Advances in Logistics and the Growth of Intra-Firm Trade: The Case of Canadian Affiliates of U.S. Multinationals, 1984-1995

We show that the advent of improved logistics management, including the “just-intime” (JIT) production system, can plausibly explain much of the dramatic (i.e., roughly 95%) growth of intra-firm trade in intermediates from Canadian affiliates to their U.S. MNC parents in the 1984-1995 period. The decline in tariffs and physical transport costs over this period was far too small (about 2.5%) to plausibly explain such a large increase in intra-firm trade, and moreover, at the industry level, there is essentially no correlation between tariff/transport cost reductions and growth of intra-firm trade. However, the growth of intra-firm trade was highly correlated (at the industry and firm level) with adoption of improved logistics and JIT, as proxied by the improvement in the inventory-to-sales ratio. This finding makes sense, since improved logistics and JIT lower the inventory carrying cost component of transporting intermediates intra-firm. At a time (i.e., 1984) when tariff and physical transport costs were already quite low, it seems plausible that inventory carrying costs were a substantial part of the cost of intra-firm trade in many industries. Indeed, the only two studies of the subject that we are aware of, the HP study by Lee, Billington and Carter (1993), and the DEC study by Arntzen et al (1995), both found this to be true. This led HP and DEC to adopt JIT logistics to reduce these costs. Acknowledgements: The statistical analysis of the confidential firm-level data on U.S. multinational corporations reported in this study was conducted at the International Investment Division, Bureau of Economic Analysis, U.S. Department of Commerce, under arrangements that maintained legal confidentiality requirements. The views expressed are those of the authors and do not necessarily reflect those of the Department of Commerce.