IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/18207.html
   My bibliography  Save this paper

Selection and Market Reallocation: Productivity Gains from Multinational Production

Author

Listed:
  • Laura Alfaro
  • Maggie X. Chen

Abstract

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-firm 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.

Suggested Citation

  • Laura Alfaro & Maggie X. Chen, 2012. "Selection and Market Reallocation: Productivity Gains from Multinational Production," NBER Working Papers 18207, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:18207 Note: IFM ITI
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w18207.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Van Biesebroeck, Johannes, 2008. "The Sensitivity of Productivity Estimates," Journal of Business & Economic Statistics, American Statistical Association, vol. 26, pages 311-328.
    2. Philippe Aghion & Jing Cai & Mathias Dewatripont & Luosha Du & Ann Harrison & Patrick Legros, 2015. "Industrial Policy and Competition," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(4), pages 1-32, October.
    3. Christian Broda & Joshua Greenfield & David Weinstein, 2006. "From Groundnuts to Globalization: A Structural Estimate of Trade and Growth," NBER Working Papers 12512, National Bureau of Economic Research, Inc.
    4. S.K. Bhutani, 2009. "China and India," India Quarterly: A Journal of International Affairs, , vol. 65(4), pages 383-391, October.
    5. Nina Pavcnik, 2002. "Trade Liberalization, Exit, and Productivity Improvements: Evidence from Chilean Plants," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 245-276.
    6. Christian Broda & David E. Weinstein, 2006. "Globalization and the Gains From Variety," The Quarterly Journal of Economics, Oxford University Press, pages 541-585.
    7. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, January.
    8. Harrison, Ann E. & Rodriguez-Clare, Andres, 2009. "Trade, Foreign Investment, and Industrial Policy," MPRA Paper 15561, University Library of Munich, Germany.
    9. Marc J. Melitz & Gianmarco I. P. Ottaviano, 2008. "Market Size, Trade, and Productivity," Review of Economic Studies, Oxford University Press, vol. 75(1), pages 295-316.
    10. Maria Guadalupe & Olga Kuzmina & Catherine Thomas, 2012. "Innovation and Foreign Ownership," American Economic Review, American Economic Association, vol. 102(7), pages 3594-3627, December.
    11. Alfaro, Laura & Chanda, Areendam & Kalemli-Ozcan, Sebnem & Sayek, Selin, 2004. "FDI and economic growth: the role of local financial markets," Journal of International Economics, Elsevier, pages 89-112.
    12. Markusen, James R., 1984. "Multinationals, multi-plant economies, and the gains from trade," Journal of International Economics, Elsevier, pages 205-226.
    13. Wolfgang Keller & Stephen R. Yeaple, 2009. "Multinational Enterprises, International Trade, and Productivity Growth: Firm-Level Evidence from the United States," The Review of Economics and Statistics, MIT Press, pages 821-831.
    14. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, pages 300-316.
    15. Ann E. Harrison & Brian J. Aitken, 1999. "Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela," American Economic Review, American Economic Association, vol. 89(3), pages 605-618, June.
    16. Natalia Ramondo & Andrés Rodríguez-Clare, 2013. "Trade, Multinational Production, and the Gains from Openness," Journal of Political Economy, University of Chicago Press, vol. 121(2), pages 273-322.
    17. Markusen, James R. & Venables, Anthony J., 1999. "Foreign direct investment as a catalyst for industrial development," European Economic Review, Elsevier, vol. 43(2), pages 335-356, February.
    18. Harrison, Ann E. & Love, Inessa & McMillan, Margaret S., 2004. "Global capital flows and financing constraints," Journal of Development Economics, Elsevier, pages 269-301.
    19. Chen, Maggie Xiaoyang & Moore, Michael O., 2010. "Location decision of heterogeneous multinational firms," Journal of International Economics, Elsevier, pages 188-199.
    20. Carluccio, Juan & Fally, Thibault, 2013. "Foreign entry and spillovers with technological incompatibilities in the supply chain," Journal of International Economics, Elsevier, pages 123-135.
    21. Laura Alfaro & Andrew Charlton & Fabio Kanczuk, 2009. "Plant-Size Distribution and Cross-Country Income Differences," NBER Chapters,in: NBER International Seminar on Macroeconomics 2008, pages 243-272 National Bureau of Economic Research, Inc.
