The extensive margin of intrafirm trade

The firm-level approach to intra-industry trade reveals that the variation in the number of exporters or exported varieties (extensive margin) accounts for a greater share of the changes in aggregate trade than the variation in the average exports per firm variety (intensive margin). This paper shows vertical intra-firm trade follows a similar pattern. The share of intra-firm imports in total US imports is found to be higher, the higher the headquarters service intensity by industry of foreign affiliate. This increase materialises mostly in terms of new affiliates than in terms of more sales per existing affiliate. The endogenous choice of optimal number of affiliates can be rationalised in a theoretical framework that combines three ingredients – a multiproduct setup, Antràs’ property-rights model and Melitz’s heterogeneity view on productivity applied to affiliates.