Multinational production and global shock propagation during the great recession

Using a new database on global multinational production (MP), I document that world multinational enterprise (MNE) sales declined as sharply as trade during the Great Recession (2008–2009). This collapse was driven by MNEs from a few key headquarters countries and associated with steeper GDP declines in MP-intensive countries. MNEs amplified the trade collapse because their overall sales fell while they maintained higher trade intensity than domestic firms. In a calibrated quantitative model with flexible vertical and horizontal MNE structures, international trade, and input–output linkages, I show that productivity shocks, which disproportionately affected trade-intensive MNEs, contributed more to the trade collapse than demand shocks. MNEs’ productivity shocks accounted for over half of the global GDP decline during the Great Recession. MP linkages significantly amplified the transmission of headquarters-country productivity shocks to global GDP, MP, and trade.