Abstract

This paper provides evidence that most firms are single-unit firms, and of the multi- unit firms most are single-affiliate firms that operate in just the parent country, while the smallest fraction of enterprises is multinational in scope. We develop a theoretical model of the firm to explain these facts. The model features (country-pair-specific) costs of creating, transferring, and accessing intangible assets within the firm. Intangible assets reduce the marginal costs of production, but transferring them across national borders involves extra costs which depend on the cultural distance between countries. Only the most successful (productive, low-cost) firms run more than one production unit, and even fewer do so in a multinational way. The findings of the theoretical model square with empirical evidence about multi-unit firms presented in this paper.

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