The Effects of Foreign Multinationals on Workers and Firms in the United States, with Bradley Setzler, Quarterly Journal of Economics, August 2021
Governments go to great lengths to attract foreign multinationals because they are thought to raise the wages paid to their employees (direct effects) and to improve outcomes at local domestic firms (indirect effects). We construct the first U.S. employer-employee dataset with foreign ownership information from tax records to measure these direct and indirect effects. We find the average direct effect of a foreign multinational firm on its U.S. workers is a 7 percent increase in wages. This premium is larger for higher skilled workers and for the employees of firms from high GDP per capita countries. We find evidence that it is membership in a multinational production network—instead of foreignness—that generates the foreign firm premium. We leverage the past spatial clustering of foreign-owned firms by country of ownership to identify the indirect effects. An expansion in the foreign multinational share of commuting zone employment substantially increases the employment, value added, and—for higher earning workers—wages at local domestic-owned firms. Per job created by a foreign multinational, our estimates suggest annual gains of 13,400 USD to the aggregate wages of local incumbents, two-thirds of which are from indirect effects. Our estimates suggest that—via mega-deals for subsidies from local governments—foreign multinationals are able to extract a sizable fraction of the local surplus they generate.
Trade and Domestic Production Networks, with Emmanuel Dhyne, Ken Kikkawa, and Magne Mogstad, Review of Economic Studies, March 2021
We examine how many and what kind of firms ultimately rely on foreign inputs, sell to foreign markets, and are affected by trade shocks. To capture that firms can trade indirectly by buying from or selling to domestic firms that import or export, we use Belgian data with information on both domestic firm-to-firm sales and foreign trade transactions. We find that most firms use a lot of foreign inputs, but only a small number of firms show that dependence through direct imports. While direct exporters are rare, a majority of firms are indirectly exporting. In most firms, however, indirect export is quantitatively modest, and sales at home are the key source of revenue. We show that what matters for the transmission of foreign demand shocks to a firm’s revenue is how much the firm ultimately sells to foreign markets, not whether these sales are from direct or indirect export.
The Life-Cycle Dynamics of Exporters and Multinational Firms, with Anna Gumpert, Haishi Li, Andreas Moxnes, and Natalia Ramondo, Journal of International Economics, September 2020
This paper studies the life-cycle dynamics of exporters and multinational enterprises (MNEs). Using rich firm-level data, we document a comprehensive set of facts on entry, exit, and growth of new exporters and new MNEs. Guided by these facts, we build a model based on the standard proximity-concentration trade-off extended to incorporate time-varying firm productivity and sunk costs of MNE entry. The calibrated version of the model goes far in matching cross-sectional and dynamic moments of the data on exporters and MNEs. Our results point to much higher sunk costs for MNE than for export activities. Finally, we show how including the choice to become an MNE affects the predicted export dynamics after a trade liberalization episode.
The Production Relocation and Price Effects of US Trade Policy: The Case of Washing Machines, with Aaron Flaaen and Ali Hortacsu, American Economic Review, July 2020
We estimate the price effect of U.S. import restrictions on washers. The 2012 and 2016 antidumping duties against South Korea and China were accompanied by downward or minor price movements along with production relocation to other export platform countries. With the 2018 tariffs, on nearly all source countries, the price of washers increased nearly 12 percent. Interestingly, the price of dryers—not subject to tariffs—increased by an equivalent amount. Factoring in dryer prices and price increases by domestic brands, the 2018 tariffs on washers imply a tariff elasticity of consumer prices of above one.
What Drives Home Market Advantage? with Kerem Cosar, Paul Grieco, and Shengyu Li, Journal of International Economics, January 2018
In the automobile industry, as in many tradable goods markets, firms usually earn their highest market share within their domestic market. The goal of this paper is to disentangle the supply- and demand-driven sources of the home market advantage. While trade costs, foreign production costs, and taste heterogeneity all matter for market outcomes, we find that a preference for home brands is the single most important driver of home market advantage - even after controlling for brand histories and dealer networks. Furthermore, we also find that consumers favor domestically producing brands even if these brands originated from a foreign country. Therefore, our results suggest a novel demand effect of FDI: Establishing local production increases demand for the brand even in the absence of any cost savings.
The Margins of Global Sourcing: Theory and Evidence from U.S. Firms, with Pol Antras and Teresa Fort, American Economic Review, September 2017
We develop a quantifiable multi-country sourcing model in which firms self-select into importing based on their productivity and country-specific variables. In contrast to canonical export models where firm profits are additively separable across destination markets, global sourcing decisions naturally interact through the firm’s cost function. We show that, under an empirically relevant condition, selection into importing exhibits complementarities across source markets. We exploit these complementarities to solve the firm’s problem and estimate the model. Comparing counterfactual predictions to reduced-form evidence highlights the importance of interdependencies in firms’ sourcing decisions across markets, which generate heterogeneous domestic sourcing responses to trade shocks.
