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Selection and Market Reallocation: Productivity Gains from Multinational Production

  • Laura Alfaro


    (Harvard Business School, Business, Government and the International Economy Unit)

  • Maggie X. Chen


    (George Washington University)

Assessing the productivity gains from multinational production has been a vital topic of economic research. Positive aggregate productivity gains are often attributed to within-firm productivity improvement; however, an alternative, less emphasized explanation is between-firm selection and market reallocation, whereby competition from multinationals leads to factor reallocation and the survival of only the most productive domestic firms. We investigate the roles of the two different mechanisms in determining the aggregate productivity gains by exploring their distinct predictions on the distributions of domestic firms: within-firm productivity improvement shifts the productivity and the revenue distributions rightward while between-.rm selection and market reallocation raise the left truncation of the distributions and shift revenue leftward. Using a rich cross-country firm-level panel dataset, we find significant evidence of both mechanisms, but between-firm selection and market reallocation accounts for the majority of aggregate productivity gains, suggesting that ignoring this channel could lead to substantial bias in understanding the nature of gains from multinational production.

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Paper provided by Harvard Business School in its series Harvard Business School Working Papers with number 12-111.

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Length: 49 pages
Date of creation: Jun 2012
Date of revision: Apr 2015
Handle: RePEc:hbs:wpaper:12-111
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