Global Production with Export Platforms

Transcription

1 Global Production with Export Platforms Felix Tintelnot University of Chicago and Princeton University (IES) ECO 552 February 19, 2014

2 Standard trade models Most trade models you have seen fix the location of firms / the technology is an endowment of the country (Eaton and Kortum (2002), Anderson and van Wincoop (2013), Chaney (2008))

3 Standard trade models Most trade models you have seen fix the location of firms / the technology is an endowment of the country (Eaton and Kortum (2002), Anderson and van Wincoop (2013), Chaney (2008)) Some pure trade models include binary choices whether to start producing in the home country and whether to export to a foreign market. (Krugman (1980), Melitz (2003))

4 How do firms serve foreign markets? $1,817 bln $1,037 bln Foreign sales, manufacturing affiliates of US firms Exports of goods from US

5 Which firms serve foreign markets? $1,817 bln $1,037 bln 80% is carried out by MNEs Foreign sales, manufacturing affiliates of US firms Exports of goods from US

6 Frameworks for horizontal multinationals Proximity-concentration trade-off Firms invest abroad to avoid marginal trade costs (proximity benefit) Firms export to avoid fixed costs (concentration benefit)

7 Frameworks for horizontal multinationals Proximity-concentration trade-off Firms invest abroad to avoid marginal trade costs (proximity benefit) Firms export to avoid fixed costs (concentration benefit) Key references: Helpman, Melitz, and Yeaple (2004), Irrazabal, Moxnes, and Opromolla (2013)

8 Frameworks for horizontal multinationals Proximity-concentration trade-off Firms invest abroad to avoid marginal trade costs (proximity benefit) Firms export to avoid fixed costs (concentration benefit) Key references: Helpman, Melitz, and Yeaple (2004), Irrazabal, Moxnes, and Opromolla (2013) Older work: Markusen (1984), Horstmann and Markusen (1989), Brainard (1997)

9 Frameworks for horizontal multinationals Proximity-concentration trade-off Firms invest abroad to avoid marginal trade costs (proximity benefit) Firms export to avoid fixed costs (concentration benefit) Key references: Helpman, Melitz, and Yeaple (2004), Irrazabal, Moxnes, and Opromolla (2013) Older work: Markusen (1984), Horstmann and Markusen (1989), Brainard (1997) Binary choice whether to establish an affiliate in a foreign country

10 Frameworks for horizontal multinationals Proximity-concentration trade-off Firms invest abroad to avoid marginal trade costs (proximity benefit) Firms export to avoid fixed costs (concentration benefit) Key references: Helpman, Melitz, and Yeaple (2004), Irrazabal, Moxnes, and Opromolla (2013) Older work: Markusen (1984), Horstmann and Markusen (1989), Brainard (1997) Binary choice whether to establish an affiliate in a foreign country Key assumption: firms cannot use their foreign affiliate to export to other countries

11 Where do affiliates sell their output? Share of exports in sales of US affiliates in Europe

12 Where do affiliates sell their output? Share of exports in sales of US affiliates in Europe

13 Tintelnot (2012) Develops a multi-country general equilibrium framework of trade and multinational production

14 Tintelnot (2012) Develops a multi-country general equilibrium framework of trade and multinational production Estimates the costs of foreign production with firm-level data on all German multinational firms

15 Tintelnot (2012) Develops a multi-country general equilibrium framework of trade and multinational production Estimates the costs of foreign production with firm-level data on all German multinational firms Studies the implications of multinational production for classic questions in international trade:

16 Tintelnot (2012) Develops a multi-country general equilibrium framework of trade and multinational production Estimates the costs of foreign production with firm-level data on all German multinational firms Studies the implications of multinational production for classic questions in international trade: How do technology shocks in one country affect production and welfare outcomes in all countries?

