Selection and Market Reallocation: Productivity Gains from Multinational Production

50 Pages Posted: 7 Jul 2012

See all articles by Laura Alfaro

Laura Alfaro

Harvard University

Maggie Xiaoyang Chen

George Washington University

Multiple version iconThere are 2 versions of this paper

Date Written: July 2012

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

Alfaro, Laura and Chen, Maggie Xiaoyang, Selection and Market Reallocation: Productivity Gains from Multinational Production (July 2012). NBER Working Paper No. w18207. Available at SSRN: https://ssrn.com/abstract=2101955

Laura Alfaro (Contact Author)

Harvard University ( email )

Cambridge, MA 02138
United States

Maggie Xiaoyang Chen

George Washington University ( email )

710 21st Street NW
Washington, DC 20052
United States

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