This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

« Back to Results

Trade, Multinationals, and Firm Dynamics

Paper Session

Saturday, Jan. 6, 2018 8:00 AM - 10:00 AM

Marriott Philadelphia Downtown, Meeting Room 409
Hosted By: Econometric Society
  • Chair: Stefania Garetto, Boston University

Talent, Geography, and Offshore R&D

Jingting Fan
,
University of Maryland

Abstract

I model and quantify the impact of a new dimension of global integration: offshore R&D.
In the model, firms match with heterogeneous researchers to develop new product blueprints,
and then engage in offshore production and exporting. Cross-country differences in the distributions of firm managerial efficiency and researcher talent generate a “talent-acquisition” motive for offshore R&D, while the frictions impeding offshore production and trade lead to a “market-access” motive. I find empirical support for both motives using firm-level patenting data. I find additional evidence for these motives via counterfactuals using the calibrated model: international differences in endowment distributions and the market access motive collectively account for 90% of the average observed level of offshore R&D. Offshore R&D increases countries’ gains from global integration by a factor of 1.2 on average, with much larger increases for developing than for developed countries. Incorporating offshore R&D also has important implications for understanding the welfare impact of traditional forms of global integration, namely trade and offshore production.

Firm-to-firm Trade in Sticky Production Networks

Kevin Lim
,
Dartmouth College

Abstract

This paper develops a structural model of trade between heterogeneous
firms in which the network of firm-level input-output linkages
is determined both dynamically and endogenously. Firms vary in the
size of their customer and supplier bases, occupy heterogeneous positions
in different supply chains, and adjust their sets of trade partners over
time. Despite the rich heterogeneity and dynamics, the model remains
computationally tractable. Using both cross-sectional and panel data on
trading relationships between US firms, I estimate the model's key parameters
via a simulated method of moments technique and assess its
fit to the data. Simulations of the model are then used to study how the
structure and dynamics of the production network matter for the propagation
of firm-level supply and demand shocks and their translation
into aggregate effects.

The Role of Trade Costs in the Surge of Trade Imbalances

Ricardo Reyes-Heroles
,
Federal Reserve Board

Abstract

This paper shows that the decline in trade costs that underlies the increase in observed global bilateral gross trade flows has notably contributed to the surge in the size of net trade imbalances over the past four decades. To show this, I propose a framework that embeds a quantitative multi-country general equilibrium model of international trade based on Ricardian comparative advantages into a dynamic framework in which trade imbalances arise endogenously. I identify and describe two mechanisms through which declines in trade costs lead to larger imbalances in the model. By exploiting the information in bilateral trade flows, among other data, I calibrate the model and provide a decomposition that shows that 69 percent of the increase in the size of world trade imbalances can be explained by the decline in trade costs across countries. In other words, lower trade costs have not only allowed for more trade across countries in a particular point in time, but also for more trade over time. Moreover, the effect of lower trade costs on trade imbalances is heterogeneous across countries. In particular, trade imbalances in countries like the United States and China have been significantly affected by the decline in trade costs. I
also show that the welfare gains from lower trade costs can differ substantially from those that are obtained when changes in trade imbalances are not taken into account.

Becoming a Multinational: An Analysis of Market Access and Risk Through Mergers

Jose Luis Fillat
,
Federal Reserve Bank of Boston
Stefania Garetto
,
Boston University

Abstract

We examine more than 2,500 mergers that involve a US acquirer and a foreign target since
2001. Our analysis focuses on the comparison of the risk premium of US firms before and after
they acquire a foreign firm for the first time. The objective of this study is to understand how foreign direct investment dynamics affect the risk premium of the acquiring firm by focusing on the merger event. In addition, our empirical analysis explores the characteristics of foreign investment that have a positive impact on risk premium. While there is strong evidence of the existence of a multinational risk premium, our analysis of firms’ initial investment abroad shows that risk premia increase as the dates of announcement and completion of the deal approach. The risk premium in the quarters before announcement is significantly higher than the risk premium after the announcement and completion of the deal. This analysis motivates the construction of a model where firms’ endogenous decisions to merge and agents’ expectations generate a risk premium over firms that remain domestic only.
JEL Classifications
  • A1 - General Economics