The Magnification Effects of Intra-firm Trade of Multinational Corporations

Abstract

The 2008 financial crisis and the credit crunch severely restrict the ability of multinational companies to invest abroad and finance cross-boarder mergers and acquisitions; yet do not impair the intra-firm trade among parent firms, subsidiaries and branches. Intra-firm trade is a complement of foreign direct investment whether it is a market-access based FDI or for considerations of factor price differential motivations. Compared with arm’s length transactions, intra-firm trade of MNCs is highly contributable to unit the global-based affiliates under one set of rationales of operation mechanism, thus reel off the substantial benefits produced within the boundaries of the host nations. The essay starts with characteristics and incentives of intra-firm trade of MNCs, then analyzes in great details the related effects from the standpoints of international trade structure, international relations and the economy perspectives of the host countries. The author concludes that the sales of affiliates of multinational firms have long dwarfed the value of FDI injection to the host countries and the transfer price system is often illegally used for tax evasion purposes, thus shortchanging the earnings of the host nations. The author proposes corresponding countermeasures by the end.