Working Paper: NBER ID: w18207
Authors: Laura Alfaro; Maggie X. Chen
Abstract: Assessing the productivity gains from multinational production has been a vital topic of economic research. Positive aggregate productivity gains are often attributed to within-firm productivity improvement; however, an alternative, less emphasized explanation is between-firm selection and market reallocation, whereby competition from multinationals leads to factor reallocation and the survival of only the most productive domestic firms. We investigate the roles of the two different mechanisms in determining the aggregate productivity gains by exploring their distinct predictions on the distributions of domestic firms: within-firm productivity improvement shifts the productivity and the revenue distributions rightward while between-firm selection and market reallocation raise the left truncation of the distributions and shift revenue leftward. Using a rich cross-country firm-level panel dataset, we find significant evidence of both mechanisms, but between-firm selection and market reallocation accounts for the majority of aggregate productivity gains, suggesting that ignoring this channel could lead to substantial bias in understanding the nature of gains from multinational production.
Keywords: Multinational production; Productivity; Market reallocation; Selection
JEL Codes: F21; F23; O14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Foreign multinational entry (F23) | within-firm productivity improvement (L23) |
| Foreign multinational entry (F23) | rightward shift in productivity distribution of domestic firms (O49) |
| Foreign multinational entry (F23) | higher productivity threshold for survival among domestic firms (L25) |
| higher productivity threshold for survival among domestic firms (D22) | negative effect on survival probabilities of less productive firms (D25) |
| Foreign multinational entry (F23) | domestic firms more likely to exit the market (L19) |
| Increased competition in product and factor markets (L11) | leftward shift in employment distribution of domestic firms (J68) |
| leftward shift in employment distribution of domestic firms (J68) | significant impact on least productive firms (D22) |