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Selection and Market Reallocation: Productivity Gains from Multinational Production

Author

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  • Laura Alfaro

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

  • Maggie X. Chen

    () (George Washington University)

Abstract

Assessing productivity gains from multinational production has been a vital topic of economic research and policy debate. Positive productivity gains are often attributed to productivity spillovers; however, an alternative, much less emphasized channel is selection and market reallocation whereby competition leads to factor reallocation both within and between domestic firms and exits of the least productive firms. We investigate the roles of these different mechanisms in determining aggregate productivity gains using a unifying framework that explores the mechanisms' distinct predictions on the distributions of domestic firms: Within-firm productivity improvement shifts the productivity distribution rightward while selection and market reallocation shifts the revenue and employment distributions leftward and raises left truncations. Using a rich cross-country firm panel dataset, we find significant evidence of both mechanisms and effects of competition in product, technology and labor space. However, selection and market reallocation account for the majority of aggregate productivity gains, suggesting that ignoring this channel could lead to substantial bias in understanding the nature of productivity gains from multinational production.

Suggested Citation

  • Laura Alfaro & Maggie X. Chen, 2012. "Selection and Market Reallocation: Productivity Gains from Multinational Production," Harvard Business School Working Papers 12-111, Harvard Business School, revised Nov 2016.
  • Handle: RePEc:hbs:wpaper:12-111
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    References listed on IDEAS

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    1. On the benefits of multinational firms
      by Economic Logician in Economic Logic on 2012-07-24 19:10:00

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    Cited by:

    1. Carluccio, Juan & Fally, Thibault, 2013. "Foreign entry and spillovers with technological incompatibilities in the supply chain," Journal of International Economics, Elsevier, vol. 90(1), pages 123-135.
    2. Feng, Ling & Li, Zhiyuan & Swenson, Deborah L., 2017. "Trade policy uncertainty and exports: Evidence from China's WTO accession," Journal of International Economics, Elsevier, vol. 106(C), pages 20-36.
    3. K. Yamamoto & T. Morita & F. Cerina, 2013. "Integration and Welfare with Horizontal Multinationals," Working Paper CRENoS 201307, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    4. Cathy Ge Bao & Maggie, 2014. "Foreign Rivals are Coming to Town: Responding to the Threat of Foreign Multinational Entry," Working Papers 2014-13, The George Washington University, Institute for International Economic Policy.
    5. Laura Alfaro & Maggie X. Chen, 2017. "Transportation Cost and the Geography of Foreign Investment," Harvard Business School Working Papers 17-061, Harvard Business School.

    More about this item

    Keywords

    Productivity gains; multinational production; selection; market reallocation; and within-firm productivity;

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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