Essays on Multinational Production and International Trade.

Abstract

This dissertation studies the determinants and the consequences of multinational production.

The first chapter assembles a unique industry-level dataset of foreign affiliate sales to document a new empirical regularity: multinational production is disproportionately allocated to industries where local producers exhibit comparative disadvantage. Then, it shows analytically and quantitatively that multinational production raises average productivity while lowers sectoral productivity dispersion in the host economy. By inducing a larger transfer of technology in sectors where the host economy is relatively less productive, multinational production weakens the host country's comparative advantage. To measure these channels, this paper incorporates sectoral heterogeneity into a Ricardian general equilibrium model of trade and multinational production. The model is estimated to measure the extent of technology transfers across countries and sectors as well as to quantify the welfare effects of multinational activity. The sectoral heterogeneity of foreign affiliate sales is quantitatively important in accounting for welfare gains from multinational activity.

The second chapter focuses on the interaction between multinational production and intra-firm trade in the global economy. A salient empirical regularity is that foreign affiliate sales decrease with trade costs, a fact that is at odds with the proximity-concentration theory of multinational activity. As a response, intra-firm trade, from parents to foreign affiliates, has been combined with models of horizontal MP to generate complementarities between trade and MP that deliver gravity-style predictions for foreign affiliate sales. Nevertheless, two other stylized facts pose further challenges to this attempt to rationalize the gravity of MP. First, as documented by (Ramondo et al., 2014) intra-firm trade is not common across foreign affiliates but rather concentrated among a small set of large multinational firms. Second, not only firms in the upper tail of the firm size distribution are subject to gravity forces, but also sales of relatively small foreign affiliates are significantly affected by geographical barriers even when they rarely conduct intra-firm transactions. Two puzzles emerge: (i) why is intra-firm trade concentrated among the largest multinational firms? and (ii) why relatively small affiliates obey gravity forces, even in the absence of intra-firm transactions? This paper constructs a framework to address these questions.