We study the significant variation in intrafirm versus arm's-length trade with micro data. Exploiting the fact that Korean is an uncommon second language and that Korean culture is relatively homogenous, we show how intrafirm sourcing by South Korean affiliates abroad increases with their share of South Korean employees. This positive association is pervasive and nontrivial. Parsing the data more carefully, we find that South Korean employees are primarily high skilled, and that their presence matters for internal trade, not for trade with South Korea per se. The share of South Koreans is also higher in affiliates from nonroutine sectors in host countries that are culturally distant from South Korea. Our empirical evidence thus supports especially Bergrstrand and Egger (2011)'s view of multinational in-house production for nonroutine activities that require adaptation and internal communication.
Bibliographical noteFunding Information:
The authors benefitted from the helpful suggestions by Melissa Thomas-Hunt, Krsitin Behfar, Alan Beckenstein, John Mclaren, Ariell Reshef, James Harrigan, Daniel Millimet, and Pravin Krishna (who saw an earlier version of the paper). All remaining errors are ours. Peter Debaere received research funds from the Darden Foundation .
- Arm's-length trade
- Cultural distance
- Intrafirm trade
ASJC Scopus subject areas
- Economics and Econometrics