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Multinational Expansion in Time and Space

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  • Garetto, Stefania
  • Oldenski, Lindsay
  • Ramondo, Natalia

Abstract

This paper studies the expansion patterns of the multinational enterprise (MNE) in time and space. Using a long panel of US MNEs, we document that: MNE affiliates grow by exporting to new markets; the activities of MNE affiliates persist during the affiliate's life, usually starting with sales to their host market and eventually expanding to export markets; and MNE affiliates' entry into new locations does not depend on the location of preexisting affiliates. Informed by these facts, we develop a multi-country quantitative dynamic model of the MNE that features heterogeneity in firm-level productivity, persistent aggregate shocks, and a rich structure of costs that affect MNE expansion. Importantly, MNE affiliates can decouple their locations of production and sales, and endogenously choose to enter or exit the host and the export markets. We introduce a compound option formulation that allows us to capture in a tractable way the rich heterogeneity that is observed in the data and that is necessary for quantitative analysis. Using the calibrated model, our quantitative application to Brexit reveals that export platforms are important for understanding the reallocation of MNE activity in time and space, and that the nature of the frictions to MNE activities matters for aggregate firm dynamics.

Suggested Citation

  • Garetto, Stefania & Oldenski, Lindsay & Ramondo, Natalia, 2019. "Multinational Expansion in Time and Space," CEPR Discussion Papers 13704, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:13704
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    1. Jerónimo Carballo & Ignacio Marra de Artiñano & Christian Volpe Martincus, 2021. "Information Frictions, Investment Promotion, and Multinational Production: Firm-Level Evidence," CESifo Working Paper Series 9043, CESifo.
    2. Brian McCaig & Nina Pavcnik & Woan Foong Wong, 2022. "FDI Inflows and Domestic Firms: Adjustments to New Export Opportunities," NBER Working Papers 30729, National Bureau of Economic Research, Inc.
    3. Tarek Alexander Hassan & Stephan Hollander & Laurence van Lent & Ahmed Tahoun, 2020. "The Global Impact of Brexit Uncertainty," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-332, Boston University - Department of Economics.
    4. Hassan, Tarek Alexander & Hollander, Stephan & Tahoun, Ahmed & van Lent, Laurence, 2019. "The Global Impact of Brexit Uncertainty," CEPR Discussion Papers 14253, C.E.P.R. Discussion Papers.
    5. Dan Cao & Erick Sager & Henry Hyatt & Toshihiko Mukoyama, 2019. "Firm Growth through New Establishments," 2019 Meeting Papers 1484, Society for Economic Dynamics.
    6. Ziran Ding, 2022. "Firm heterogeneity, variable markups, and multinational production: A review from trade policy perspective," Journal of Economic Surveys, Wiley Blackwell, vol. 36(5), pages 1311-1357, December.
    7. Monika Sztajerowska, 2021. "International Investment Agreements, Double-Taxation Treaties and Multinational Activity: The (Heterogeneous) Effects of Binding," PSE Working Papers halshs-03265057, HAL.
    8. Luo, Changyuan & Si, Chunxiao & Zhang, Hongyong, 2022. "Moving out of China? Evidence from Japanese multinational firms," Economic Modelling, Elsevier, vol. 110(C).
    9. Chen, Cheng & Sun, Chang & Zhang, Hongyong, 2022. "Learning and information transmission within multinational corporations," European Economic Review, Elsevier, vol. 143(C).
    10. Monika Sztajerowska, 2021. "International Investment Agreements, Double-Taxation Treaties and Multinational Activity: The (Heterogeneous) Effects of Binding," Working Papers halshs-03265057, HAL.

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    More about this item

    Keywords

    Firm Dynamics; Foreign direct investment; multinational firms; sunk costs;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade

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