Internationalization of services: The case of intra‐multinational enterprise trade (original) (raw)

2019, Thunderbird International Business Review

Increased tradability of services, made possible by the information and communications technology (ICT) revolution, has been at the heart of the internationalization of services. Although rapid growth of the services trade between parents of multinational enterprises (MNEs) and their overseas subsidiaries has contributed to the internationalization of services, empirical studies examining the determinants of intra-MNE trade in services are few. This article, using the ownership, location, and internalization (OLI) framework, attempts to explain intra-MNE trade in services. The results provide strong support for the OLI perspective, and posit a complementary relationship between manufacturing foreign direct investment and intra-MNE services trade. The results also suggest the importance of subsidiaries' absorptive capacity and breadth of global connectedness for intra-MNE trade. K E Y W O R D S internationalization of services, intra-MNE services trade, services offshoring 1 | INTRODUCTION Although the U.S. private service sector accounts for about 70% of gross domestic product (GDP) and employment, international trade in private services-exports plus imports-accounts for only about a quarter of the total trade in goods and services. This is because historically many services, especially services requiring face-to-face contacts, are "nontradable" across national borders (U.S. Council of Economic Advisers, 2018). Recently, however, the information and communications technology (ICT) revolution has not only turned many nontradable services or less tradable business services into highly tradable services, but also accelerated the global dispersion of goods production and internationalization of services (Borga & Koncz-Bruner, 2012; Grimm, 2016). Thus, the offshoring of goods production and services to third parties and to majority-owned MNE affiliates has grown (see Table 2). Empirical studies, however, have not quite kept pace with the growing importance of intra-firm trade, much less intra-MNE trade in services.