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What happens when Wal-Mart comes to your country? multinational firms' entry, productivity, and inefficiency

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  • Silvio Contessi

Abstract

Despite the microeconomic evidence supporting the superior idiosyncratic productivity of multinational firms (MFN) and their affiliates, cross-country studies fail to find robust evidence of a positive relationship between Foreign Direct Investment and growth. In order to study the aggregate implications of MNF entry and production, I develop a Dynamic Stochastic General Equilibrium model with firm heterogeneity where MNF sort according to their own productivity. Entry and production of MNF contribute to aggregate productivity growth at decreasing rates over time but potentially crowd out domestic producers due to increased product and factor market competition. I compare the aggregate benefit of productivity contributions with the cost of crowding out and argue that composition and crowding-out effects can help explain the conflicting evidence on the impact of Foreign Direct Investment on growth.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2010-043.

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Date of creation: 2010
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Handle: RePEc:fip:fedlwp:2010-043

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Keywords: International business enterprises;

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