Research Insights: How Does Intra-firm Trade Affect Multinational Production and the Transfer of Knowledge?

Multinational Corporations (MNCs) strategically position their production facilities near customers to counter the “trade gravity effect” where geographical distance reduces foreign sales through shipping costs and trade barriers. Despite this, the foreign sales of larger firms engaged in intra-firm trade remain influenced by the distance from headquarters. The transfer of intermediate inputs, technology, and processes from headquarters to affiliates is vital for enabling cross-border production and knowledge exchange. However, it reintroduces shipping costs, further diminishing affiliate sales. Reducing barriers to intra-firm trade can help enhance knowledge transfer across countries and narrow global productivity and income gaps.