DP13704 Multinational Expansion in Time and Space

Author(s): Stefania Garetto, Lindsay Oldenski, Natalia Ramondo
Publication Date: April 2019
Date Revised: May 2019
Keyword(s): Firm Dynamics, Foreign direct investment, multinational firms, sunk costs
JEL(s): F1
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13704

This paper studies the expansion patterns of the multinational enterprise (MNE) in time and space. Using a long panel of US MNEs, we document that: MNE affiliates grow by exporting to new markets; the activities of MNE affiliates persist during the affiliate's life, usually starting with sales to their host market and eventually expanding to export markets; and MNE affiliates' entry into new locations does not depend on the location of preexisting affiliates. Informed by these facts, we develop a multi-country quantitative dynamic model of the MNE that features heterogeneity in firm-level productivity, persistent aggregate shocks, and a rich structure of costs that affect MNE expansion. Importantly, MNE affiliates can decouple their locations of production and sales, and endogenously choose to enter or exit the host and the export markets. We introduce a compound option formulation that allows us to capture in a tractable way the rich heterogeneity that is observed in the data and that is necessary for quantitative analysis. Using the calibrated model, our quantitative application to Brexit reveals that export platforms are important for understanding the reallocation of MNE activity in time and space, and that the nature of the frictions to MNE activities matters for aggregate firm dynamics.