Question

What is Intra-firm trade? Why might US firms be interested in investing abroad, setting up affiliates, producing parts and components of their products, and import from their own affiliates? Wouldn't it be easier to allow a foreign firm to produce the components and export those to the US? Clarify your answer by using the example of the American Apparel manufacturers who get their garments made abroad in their affiliates and then sew their own labels and sell those finished garments back in the home market.

Answer 1

Intra-firm trade is the trade of goods from different countries but between the affiliates of a large multinational company.Same company opens firm in other country and then buy back the goods produced by them.

US based firms invests abroad by opening up affiliates and producing parts and components of their products and import from their own affiliates because of many reasons like-

• Easy availability of raw materials.
• Availability of cheap labour.
• Availability of electricity at low cost.
• Local government help due to help in development of local area. etc

All these factors leads to the lowering of the cost of production and hence they can produce these parts and components of their good at low cost.

Yes it will be easier to allow a foreign firm to produce these components and then export this to US, but it will become costlier as the firm which will produce the component will also take its profit and hence price of these components will rise which will not be good so they produce their own and import.

It can be more easily understood with the example of American Apparel manufacturers who produce clothes in their affiliates in foreign countries and then import and put their levels and sell in local markets. This is beaploth fabrics are not easily available in America if available they are costlier then other nation so these firms opens their affiliate firm in countries which have cheap fabric and labour like China, Vietnam, India, Bangladesh etc and they manufacture fabrics and clothes there and then import which cost them less and then they put their levels and sell in American market.