17 Tintelnot (2012) Develops a multi-country general equilibrium framework of trade and multinational production Estimates the costs of foreign production with firm-level data on all German multinational firms Studies the implications of multinational production for classic questions in international trade: How do technology shocks in one country affect production and welfare outcomes in all countries? How do regional trade and investment agreements affect participants and non-participants of the agreement?

18 Key ingredients of the model Comparative advantage

19 Key ingredients of the model Comparative advantage Proximity-concentration trade-off

20 Key ingredients of the model Comparative advantage Proximity-concentration trade-off Export platform sales

21 Key ingredients of the model Comparative advantage Proximity-concentration trade-off Export platform sales Firm heterogeneity, monopolistic competition, CES preferences

22 Fixed costs and export platform sales Why both?

23 Fixed costs and export platform sales Why both? Model estimated without fixed costs does not generate enough export platform sales

24 Fixed costs and export platform sales Why both? Model estimated without fixed costs does not generate enough export platform sales Fixed costs explain why most firms concentrate their production in only a few locations

25 Fixed costs and export platform sales Why both? Model estimated without fixed costs does not generate enough export platform sales Fixed costs explain why most firms concentrate their production in only a few locations A model without fixed costs leads to different quantitative answers to welfare and policy questions

26 Why has this not been done before? It would be nearly impossible to use e.g. Helpman, Melitz, and Yeaple (2004) off the shelf and put export platforms into it.

27 Why has this not been done before? It would be nearly impossible to use e.g. Helpman, Melitz, and Yeaple (2004) off the shelf and put export platforms into it. Hard permutation problem at the firm-level

28 Why has this not been done before? It would be nearly impossible to use e.g. Helpman, Melitz, and Yeaple (2004) off the shelf and put export platforms into it. Hard permutation problem at the firm-level Key idea for tractability:

29 Why has this not been done before? It would be nearly impossible to use e.g. Helpman, Melitz, and Yeaple (2004) off the shelf and put export platforms into it. Hard permutation problem at the firm-level Key idea for tractability: Each firm consists of a continuum of products

30 Why has this not been done before? It would be nearly impossible to use e.g. Helpman, Melitz, and Yeaple (2004) off the shelf and put export platforms into it. Hard permutation problem at the firm-level Key idea for tractability: Each firm consists of a continuum of products In each country in which the firm has a plant, it receives product-location-specific productivity draws

31 Why has this not been done before? It would be nearly impossible to use e.g. Helpman, Melitz, and Yeaple (2004) off the shelf and put export platforms into it. Hard permutation problem at the firm-level Key idea for tractability: Each firm consists of a continuum of products In each country in which the firm has a plant, it receives product-location-specific productivity draws Analytic solution for the output at the plant-level (under convenient distributional assumption)

32 Why has this not been done before? It would be nearly impossible to use e.g. Helpman, Melitz, and Yeaple (2004) off the shelf and put export platforms into it. Hard permutation problem at the firm-level Key idea for tractability: Each firm consists of a continuum of products In each country in which the firm has a plant, it receives product-location-specific productivity draws Analytic solution for the output at the plant-level (under convenient distributional assumption) Smooth substitutibility between the firm s plants

33 Preview of main quantitative results Fixed costs of foreign production are quantitatively important:

34 Preview of main quantitative results Fixed costs of foreign production are quantitatively important: Without fixed costs multinationals would produce more than twice as much abroad.

35 Preview of main quantitative results Fixed costs of foreign production are quantitatively important: Without fixed costs multinationals would produce more than twice as much abroad. Estimated model with fixed costs can match the export platform sales of US MNEs

36 Preview of main quantitative results Fixed costs of foreign production are quantitatively important: Without fixed costs multinationals would produce more than twice as much abroad. Estimated model with fixed costs can match the export platform sales of US MNEs Effects of a foreign technology shock:

