Multinational Expansion in Time and Space

Stefania Garetto, Lindsay Oldenski and Natalia Ramondo

No 13704, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper studies the expansion patterns of the multinational enterprise (MNE) in time and space. Using a long panel of US MNEs, we document that: MNE affiliates grow by exporting to new markets; the activities of MNE affiliates persist during the affiliate’s life, usually starting with sales to their host market and eventually expanding to export markets; and MNE affiliates’ entry into new locations does not depend on the location of preexisting affiliates. Informed by these facts, we develop a multi-country quantitative dynamic model of the MNE that features heterogeneity in firm-level productivity, persistent aggregate shocks, and a rich structure of costs that affect MNE expansion. Importantly, MNE affiliates can decouple their locations of production and sales, and endogenously choose to enter or exit the host and the export markets. We introduce a compound option formulation that allows us to capture in a tractable way the rich heterogeneity that is observed in the data and that is necessary for quantitative analysis. Using the calibrated model, our quantitative application to Brexit reveals that export platforms are important for understanding the reallocation of MNE activity in time and space, and that the nature of the frictions to MNE activities matters for aggregate firm dynamics.

Keywords: Multinational firms; Foreign direct investment; Firm dynamics; Sunk costs (search for similar items in EconPapers)
JEL-codes: F1 (search for similar items in EconPapers)
Date: 2019-04
New Economics Papers: this item is included in nep-bec and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

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Related works:
Working Paper: Multinational Expansion in Time and Space (2019)
Working Paper: Multinational Expansion in Time and Space (2019)
Working Paper: Multinational Expansion in Time and Space (2019)
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