Firms' Internal Networks and Austerity Spillover

52 Pages Posted: 3 Aug 2020

See all articles by Antonio De Vito

Antonio De Vito

IE Business School - IE University

Martin Jacob

WHU - Otto Beisheim School of Management

Guosong Xu

Rotterdam School of Management, Erasmus University

Date Written: July 3, 2020

Abstract

This paper studies how fiscal consolidation (austerity) shocks transmit across countries through multinationals’ internal networks of subsidiaries. Using a large multi-country subsidiary-level data set, we find that local business units cut capital investment in response to a foreign austerity shock. We document three channels that propagate these shocks through firms’ internal networks: production linkages among subsidiaries, business confidence, and financial constraints. In the aggregate, domestic investment and employment decline with higher exposure to fiscal shocks originated abroad, suggesting that such spillover matters for overall economic activity.

Keywords: Austerity, Fiscal Policy, Investment, Internal Networks, Spillover Effects

JEL Classification: D25, G11, H32, L14

Suggested Citation

De Vito, Antonio and Jacob, Martin and Xu, Guosong, Firms' Internal Networks and Austerity Spillover (July 3, 2020). Available at SSRN: https://ssrn.com/abstract=3643481 or http://dx.doi.org/10.2139/ssrn.3643481

Antonio De Vito

IE Business School - IE University ( email )

Calle Maria de Molina 12
Madrid, Madrid 28006
Spain

Martin Jacob

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
D-56179 Vallendar, 56179
Germany

HOME PAGE: http://www.whu.edu/steuer

Guosong Xu (Contact Author)

Rotterdam School of Management, Erasmus University ( email )

Rotterdam
Netherlands

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