The Regional Nature of MNE Activities and the Gravity Model

Abstract

It has been demonstrated by Rugman and his colleagues that a majority of the activities undertaken by the world's largest 500 MNEs, such as sales, assets, and employment, are regional in nature. This evidence has also been extended to trade and FDI patterns of OECD countries. Given the costs associated with doing business in foreign and distant markets, one may expect there to be a regional concentration in such activities. That is, the concentration of MNE activities in regional markets may be consistent with a transactions cost model. The objective of the analysis undertaken in this paper is to measure the extent to which the concentrations of OECD MNE activities can be explained by a formal transactions costs model (the gravity model in this case). These results are important for two main reasons. To the extent the concentrations are consistent with a formal model, then, first, this would provide further theoretical arguments in support of Rugman's hypotheses, and second, this would indicate that MNE managers have it right – that is, the activities of the corporations they manage are as global as they should be. On the other hand, if the activities are not fully explainable by atransactions cost model, the implications would be quite different. Theresults indicate that although some activities can be explained by a gravity model, many dimensions of OECD MNE activities, especially within the EU, are not explainable using a gravity model. That is, many of the activities of EU MNEs are more regionally concentrated than would be predicted by transactions costs.

Citation

Hejazi, W. (2007), "The Regional Nature of MNE Activities and the Gravity Model", Rugman, A.M. (Ed.) Regional Aspects of Multinationality and Performance (Research in Global Strategic Management, Vol. 13), Emerald Group Publishing Limited, Leeds, pp. 85-109. https://doi.org/10.1016/S1064-4857(07)13005-9