Gravity in the Weightless Economy
Year: 2010
Type: article
Abstract: This paper studies the international mobility of technology through the lens of multinational firms. We show that gravity applies to the activity of multinational firms, and the strength of gravity is greatest in technologically-complex, research and development intensive industries. To explain gravity in the weightless economy, we develop a model in which a multinational’s production can be fragmented into intermediates that vary in the codifiability of their technology. Poorly codified technology requires face-to-face communication to transfer accurately, leading to production inefficiencies that can be avoided if an affiliate instead imports intermediates embodying this technology from its parent firm. Because intermediate input trade incurs shipping costs, affiliates’ sales are subject to the force of gravity, and this force is strongest in technologically complex industries. An additional implication of this mechanism is that affiliates are more constrained in their ability to substitute local production for intermediate imports in technologically complex industries. We confirm these predictions and show that trade costs increase the average technological complexity of
Authors: Wolfgang Keller, Stephen Yeaple
Language: English
Topic: Global trade and economics
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2129020436