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Selection, Reallocation, and Spillover: Identifying the Sources of Gains from Multinational Production

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  • Laura Alfaro
  • Maggie X. Chen

Abstract

Quantifying the gains from multinational production has been a vital topic of economic research. Positive productivity gains are often attributed to knowledge spillover from multinational to domestic firms. An alternative, less stressed explanation is rm selection whereby competition from multinationals leads to market reallocation and survival of only the most productive domestic firms. We develop a model that incorporates both aspects and identify their relative importance in the gains from multinational production by exploring their distinct predictions on domestic productivity and revenue distributions. We show that knowledge spillover shifts both distributions rightward while selection and reallocation raise the left truncation of the distributions and shift revenue leftward. Using a rich firm-level panel dataset that spans 60 countries, we find firm selection and market reallocation constitute an important source of productivity gains while its relative importance varies across nations. Ignoring the role of this source can lead to significant bias in understanding the nature of gains. We also perform counterfactual analysis and quantify both the aggregate and the decomposed welfare effects of multinational production.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18207.

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Date of creation: Jul 2012
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Handle: RePEc:nbr:nberwo:18207

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Cited by:
  1. K. Yamamoto & T. Morita & F. Cerina, 2013. "Integration and Welfare with Horizontal Multinationals," Working Paper CRENoS 201307, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
  2. Carluccio, Juan & Fally, Thibault, 2013. "Foreign entry and spillovers with technological incompatibilities in the supply chain," Journal of International Economics, Elsevier, vol. 90(1), pages 123-135.

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