    22. Chang-Tai Hsieh & Peter J. Klenow, 2009. "Misallocation and Manufacturing TFP in China and India," The Quarterly Journal of Economics, Oxford University Press, vol. 124(4), pages 1403-1448.
    23. James R. Markusen, 1995. "The Boundaries of Multinational Enterprises and the Theory of International Trade," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 169-189, Spring.
    24. Aitken, Brian & Harrison, Ann & Lipsey, Robert E., 1996. "Wages and foreign ownership A comparative study of Mexico, Venezuela, and the United States," Journal of International Economics, Elsevier, pages 345-371.
    25. Alfonso Irarrazabal & Andreas Moxnes & Luca David Opromolla, 2013. "The Margins of Multinational Production and the Role of Intrafirm Trade," Journal of Political Economy, University of Chicago Press, vol. 121(1), pages 74-126.
    26. Feenstra, Robert C. & Hanson, Gordon H., 1997. "Foreign direct investment and relative wages: Evidence from Mexico's maquiladoras," Journal of International Economics, Elsevier, pages 371-393.
    27. Matthias Arnold, Jens & Javorcik, Beata S., 2009. "Gifted kids or pushy parents? Foreign direct investment and plant productivity in Indonesia," Journal of International Economics, Elsevier, pages 42-53.
    28. Alfaro, Laura & Chanda, Areendam & Kalemli-Ozcan, Sebnem & Sayek, Selin, 2010. "Does foreign direct investment promote growth? Exploring the role of financial markets on linkages," Journal of Development Economics, Elsevier, pages 242-256.
    29. Ann E. Harrison & Margaret S. McMillan, 2001. "Does Direct Foreign Investment Affect Domestic Firms' Credit Constraints?," NBER Working Papers 8438, National Bureau of Economic Research, Inc.
    30. Olley, G Steven & Pakes, Ariel, 1996. "The Dynamics of Productivity in the Telecommunications Equipment Industry," Econometrica, Econometric Society, pages 1263-1297.
    31. Girma, Sourafel & Wakelin, Katharine, 2001. "Regional Underdevelopment: Is FDI the Solution? A Semiparametric Analysis," CEPR Discussion Papers 2995, C.E.P.R. Discussion Papers.
    32. Beata Smarzynska Javorcik, 2004. "Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers Through Backward Linkages," American Economic Review, American Economic Association, vol. 94(3), pages 605-627, June.
    33. Harrison, Ann E. & Love, Inessa & McMillan, Margaret S., 2004. "Global capital flows and financing constraints," Journal of Development Economics, Elsevier, pages 269-301.
    34. Natalia Ramondo, 2009. "Foreign Plants and Industry Productivity: Evidence from Chile," Scandinavian Journal of Economics, Wiley Blackwell, vol. 111(4), pages 789-809, December.
    35. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    36. Matthias Arnold, Jens & Javorcik, Beata S., 2009. "Gifted kids or pushy parents? Foreign direct investment and plant productivity in Indonesia," Journal of International Economics, Elsevier, pages 42-53.
    37. Rodriguez-Clare, Andres, 1996. "Multinationals, Linkages, and Economic Development," American Economic Review, American Economic Association, vol. 86(4), pages 852-873, September.
    38. Alfaro, Laura & Chanda, Areendam & Kalemli-Ozcan, Sebnem & Sayek, Selin, 2004. "FDI and economic growth: the role of local financial markets," Journal of International Economics, Elsevier, pages 89-112.
    39. James Levinsohn & Amil Petrin, 2003. "Estimating Production Functions Using Inputs to Control for Unobservables," Review of Economic Studies, Oxford University Press, vol. 70(2), pages 317-341.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Carluccio, Juan & Fally, Thibault, 2013. "Foreign entry and spillovers with technological incompatibilities in the supply chain," Journal of International Economics, Elsevier, pages 123-135.
    2. 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.
    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. repec:eee:inecon:v:106:y:2017:i:c:p:20-36 is not listed on IDEAS
    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.
    6. Feng, Ling & Li, Zhiyuan & Swenson, Deborah L., 2017. "Trade policy uncertainty and exports: Evidence from China's WTO accession," Journal of International Economics, Elsevier, pages 20-36.

    More about this item

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:18207. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.