Template-Type: ReDIF-Paper 1.0
Title: The Structure of Multinational Sales under Demand Risk
Author-Name: Francesco Paolo Conteduca
Author-Email: francesco.conteduca@gess.uni-mannheim.de
Author-Name: Ekaterina Kazakova
Author-Email: Ekaterina.kazakova@gess.uni-mannheim.de
Classification-JEL: F12, F23, L23
Keywords: FDI, Multinational Enterprise, Demand Risk, Risk Aversion, Export Platform

Abstract: This paper analyzes the effects of demand risk on the location and sales structure of multinational firms. We build
a structural model of horizontal FDI with firms that are heterogeneous in terms of risk aversion and productivity.
Firms decide on the location of their production plants, the set of countries to serve from these plants, and the
volume of sales for each plant. These decisions hinge both on the expected demand for each market and the
correlation structure of demand realizations across destination markets. Ceteris paribus, markets that offer better
hedging opportunities to multinationals induce larger sales and are more attractive locations for production. We
use firm-level data for German multinational companies to estimate firm-specific risk aversion coefficients as well as
other model parameters. We find that multinationals are heterogeneously risk averse. Finally, in a counterfactual
analysis, we show how a reduction in tariffs for goods imported into China changes the trade flows to the other
countries, the sign of the change depending on the correlation structure.

Note: 
Length: 48
Creation-Date: 2018-04
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp009
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2018_009