Production under foreign ownership and domestic volatility: An empirical investigation at the sector level

The main goal of this paper is to assess empirically to which extent the volatility of production is due to activities of firms under foreign ownership. Following Bergin et al. (2009) and Levasseur (2010), we postulate that multinational firms can use their contractors and their sites of production located abroad to “export” some of their domestic fluctuations, thus exacerbating further the business cycles of the hosting economy. Using a sample of twelve manufacturing sectors in eight EU countries and a data panel estimation, we find that the higher the share of firms under foreign ownership in a given sector of a country, the higher the volatility of production in that sector of that country, thus confirming the aforementioned assumption. Moreover, our estimates show how important to deal with sector-specific volatility, a result we attribute to idiosyncratic shocks arising at the sector level from both demand and supply sides. Our findings are robust to various ways of extracting cycles and to different time spans for measuring volatility.