as depicted by the variation in TFP levels, are more prone to integrate offshored production. We also provide novel evidence on the interplay of firm heterogeneity and property-rights factors at the firm level. In particular, the estimation results confirm the Antràs and Helpman (2008) prediction that foreign legislative institutions in support of headquarter provision favor the firm’s foreign internalization decision.