Intensive and Extensive Decisions of Firms with Spatial Dependency

We examine how firms operating in three or more countries show different international spatial dependencies, compared to those operating in just two countries (home and one foreign country). In a multi-country model, we focus on the significance of rival locations abroad, which has not been considered in bilateral two-country models. We present a model in which a multinational enterprise (MNE) determines the spatial extension of operations (measured by the number of foreign countries per parent firm) and the intensity of production (measured by the volume of local sales or exports per foreign location). We call these "extensive decisions" and "intensive decisions," respectively. We then estimate how their affiliates' locations are substitutable or complementary with each other. We use panel data on Japanese-owned foreign affiliates from 2000-2007 and measure key determinants to trade and foreign direct investment (FDI) multilaterally, relative to other foreign locations. We find that 1) the setup of a new location for local sales is replaceable with the imports from surrounding economies, 2) the setup of a new location for exports is encouraged by the market size of surrounding economies, and 3) the export volume to the third foreign economies are also enhanced.