Working Paper: NBER ID: w22498
Authors: Javier Cravino; Andrei A. Levchenko
Abstract: We investigate how multinational firms contribute to the transmission of shocks across countries using a large multi-country firm-level dataset that contains cross-border ownership information. We use these data to document two novel empirical patterns. First, foreign affiliate and headquarter sales exhibit strong positive comovement: a 10% growth in the sales of the headquarter is associated with a 2% growth in the sales of the affiliate. Second, shocks to the source country account for a significant fraction of the variation in sales growth at the source-destination level. We propose a parsimonious quantitative model to interpret these findings and to evaluate the role of multinational firms for international business cycle transmission. For the typical country, the impact of foreign shocks transmitted by all foreign multinationals combined is non-negligible, accounting for about 10% of aggregate productivity shocks. On the other hand, since bilateral multinational production shares are small, interdependence between most individual country pairs is minimal. Our results do reveal substantial heterogeneity in the strength of this mechanism, with the most integrated countries significantly more affected by foreign shocks.
Keywords: multinational firms; business cycles; international transmission
JEL Codes: F23; F44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| 10% increase in the sales of a multinational's headquarters (F23) | 2% increase in the sales of its foreign affiliates (F23) |
| source country shocks (F29) | sales growth at the source-destination level (F61) |
| foreign shocks (F69) | sales growth at the source-destination level (F61) |