Working Paper: CEPR ID: DP16579
Authors: Elhanan Helpman; Benjamin Niswonger
Abstract: We develop a model of large multinational enterprises, each one producing a continuum ofproducts. These outsized firms compete as oligopolists in a domestic and foreign market, facingcompetitive pressure from single-product firms that engage in monopolistic competition. Themultinational enterprises invest in R&D in order to expand the span of their products and inforeign direct investment (FDI) in order to expand the range of products manufactured by theirforeign affiliates. We study the dynamic evolution of these markets and characterize transitiondynamics and steady states. In addition to the evolution of product spans, we characterize theevolution of prices, markups, market shares, and exports relative to subsidiary sales. Furthermore,we study comparative dynamics that result from changes in trade costs, R&D costs, thecost of FDI and productivity changes of the multinational firms.
Keywords: multinational enterprise; foreign affiliate; foreign direct investment; innovation; firm dynamics; product span
JEL Codes: D43; F12; F23; L11; L13; L25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher export costs (F14) | Lower prices charged by foreign subsidiaries (F23) |
| Higher export costs (F14) | Lower foreign markups (F31) |
| Higher export costs (F14) | Lower market shares (D49) |
| Transition to new steady state (C62) | Gradual expansion of the number of products sold by foreign affiliates (F10) |
| Gradual expansion of the number of products sold by foreign affiliates (F10) | Rising foreign prices (F31) |
| Gradual expansion of the number of products sold by foreign affiliates (F10) | Rising markups (D43) |
| Gradual expansion of the number of products sold by foreign affiliates (F10) | Rising market shares (D49) |
| Reduction in FDI costs (F23) | Monotonic adjustments of foreign prices (F31) |
| Reduction in FDI costs (F23) | Monotonic adjustments of foreign markups (F31) |
| Reduction in FDI costs (F23) | Monotonic adjustments of market shares (D43) |
| Reduction in FDI costs (F23) | Decline in exports relative to subsidiary sales (F14) |
| Increase in product span (O49) | Raise in domestic price markup (D49) |
| Increase in product span (O49) | Raise in market share (D49) |
| Improvements in labor productivity (O49) | Raise in foreign market shares (F23) |
| Improvements in labor productivity (O49) | Raise in markups (D49) |