Simulating Heterogeneous Multinational Firms

This paper develops a micro-simulation framework for multinational entry and sales activities across countries. The model is based on Eaton, Kortum, and Kramarz's (2010) quantitative trade model adapted towards multinational production. Using micro data on Japanese manufacturing firms, we illustrate the empirical regularities of multinational entry and sales activity and estimate the model's structural parameters with simulated method of moments. We demonstrate that our adapted model is able to replicate important dimensions of the in-sample moments conditioned in our estimation strategy and does a reasonable job in external model validation tests. We can replicate activity under an economic period with a far different level of FDI barriers than was conditioned upon in our estimation sample. Overall, we demonstrate the richness of the simulation framework as a quantitative tool for FDI policy analysis.