Working Paper: NBER ID: w25804
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 usually start with sales exclusively to the host market and eventually enter export markets, and that this extensive margin of expansion accounts for most of their sales growth. 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 novel compound option formulation that allows us to capture in a tractable way the rich heterogeneity observed in the data, which is necessary for quantitative analysis. Using the calibrated model, our quantitative application to Brexit reveals that the nature of the frictions to MNE activities matters for understanding the reallocation of MNE activity in time and space and for predicting the effects of globalization shocks.
Keywords: Multinational Enterprises; Trade Policy; Brexit; Dynamic Models; Quantitative Analysis
JEL Codes: F1; F23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| MNE expansion (F29) | extensive margin vs intensive margin (F12) |
| MNEs entering new markets (F23) | new affiliates or exporting from existing ones (F10) |
| affiliates beginning with sales to host market (L14) | diversifying into export markets (F10) |
| increasing export costs between the UK and EU countries (F10) | decline in UK-based affiliates' sales to the EU and EU-based affiliates' sales to the UK (F69) |
| compound option structure within the model (G13) | differing long-run responses of MNE activity (F23) |
| market entry costs (L11) | operational decisions in the context of globalization shocks (F69) |