The Role of Multinational Firms in the Global Economy
Paper Session
Friday, Jan. 6, 2023 8:00 AM - 10:00 AM (CST)
- Chair: Teresa Fort, Dartmouth College
Capital Services in Global Value Chains
Abstract
This paper links the supply of investment goods with the use of capital services in a model of global production. By lowering prices of imported investment goods, trade liberalization lowers costs for producers that use capital services. Capital incomes rise relative to labor as exports in each country reallocate towards its more capital-intensive mix of industries. These forces are quantitatively important. Welfare gains from trade are twice as high as models where capital is a primary factor in fixed supply, and changes in trade costs between 1997-2007 explain one-quarter of the decline in the global labor share.Greenfield or Brownfield? FDI Entry Mode and Intangible Capital
Abstract
When a multinational firm invests abroad, it can either establish a new facility (greenfield investment, GF) or purchase a local firm (cross-border merger and acquisition, M&A). Using a novel US firm-level dataset, I provide the first evidence that multinationals with higher levels of intangible capital systematically invest through GF rather than through M&A. Motivated by this empirical result, I develop a general equilibrium search model of a multinational firm’s choice between M&A and GF. The model implies that equilibrium FDI patterns can be suboptimal. In particular, since the gap between the productivities of multinationals and local firms is larger in less developed countries, policymakers there can increase welfare by incentivizing FDI through M&A. By allowing highly productive multinationals to use local intangible capital, this policy increases aggregate productivity more than the laissez-faire outcome.Multinational Production and Global Shock Propagation during the Great Recession
Abstract
Both international trade and multinational production (MP) collapsed during the Great Recession. What fundamentals explained the MP and trade collapse, and how did they impact countries’ differential real wage changes? I answer these questions with a model of MP, trade, and sectoral linkages. The model highlights the frictions multinational enterprises (MNEs) face when they source from and sell to non-headquarters countries. These parameters govern MNEs’ vertical/horizontalness and render the rich interactions between MP and trade. I consider two possible sources of the MP collapse: compared to local producers, (1) MNEs respond differently to the same shock to foreign trade and domestic sectoral final demand, and (2) MNEs are affected by different shocks (MNE-specific shocks). MNE-specific shocks include those affecting MNEs’ productivity relative to local producers, as well as their vertical/horizontal-ness. I find that 71% of cross-country variation in multinational foreign affiliate sales declines relative to GDP and 19% of cross-country variation in trade declines relative to GDP can be explained by MNE-specific shocks. MNE-specific shocks hitting a few important headquarters and host countries propagate worldwide and explain much of the MP collapse. However, sectoral final demand shocks to almost all countries are necessary to explain a significant share of the trade collapse. The MP collapse contributes much more to cross-country variation in real wage changes than trade collapse.Discussant(s)
Nitya Pandalai-Nayar
,
University of Texas-Austin
Fariha Kamal
,
U.S. Census Bureau
Jingting Fan
,
Pennsylvania State University
Vanessa Alviarez
,
Inter-American Development Bank
JEL Classifications
- F2 - International Factor Movements and International Business