Working Paper: CEPR ID: DP11036
Authors: Julian di Giovanni; Andrei A. Levchenko; Isabelle Mejean
Abstract: This paper investigates the role of individual firms in international business cycle comovement using data covering the universe of French firm-level value added, bilateral imports and exports, and cross-border ownership over the period 1993-2007. At the micro level, controlling for firm and country effects, trade in goods with a particular foreign country is associated with a significantly higher correlation between a firm and that foreign country. In addition, foreign multinational affiliates operating in France are significantly more correlated with the source economy. The impact of direct trade and multinational linkages on comovement at the micro level has significant macro implications. Because internationally connected firms are systematically larger than non-internationally connected firms, the firms directly linked to foreign countries represent only 8% of all firms, but 56% of all value added, and account for 75% of the observed aggregate comovement. Without those linkages the correlation between France and foreign countries would fall by about 0.091, or one-third of the observed average business cycle correlation of 0.29 in our sample of partner countries. These results are evidence of transmission of business cycle shocks through direct trade and multinational ownership linkages at the firm level.
Keywords: comovement; firm-level shocks; international trade; large firms
JEL Codes: F44; F61; F62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Trade in goods with a foreign country (F10) | Higher correlation between a firm and that foreign country (F23) |
| Direct trade linkages (F19) | Increase in correlation between individual firms and foreign GDP growth (F69) |
| Foreign multinational affiliates operating in France (F23) | Higher correlation with their source economies (F69) |
| Direct and indirect trade linkages at the firm level (F12) | Significant macro implications (E60) |
| Directly connected firms (L14) | Disproportionate amount of value added and aggregate comovement (D46) |
| Severing direct linkages (F12) | Fall in correlation between France and foreign countries (F29) |