37 Preview of main quantitative results Fixed costs of foreign production are quantitatively important: Without fixed costs multinationals would produce more than twice as much abroad. Estimated model with fixed costs can match the export platform sales of US MNEs Effects of a foreign technology shock: Welfare gains abroad from a US technology improvement are an order of magnitude larger than in a pure trade model

38 Preview of main quantitative results Fixed costs of foreign production are quantitatively important: Without fixed costs multinationals would produce more than twice as much abroad. Estimated model with fixed costs can match the export platform sales of US MNEs Effects of a foreign technology shock: Welfare gains abroad from a US technology improvement are an order of magnitude larger than in a pure trade model Effects of regional trade and investment agreements:

39 Preview of main quantitative results Fixed costs of foreign production are quantitatively important: Without fixed costs multinationals would produce more than twice as much abroad. Estimated model with fixed costs can match the export platform sales of US MNEs Effects of a foreign technology shock: Welfare gains abroad from a US technology improvement are an order of magnitude larger than in a pure trade model Effects of regional trade and investment agreements: CETA could divert around seven percent of European MNE s production from US to Canada

40 Related literature Quantitative models of trade Eaton and Kortum (2002), Anderson and van Wincoop (2003)

41 Related literature Quantitative models of trade Eaton and Kortum (2002), Anderson and van Wincoop (2003) Proximity-concentration trade-off Horstmann and Markusen (1992), Brainard (1997), Helpman, Melitz, and Yeaple (2004), Irarrazabal, Moxnes, and Opromolla (2012)

42 Related literature Quantitative models of trade Eaton and Kortum (2002), Anderson and van Wincoop (2003) Proximity-concentration trade-off Horstmann and Markusen (1992), Brainard (1997), Helpman, Melitz, and Yeaple (2004), Irarrazabal, Moxnes, and Opromolla (2012) Quantitative models of trade and multinational production Ramondo and Rodriguez-Clare (2012), Arkolakis, Ramondo, Rodriguez-Clare, and Yeaple (2012)

43 Outline Model Estimation with firm-level data Calibration with aggregate data G.E. Counterfactuals

44 Model

45 Environment N countries

46 Environment N countries Representative consumer: Measure of L j consumers / workers Dixit-Stiglitz preferences, elasticity of substitution σ > 1

47 Environment N countries Representative consumer: Measure of L j consumers / workers Dixit-Stiglitz preferences, elasticity of substitution σ > 1 Firms: Measure of M i firms Country of origin i, core productivity level φ, fixed cost vector η, and plant productivity shifter ɛ

48 Environment N countries Representative consumer: Measure of L j consumers / workers Dixit-Stiglitz preferences, elasticity of substitution σ > 1 Firms: Measure of M i firms Country of origin i, core productivity level φ, fixed cost vector η, and plant productivity shifter ɛ Trade costs τ lm to serve country m from country l Efficiency loss γ il for firms from country i in country l

49 Production technology Each firm has a measure 1 of differentiated products.

50 Production technology Each firm has a measure 1 of differentiated products. Conditional on plant in l: Firm can produce product υ under CRS with productivity ν l (υ) in country l

51 Production technology Each firm has a measure 1 of differentiated products. Conditional on plant in l: Firm can produce product υ under CRS with productivity ν l (υ) in country l Product-level productivities in county l Z are distributed Frechet: P r(ν l x) = exp ( (φɛ l ) θ (γ il x) θ)

52 Production technology Each firm has a measure 1 of differentiated products. Conditional on plant in l: Firm can produce product υ under CRS with productivity ν l (υ) in country l Product-level productivities in county l Z are distributed Frechet: P r(ν l x) = exp ( (φɛ l ) θ (γ il x) θ) Technical restriction: θ > σ 1

53 Firm s problem and timing The firm initially observes the following characteristics about itself: Country of origin i Core productivity, φ Fixed cost vector, η

54 Firm s problem and timing The firm initially observes the following characteristics about itself: Country of origin i Core productivity, φ Fixed cost vector, η The firm solves the following problem: 1 Select a set of countries Z Z i in which to build a plant and pay fixed costs: k Z η kw k

