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The Role of Multinational Production in a Risky Environment

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  • VEronica Rappoport

    (Columbia Business School)

  • Natalia Ramondo

    (U. Texas-Austin)

Abstract

The crucial difference between Foreign Direct Investment (FDI) and other international financial flows is that the former involves technology flows across countries. In the presence of country-specific shocks, these flows not only alter the distribution of output across countries, but also across different states of nature. This paper introduces FDI simultaneously as a portfolio and technology flow in a risky environment. We find that multinational activities improve the scope for international risk diversification even in world with complete international financial markets. Multinational firms have incentives to locate affiliates in countries with business cycles least correlated with world risk. In doing so, they reshape the patterns of world risk and improve the scope for international risk diversification. A calibration exercise for OECD countries suggests that multinational activities reduces the consumption risk premium by 5% beyond the diversification opportunities provided by complete financial markets.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 1106.

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Date of creation: 2009
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Handle: RePEc:red:sed009:1106

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  1. Robert E. Lipsey, 2001. "Foreign Direct Investment and the Operations of Multinational Firms: Concepts, History, and Data," NBER Working Papers 8665, National Bureau of Economic Research, Inc.
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Cited by:
  1. José L. Fillat & Stefania Garetto, 2010. "Risk, returns, and multinational production," Risk and Policy Analysis Unit Working Paper QAU10-5, Federal Reserve Bank of Boston.
  2. Logan Lewis, 2011. "Exports versus Multinational Production under Nominal Uncertainty," 2011 Meeting Papers 223, Society for Economic Dynamics.
  3. Jörn Kleinert & Julien Martin & Farid Toubal, 2012. "The few leading the many: foreign affiliates and business cycle comovement," Globalization and Monetary Policy Institute Working Paper 116, Federal Reserve Bank of Dallas.
  4. Silvio Contessi, 2010. "What happens when Wal-Mart comes to your country? multinational firms' entry, productivity, and inefficiency," Working Papers 2010-043, Federal Reserve Bank of St. Louis.
  5. Tarek Alexander Hassan, 2010. "Country Size, Currency Areas, and International Asset Returns," 2010 Meeting Papers 365, Society for Economic Dynamics.

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