Global Production with Export Platforms, Quarterly Journal of Economics, February 2017
Most international commerce is carried out by multinational firms, which use their foreign affiliates both to serve the market of the host country and to export to other markets outside the host country. In this paper, I examine the determinants of multinational firms’ location and production decisions and the welfare implications of multinational production. The few existing quantitative general equilibrium models that incorporate multinational firms achieve tractability by assuming away export platforms – i.e. they do not allow foreign affiliates of multinationals to export – or by ignoring fixed costs associated with foreign investment. I develop a quantifiable multi-country general equilibrium model, which tractably handles multinational firms that engage in export platform sales and that face fixed costs of foreign investment. I first estimate the model using German firm-level data to uncover the size and nature of costs of multinational enterprise and show that the fixed costs of foreign investment are large. Second, I calibrate the model to data on trade and multinational production for twelve European and North American countries. Counterfactual analysis reveals that multinationals play an important role in transmitting technological improvements to foreign countries and that the pending Canada-EU trade and investment agreement could divert a sizable fraction of the production of EU multinationals from the US to Canada. JEL Codes: F12, F23, L23
Borders, Geography and Oligopoly: Evidence from the Wind Turbine Industry, with Kerem Cosar and Paul Grieco, Review of Economics and Statistics, July 2015
Using a micro-level dataset of wind turbine installations in Denmark and Germany, we estimate a structural oligopoly model with cross-border trade and heterogeneous firms. Our approach separately identifies border-related from distance-related variable costs and bounds the fixed cost of exporting for each firm. In the data, firms’ market shares drop precipitously at the border. We find that 40 to 50 percent of the gap can be attributed to national border costs. Counterfactual analysis indicates that eliminating national border frictions would increase total welfare in the wind turbine industry by 4 percent in Denmark and 6 percent in Germany.
Multinational Production: Data and Stylized Facts, with Natalia Ramondo and Andres Rodriguez-Clare, American Economic Review, Papers and Proceedings, May 2015
We present a comprehensive data set on the bilateral activity of multinational firms, with focus on two variables: affiliate revenues and the number of affiliates across country pairs. Our basic data are from UNCTAD and include 59 countries, an average over 1996-2001. We implement an extrapolation procedure that fills in missing values using, alternately, FDI stocks and the bilateral number of M&A transactions. Our dataset allows for the analysis of new patterns of multinational production activities across countries, by taking into account firm rather than balance of payment variables, and both the intensive and extensive margins of multinational activities.
Bias in Estimating Border- and Distance-related Trade Costs: Insights from an Oligopoly Model, with Kerem Cosar and Paul Grieco, Economics Letters, January 2015
Regressions of price differences between locations in different countries without controlling for the local market structure and the location of origin of the product will lead to a biased estimate of the impact of national boundaries. We demonstrate that non-classical measurement error in distance and unaccounted mark-up differences across countries are responsible for these biases. In a quantitative exercise based on our previous work (Co¸sar et al., 2014), we show that the estimated border effect with price difference regressions overstates the true border effect by a factor of two or more.
Foreign Demand Shocks to Production Networks: Firm Responses and Worker Impacts, with Emmanuel Dhyne, Ayumu Ken Kikkawa, Toshiaki Komatsu, Magne Mogstad, July 2022
We quantify and explain the firm responses and worker impacts of foreign demand shocks to domestic production networks. To capture that firms can be indirectly exposed to such shocks by buying from or selling to domestic firms that import or export, we use Belgian data with information on both domestic firm-to-firm sales and foreign trade transactions. Our estimates of firm responses suggest that Belgian firms pass on a large share of a foreign demand shock to their domestic suppliers, face upward-sloping labor supply curves, and have sizable fixed overhead costs in labor. Motivated and guided by these findings, we develop and estimate an equilibrium model that allows us to study how idiosyncratic and aggregate changes in foreign demand propagate through a small open economy and affect firms and workers. Our results suggest that the way the labor market is typically modeled in existing research on foreign demand shocks—with no fixed costs and perfectly elastic labor supply—would grossly understate the decline in real wages due to an increase in foreign tariffs.
Spatial Economics for Granular Settings, with Jonathan Dingel, January 2021, Revisions requested at Econometrica
We examine the application of quantitative spatial models to the growing body of fine spatial data used to study economic outcomes for regions, cities, and neighborhoods. In “granular” settings where people choose from a large set of potential residence-workplace pairs, idiosyncratic choices affect equilibrium outcomes. Using both Monte Carlo simulations and event studies of neighborhood employment booms, we demonstrate that calibration procedures that equate observed shares and modeled probabilities perform very poorly in such settings. We introduce a general-equilibrium model of a granular spatial economy. Applying this model to Amazon’s proposed HQ2 in New York City reveals that the project’s predicted consequences for most neighborhoods are small relative to the idiosyncratic component of individual decisions in this setting. We propose a convenient approximation for researchers to quantify the “granular uncertainty” accompanying their counterfactual predictions.
Global Sourcing and Multinational Activity: A Unified Approach, with Pol Antras, Evgenii Fadeev, and Teresa Fort, May 2022
We develop a multi-country model in which multinational firms choose not only the location of their various assembly plants worldwide, but also the countries from which these plants import inputs. Our framework identifies a natural complementarity between these global sourcing and global assembly decisions. This complementarity delivers novel implications for the role of geography and trade policy in shaping the firms’ global production strategies. By merging data on the full range of all US firms’ domestic activities and imports from the US Census Bureau with comprehensive information on US multinationals’ foreign affiliate activity and on foreign-owned firms’ US plants, we provide novel evidence on these interdependencies. Multinationals account for the vast majority of US imports and exports, their export platform sales dwarf US exports, and they are much more likely to import not only from the countries in which they have affiliates, but also from other countries within their affiliate’s region.