55 Firm s problem and timing The firm initially observes the following characteristics about itself: Country of origin i Core productivity, φ Fixed cost vector, η The firm solves the following problem: 1 Select a set of countries Z Z i in which to build a plant and pay fixed costs: k Z η kw k 2 After plants are selected:

56 Firm s problem and timing The firm initially observes the following characteristics about itself: Country of origin i Core productivity, φ Fixed cost vector, η The firm solves the following problem: 1 Select a set of countries Z Z i in which to build a plant and pay fixed costs: k Z η kw k 2 After plants are selected: Observe vector of plant-specific productivity shifters, ɛ, and receive product-location-specific productivity draws

57 Firm s problem and timing The firm initially observes the following characteristics about itself: Country of origin i Core productivity, φ Fixed cost vector, η The firm solves the following problem: 1 Select a set of countries Z Z i in which to build a plant and pay fixed costs: k Z η kw k 2 After plants are selected: Observe vector of plant-specific productivity shifters, ɛ, and receive product-location-specific productivity draws Decide for each product which market to serve from where

58 Firm s problem and timing The firm initially observes the following characteristics about itself: Country of origin i Core productivity, φ Fixed cost vector, η The firm solves the following problem: 1 Select a set of countries Z Z i in which to build a plant and pay fixed costs: k Z η kw k 2 After plants are selected: Observe vector of plant-specific productivity shifters, ɛ, and receive product-location-specific productivity draws Decide for each product which market to serve from where Set prices for each product Observe: i, φ, η ǫ, product-location-specific productivity draws Select: Z Z i For each product and market: l Z, price

59 Plant-level output Given a set of countries Z in which the firm built a plant

60 Plant-level output Given a set of countries Z in which the firm built a plant Firm selects for each product and market the plant with the minimum cost

61 Plant-level output Given a set of countries Z in which the firm built a plant Firm selects for each product and market the plant with the minimum cost If l Z: r l (i, φ, Z, ɛ) = κφ σ 1 θ m Y m P 1 σ m ( (γ il w l τ lm ) θ ɛ θ l (γ ik w k τ km ) θ ɛ θ k k Z ) ( θ+1 σ θ )

62 Location choice Expected variable profits from location set Z: E ɛ (π(i, φ, Z, ɛ)) = 1 E ɛ (r l (i, φ, Z, ɛ)) σ l Z

63 Location choice Expected variable profits from location set Z: E ɛ (π(i, φ, Z, ɛ)) = 1 E ɛ (r l (i, φ, Z, ɛ)) σ l Z Expected total profits from location set Z: E ɛ (Π(i, φ, Z, ɛ, η)) = E ɛ (π(i, φ, Z, ɛ)) η k w k k Z,k i

64 Location choice Expected variable profits from location set Z: E ɛ (π(i, φ, Z, ɛ)) = 1 E ɛ (r l (i, φ, Z, ɛ)) σ l Z Expected total profits from location set Z: E ɛ (Π(i, φ, Z, ɛ, η)) = E ɛ (π(i, φ, Z, ɛ)) k Z,k i η k w k Each firm chooses the set of locations that maximizes its expected profits. Z(i, φ, η) arg max Z Z i E ɛ(π(i, φ, Z, ɛ, η))

65 Motivation to build foreign plants Proximity to markets Comparative advantage Benefits get reduced by efficiency losses of foreign production, γ il Trade-off between these benefits and fixed costs

66 Aggregation and Equilibrium Aggregate over the choices of firms (φ, η, ɛ) from all countries (i). Profits are distributed to consumers in countries in which the firms originated Equilibrium definition is standard (monopolistic competition): Consumers / Firms optimize Markets clear Fixed point for price indices and income in every country.

