Working Paper: NBER ID: w30494
Authors: Vanessa I. Alviarez; Cheng Chen; Nitya Pandalainayar; Liliana Varela; Keimu Yi; Hongyong Zhang
Abstract: We study the role of multinationals (MNCs) in facilitating firm-level and aggregate structural transformation. Using a stylized model of multinational production and trade, we show that an inward multinational liberalization in the manufacturing sector raises employment in host country firms, and decreases manufacturing employment, while also raising services employment, in the parent firms. We also show the conditions under which aggregate structural transformation occurs. We test the model's firm-level predictions by using confidential microdata from Japan. We study the response of Japanese MNC parents and of their affiliates in China to an exogenous change in China's openness to foreign direct investment (FDI). We find that in industries where inward FDI was encouraged, Japan MNC's affiliates in China experienced increases in their employment. We also find that MNC parents in the encouraged industries experienced decreases in home country manufacturing employment and increases in home country services and R&D employment. Finally, using microdata for several advanced and middle-income countries, we decompose the change in overall manufacturing employment shares into MNC and non-MNC components. We find a significant role for MNCs across all countries, suggesting the mechanism we highlight is an important global driver of structural transformation.
Keywords: multinationals; structural transformation; foreign direct investment; employment
JEL Codes: F41; F44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Inward multinational liberalization in manufacturing sector (F23) | Increase in employment at host country affiliates (F29) |
| Inward multinational liberalization in manufacturing sector (F23) | Decrease in manufacturing employment at Japanese parent firms (L23) |
| Conditions of host country's FDI policies (F23) | Increase in employment at MNC affiliates in encouraged industries (F23) |
| MNCs (F23) | Change in manufacturing employment shares across various countries (O14) |