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Heterogeneous multinational firms and productivity gains from falling FDI barriers

Shawn Arita () and Kiyoyasu Tanaka ()

Review of World Economics (Weltwirtschaftliches Archiv), 2014, vol. 150, issue 1, 83-113

Abstract: This paper quantitatively assesses the impact of falling foreign direct investment (FDI) barriers on individual firms and its implications for intra-industry reallocation and aggregate productivity. We calibrate the firm-heterogeneity model of Eaton et al. (Econometrica 79(5):1453–1498, 2011 ) to match micro-level data on Japanese multinational firms facing fixed and variable costs of foreign production. We demonstrate that the calibrated model can be used to replicate the entry and sales patterns of Japanese multinationals. Counterfactual simulations show that declining FDI barriers lead to a disproportionate expansion of foreign production by more efficient firms relative to less efficient firms. A hypothetical 20 % reduction in FDI barriers is found to generate up to a 26.8 % improvement in industry-level productivity through global market-share reallocations within the industry. Compared with fixed entry barriers, reallocation effects and productivity gains are larger for a reduction of variable costs of foreign production. Copyright Kiel Institute 2014

Keywords: Multinational firms; FDI; Firm heterogeneity; Investment liberalization; F10; F23; L25; R12; R30 (search for similar items in EconPapers)
Date: 2014
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Working Paper: Heterogeneous Multinational Firms and Productivity Gains from Falling FDI Barriers (2012) Downloads
Working Paper: Heterogeneous multinational firms and productivity gains from falling FDI barriers (2012) Downloads
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