67 Equilibrium computation Consumers and firms need to know A l = in order to make their decisions. Y l P 1 σ l and w l, l = 1,.., N Given parameter vector β, the equilibrium can be computed as a solution for A and w of: A l (β, w, A) = A l l = 1,.., N L d l (β, w, A) = L l l = 1,.., N 1

68 Remarks Special case: Anderson and van Wincoop (2003) Model is suitable to address both firm level and aggregate data Continuum of products and product-location-specific productivity shocks make it feasible to solve and estimate the model

69 Estimation

70 Overview of estimation Data on all German multinationals in 12 Western European and North American countries

71 Overview of estimation Data on all German multinationals in 12 Western European and North American countries Observe for each firm Set of locations Total output of each affiliate and of the parent company

72 Overview of estimation Data on all German multinationals in 12 Western European and North American countries Observe for each firm Set of locations Total output of each affiliate and of the parent company Additional data on aggregate manufacturing expenditures, and proxies for bilateral trade costs and price indices

73 Overview of estimation Data on all German multinationals in 12 Western European and North American countries Observe for each firm Set of locations Total output of each affiliate and of the parent company Additional data on aggregate manufacturing expenditures, and proxies for bilateral trade costs and price indices Estimate distribution of fixed costs, η t,k log N (µ η, σ η ), unit input costs, w k = w k γ ik, and other distributional parameters via Maximum Likelihood

74 Overview of estimation Data on all German multinationals in 12 Western European and North American countries Observe for each firm Set of locations Total output of each affiliate and of the parent company Additional data on aggregate manufacturing expenditures, and proxies for bilateral trade costs and price indices Estimate distribution of fixed costs, η t,k log N (µ η, σ η ), unit input costs, w k = w k γ ik, and other distributional parameters via Maximum Likelihood Fix σ = 6, θ = 7 Estimation of θ

75 Intuition for identification The intensive margin how much do firms produce in a country relative to home identifies the unit input cost in that country.

76 Intuition for identification The intensive margin how much do firms produce in a country relative to home identifies the unit input cost in that country. The extensive margin in which sets of countries do the firms establish plants identifies the fixed cost parameters.

77 Intuition for identification The intensive margin how much do firms produce in a country relative to home identifies the unit input cost in that country. The extensive margin in which sets of countries do the firms establish plants identifies the fixed cost parameters. The size distribution of firms identifies the core productivity level distribution parameters and the noise in the output of the firm the dispersion parameter of the plant-wide productivity shifters.

78 Likelihood function Parameters: Θ = { w, σ ɛ, µ η, σ η, µ φ, σ φ } Likelihood function: = L(Θ; {Z t, r t } T t=1) T Pr (Z = Z t φ; w, σ ɛ, µ η, σ η )g(r t Z t, φ; w)dg(φ µ φ, σ φ ) t=1 φ

79 Likelihood function Parameters: Θ = { w, σ ɛ, µ η, σ η, µ φ, σ φ } Likelihood function: = L(Θ; {Z t, r t } T t=1) T Pr (Z = Z t φ; w, σ ɛ, µ η, σ η )g(r t Z t, φ; w)dg(φ µ φ, σ φ ) t=1 φ Control for unobserved heterogeneity in core productivity levels

80 Constrained maximum Likelihood estimation Estimation problem max Θ,ψ log L(Θ; {Z t, ψ t } T t=1) s.t. r t,l ( w, Z t, ψ t ) = κ m Y m P 1 σ m ( ( w l τ lm ) θ ψt,l θ ) ( θ+1 σ θ ) k Z t ( w k τ km ) θ ψ θ t,k t {1,...T }, l {1,...N} such that l Z t.

