Market Reallocation and Knowledge Spillover: The Gains from Multinational Production
Harvard University - Business, Government and the International Economy Unit
Maggie Xiaoyang Chen
George Washington University
June 17, 2013
Harvard Business School BGIE Unit Working Paper No. 12-111
Quantifying the gains from multinational production has been a vital topic of economic research. Positive productivity gains are often attributed to knowledge spillover from multinational to domestic firms. An alternative, less emphasized explanation is market reallocation, whereby competition from multinationals leads to factor reallocation and the survival of only the most productive domestic firms. We develop a model that incorporates both aspects and quantify their relative importance in the gains from multinational production by exploring their distinct predictions for domestic distributions of productivity and revenue. We show that knowledge spillover shifts both distributions rightward while market reallocation raises the left truncation of the distributions and shifts revenue leftward. Using a rich firm-level panel dataset that spans 60 countries, we find that both market reallocation and knowledge spillover are significant sources of productivity gain. Ignoring the role of market reallocation can lead to significant bias in understanding the nature of gains from multinational production.
Number of Pages in PDF File: 49
Keywords: Gains from Multinational Production, Market Reallocation, Knowledge Spillover
JEL Classification: F2, O1, O4
Date posted: July 5, 2012 ; Last revised: June 17, 2013
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