Multinational Production and Labor Share

We study the effect of multinational enterprises (MNEs) on the decreased labor share of income distribution in the source country. We develop a general equilibrium model that features a heterogeneous firms and non-parametric production function, with augmented foreign factors to capture foreign employment First-order approximation points out that the differences in the factor demand elasticities are key parameters for the implication to the labor share. To identify them, we develop a method-of-moments estimator that leverages foreign factor augmentation shocks. We then apply the method to a unique natural experiment, the 2011 Thailand Floods and study the impact on Japanese multinational firms. We employ uniquely combined Japanese firm- and foreign affiliate- level datasets. The estimate indicates that foreign factor augmentation increased capital demand in Japan more than labor demand, which suggests that the foreign factor augmentation reduced the labor share in Japan.