81 Parameter estimates Unit input costs Fixed costs w µ η Austria (0.021) (0.423) Belgium (0.038) (0.500) S.d. log fixed cost, σ η Canada (0.320) (0.080) (0.571) Scale parameter productivity, µ φ Switzerland (0.017) (0.055) (0.472) Shape parameter productivity, σ φ Spain (0.620) (0.018) (0.335) S.d. log productivity shock, σ ɛ France (0.009) (0.023) (0.243) United Kingdom Log-Likelihood -1.21E+004 (0.021) (0.321) Number of firms, T 665 Ireland (0.052) (0.671) Italy Fixed costs in Euro (0.039) (0.309) Data summary by country Netherlands (0.029) (0.513) United States (0.016) (0.250)

82 Decomposing the sources of home bias in production Average share of foreign production in the output of German MNEs across counterfactual production costs Data Model No fixed Same unit No fixed costs input costs as costs and same in Germany unit input costs as in Germany (0.013) (0.009) (0.021) (0.001)

83 Calibration

84 Calibration of the general equilibrium Data: Bilateral manufacturing trade flows from OECD Bilateral MP from Ramondo, Rodriguez-Clare, and Tintelnot (in process) Size of labor force and skill level from Barro and Lee (2010) Gravity variables from CEPII Estimates of German MNEs production costs in various destination countries

85 Calibration targets Targets: 1 Trade shares: 2 MP-shares: ξ lm = X lm Y m κ il = X ilm m. X lm 3 Variable production costs for German firms in country l relative to costs at home (j): w l w j = w lγ jl w j m

86 Restrictions on parameters Variable iceberg trade and MP costs τ lm = β τ const(dist lm ) βτ dist (β τ contig ) contig lm (β τ lang )language lm for l m γ il = β γ const (dist il) βγ dist (β γ contig )contig il (β γ lang )language il Fixed MP costs: η l log N (ln f il, β f σ) for i l f il = β f const (dist il) βf dist (β f contig )contig il (β f lang )language il for i l Fixed endowments: L i, M i Fixed parameters: σ = 6, θ = 7 σ ɛ = 0 φ Pareto with shape parameter 5.5

87 Calibration procedure Fit of targets Calibration problem ξ(β, w, A) ξ d(β, w, A) = κ(β, w, A) κ w(β,w,a) w j min d(β, w, β,w,a A) d(β, w, A) subject to: A l (β, w, A) = A l w w j l = 1,.., N L d l (β, w, A) = L l l = 1,.., N 1

88 Trade and MP costs estimates Pure trade model Global production model Trade cost constant distance language contiguity Variable MP cost constant distance language contiguity Fixed MP cost constant distance language contiguity dispersion Norm trade fit Norm MP fit 0.158

89 Share of exports in production of US affiliates: Data and Model IRL 0.7 CHE 0.6 NLD BEL data 0.5 DEU AUT ESP CAN FRA ITA GBR model Figure: Export platform shares for US multinationals - data and model

90 G.E. Counterfactuals

91 The benefits of foreign technology How does a technology shock in one country affect production and welfare outcomes in all countries?

92 The benefits of foreign technology How does a technology shock in one country affect production and welfare outcomes in all countries? Suppose all US firms improve their productivity by 20 percent.

93 The benefits of foreign technology How does a technology shock in one country affect production and welfare outcomes in all countries? Suppose all US firms improve their productivity by 20 percent. With and without multinational production, US welfare improves by around 20 percent.

94 Benefits from US technology improvement Pure trade model Global production model Austria Belgium Canada Switzerland Germany Spain France United Kingdom Ireland Italy Netherlands United States Results without increasing returns

95 Effects from CETA Comprehensive Economic and Trade Agreement (Canada and EU)

96 Effects from CETA Comprehensive Economic and Trade Agreement (Canada and EU) What are the effects on signatory countries and the United States?

