How weak are the signals? International price indices and multinational enterprises

Received: 23 January 2001 Revised: 12 October 2003 Accepted: 14 October 2003 Online publication date: 8 January 2004 Abstract International price indices (IPIs) provide the most timely and comprehensive market information available to international business. How do multinational enterprises (MNEs) affect the validity of IPIs? We review the earlier debate over methods for calculating IPIs, which concluded that unit values were inferior to specification prices, although most governments produce only unit value indexes. We explore three ways in which MNEs can affect the validity of IPIs: determining the ‘representative’ transfer price, excluding intrafirm transactions from the index, and choosing the ‘right’ transfer price along the transportation chain. We argue that MNE activities strengthen the case for specification prices; although still uncommon, they are the stronger signal of international markets. Our empirical analysis supports this hypothesis, finding that a 10% increase in the intrafirm trade share of US imports widens the gap between specification price and unit value by 1.3%, with transfer price manipulation further increasing the gap. Journal of International Business Studies (2004) 35, 61–74. doi:10.1057/palgrave. jibs.8400069