Interdependence in Multinational Production Networks

Most multinational firms today operate multilateral production networks. Most existing emperical analyses, however, have focused on the choice between producing at home and investing overseaas and assumed firms' decisions to invest in foreign countries to be interdepedent of their locations in third countries. This paper uses detailed French multinational subsidiary level data to examine the effect of existing production networks on multinationals' entry decisions. The paper finds strong evidence of horizontal and vertical inderdependence across multinationals' foreign production locations, but little evidence of interdependence between home-country production and foreign investment when third-country effects are taken into account. This result constitutes a sharp contrast to the conventional emphasis, and highlights the importance of investigating the causes and effects of foreign direct investment in the context of multinational production networks.