97 Effects from CETA Comprehensive Economic and Trade Agreement (Canada and EU) What are the effects on signatory countries and the United States? My model is particularly suitable to address this question:

98 Effects from CETA Comprehensive Economic and Trade Agreement (Canada and EU) What are the effects on signatory countries and the United States? My model is particularly suitable to address this question: Trade costs between US and Canada are low

99 Effects from CETA Comprehensive Economic and Trade Agreement (Canada and EU) What are the effects on signatory countries and the United States? My model is particularly suitable to address this question: Trade costs between US and Canada are low Some European firms want to have only one plant in North America

100 Effects from CETA Comprehensive Economic and Trade Agreement (Canada and EU) What are the effects on signatory countries and the United States? My model is particularly suitable to address this question: Trade costs between US and Canada are low Some European firms want to have only one plant in North America Re-optimization by multinational firms induces a third-country effect additional to the terms of trade effect.

101 Effects from CETA Difference in inward MP-shares Canada United States Rel. welfare Canada EU countries Switzerland United States

102 Effects from CETA Difference in inward MP-shares Canada United States Rel. welfare Canada EU countries Switzerland United States EU countries production share in the US would fall from 5.61 to 5.15 percent. In relative terms, this is a decline by 7 percent.

103 Effects from CETA Difference in inward MP-shares Canada United States Rel. welfare Canada EU countries Switzerland United States EU countries production share in the US would fall from 5.61 to 5.15 percent. In relative terms, this is a decline by 7 percent. The overall share of foreign production in the US would fall by 6 percent.

104 Effects from CETA Difference in inward MP-shares Canada United States Rel. welfare Canada EU countries Switzerland United States EU countries production share in the US would fall from 5.61 to 5.15 percent. In relative terms, this is a decline by 7 percent. The overall share of foreign production in the US would fall by 6 percent. Canada would experience the largest welfare gains.

105 The gains from Trade and MP The gains from trade:

106 The gains from Trade and MP The gains from trade: The real income changes, Y P Y nt P nt, are similar to a pure trade model

107 The gains from Trade and MP The gains from trade: Y P The real income changes,, are similar to a pure trade model Y nt P Large distributional effects: nt Profits rise much more than real wages.

108 The gains from Trade and MP The gains from trade: Y P The real income changes,, are similar to a pure trade model Y nt P Large distributional effects: nt Profits rise much more than real wages. The gains from MP: The real income changes from MP are smaller.

109 The gains from Trade and MP The gains from trade: Y P The real income changes,, are similar to a pure trade model Y nt P Large distributional effects: nt Profits rise much more than real wages. The gains from MP: The real income changes from MP are smaller. Firms real profits fall considerably; change in real wages is similar to disallowing trade.

110 The gains from Trade and MP The gains from trade: Y P The real income changes,, are similar to a pure trade model Y nt P Large distributional effects: nt Profits rise much more than real wages. The gains from MP: The real income changes from MP are smaller. Firms real profits fall considerably; change in real wages is similar to disallowing trade. Remark: Free entry may lead to different welfare outcomes (future work).

111

112 Conclusion Main contributions:

113 Conclusion Main contributions: A new framework that tractably handles multinational firms that engage in export platform sales and that face fixed costs of foreign investment.

114 Conclusion Main contributions: A new framework that tractably handles multinational firms that engage in export platform sales and that face fixed costs of foreign investment. Quantification of the size and importance of fixed costs of foreign investment both in partial and general equilibrium

115 Conclusion Main contributions: A new framework that tractably handles multinational firms that engage in export platform sales and that face fixed costs of foreign investment. Quantification of the size and importance of fixed costs of foreign investment both in partial and general equilibrium Demonstrated the usefulness of the framework for current policy analysis

116 Conclusion Main contributions: A new framework that tractably handles multinational firms that engage in export platform sales and that face fixed costs of foreign investment. Quantification of the size and importance of fixed costs of foreign investment both in partial and general equilibrium Demonstrated the usefulness of the framework for current policy analysis Extensions / future applications: Competition for multinationals by national governments.

