Working Paper: CEPR ID: DP13704
Authors: Stefania Garetto; Lindsay Oldenski; Natalia Ramondo
Abstract: This paper studies the expansion patterns of the multinational enterprise (MNE) in time and space. Using a long panel of US MNEs, we document that: MNE affiliates grow by exporting to new markets; the activities of MNE affiliates persist during the affiliate’s life, usually starting with sales to their host market and eventually expanding to export markets; and MNE affiliates’ entry into new locations does not depend on the location of preexisting affiliates. Informed by these facts, we develop a multi-country quantitative dynamic model of the MNE that features heterogeneity in firm-level productivity, persistent aggregate shocks, and a rich structure of costs that affect MNE expansion. Importantly, MNE affiliates can decouple their locations of production and sales, and endogenously choose to enter or exit the host and the export markets. We introduce a compound option formulation that allows us to capture in a tractable way the rich heterogeneity that is observed in the data and that is necessary for quantitative analysis. Using the calibrated model, our quantitative application to Brexit reveals that export platforms are important for understanding the reallocation of MNE activity in time and space, and that the nature of the frictions to MNE activities matters for aggregate firm dynamics.
Keywords: multinational firms; foreign direct investment; firm dynamics; sunk costs
JEL Codes: F1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| MNE decisions (F23) | market conditions (P42) |
| MNE expansion (F29) | entering new markets (L17) |
| entry of new MNE affiliates (F23) | independent of location of preexisting affiliates (R30) |
| changes in export costs due to Brexit (F69) | decrease in incentive to open new affiliates (M13) |
| decrease in incentive to open new affiliates (M13) | decline in sales from existing affiliates (L14) |
| decline in sales from existing affiliates (L14) | affecting overall MNE activity (F23) |