The Proximity-Concentration Tradeoff under Uncertainty

———————————————————————————————————— In this paper we analyze the firm’s choice between serving a foreign market through exports or through foreign affiliate sales in an environment characterized by country-specific shocks to the cost of production. Our model predicts that country pairs with less correlated output fluctuations trade more, relative to affiliate sales, while countries with more volatile fluctuations are served relatively more by exporters than by foreign affiliates selling abroad. Using detailed data on trade and affiliate sales, we find empirical support for our model’s predictions. ——————————————————————————————————————————— We would like to thank the editors, two anonymous referees, Yona Rubinstein, and participants at various conferences and seminars for helpful comments. We would also like to thank Raymond Mataloni, Stephen Yeaple, and William Zeile for their help with the multinational affiliate data. Ramondo thanks the Peter B. Kenen fellowship from the International Economics Section, Princeton University, for support. Ruhl thanks the National Science Foundation for support under grant SES-0536970. The statistical analysis of firm-level data on U.S. multinational companies was conducted at the Bureau of Economic Analysis, U.S. Department of Commerce, under arrangements that maintain legal confidentiality requirements. The views expressed are those of the authors and do not reflect official positions of the U.S. Department of Commerce.