117 Thank you for your attention!

118 Back-up

119 The gains from trade Global Production model Pure Trade model Welfare Real profit Real wage Welfare / Real wage change change change change Austria Belgium Canada Switzerland Germany Spain France United Kingdom Ireland Italy Netherlands United States

120 The gains from trade Global Production model Pure Trade model Welfare Real profit Real wage Welfare / Real wage change change change change Austria Belgium Canada Switzerland Germany Spain France United Kingdom Ireland Italy Netherlands United States

121 The gains from multinational production Global Production model Welfare Real profit Real wage change change change Austria Belgium Canada Switzerland Germany Spain France United Kingdom Ireland Italy Netherlands United States

122 The gains from openness Global Production model Welfare Real profit Real wage change change change Austria Belgium Canada Switzerland Germany Spain France United Kingdom Ireland Italy Netherlands United States

123 Benefits from US technology improvement Restricted global production model without fixed cost Relative to benchmark Relative to US gains Austria Belgium Canada Switzerland Germany Spain France United Kingdom Ireland Italy Netherlands United States back

124 Demand Utility of representative consumer in country j U j 1 Ω 0 Goods are substitutes, σ > 1 σ/(σ 1) q j (ω, υ) (σ 1)/σ dυdω.

125 Demand Utility of representative consumer in country j U j Ω 1 Goods are substitutes, σ > 1 0 q j (ω, υ) (σ 1)/σ dυdω σ/(σ 1) The quantity demanded in country j of variety υ supplied by firm ω is q j (ω, υ) = p j (ω, υ) σ Y j. P 1 σ j.

126 Demand Expenditure on goods of firm ω s j (ω) = p j (ω) 1 σ Y j Pj 1 σ.

127 Demand Expenditure on goods of firm ω Firm level price index p j (ω) s j (ω) = p j (ω) 1 σ 1 0 Y j Pj 1 σ p j (ω, υ) 1 σ dυ. 1/(1 σ)

128 Demand Expenditure on goods of firm ω Firm level price index p j (ω) s j (ω) = p j (ω) 1 σ 1 0 Y j Pj 1 σ p j (ω, υ) 1 σ dυ Aggregate price index in country j P j p j (ω) (1 σ) dω Ω j. 1/(1 σ) 1/(1 σ). BACK

129 Price index The consumer price index in market m is P m = M i i φ Z Z i ρ i,φ Z E ɛ (p m (i, φ, Z, ɛ) 1 σ )dg(φ) 1/(1 σ) (1) Equilibrium

130 Labor market clearing Labor market clearing condition w k L k = σ 1 σ + i k m M i φ X km η Z i k 1 [Z = Z(i, φ, η)] f ik η k w k df (η)dg(φ) Set of location vectors that includes a location in country k: i k = {Z Zi Z k = 1} Equilibrium Equilibrium computation (2)

131 Income and Current account balance Income in country m Y m = w m L m +M m φ η df (η)dg(φ) Z Z m 1 [Z = Z(i, φ, η)] E ɛ (Π i, φ, Z, ɛ, η) (3)

132 Income and Current account balance Income in country m Y m = w m L m +M m φ η df (η)dg(φ) Current account balance implies that X lm = Y m Z Z m 1 [Z = Z(i, φ, η)] E ɛ (Π i, φ, Z, ɛ, η) l (3) Equilibrium

133 Equilibrium definition Given τ ij, γ ij, M i, F (η), G(φ), H(ɛ), Z i, i, j = 1,..., N, a global production equilibrium is a set of wages, w i, price indices, P i, income, Y i, allocations for the representative consumer, q(ω, υ), prices, p m (i, φ, Z, ɛ), and location choices, Z(i, φ, η), for the firm, such that (i) q(ω, υ) is the solution of the consumer s optimization problem. (ii) p m (i, φ, Z, ɛ) and Z(i, φ, η) solve the firm profit maximization problem. (iii) P i satisfies equation (1). (iv) The labor market clearing condition, (2), holds. (v) Y m satisfies equation (3). Equilibrium overview

134 Estimation of dispersion parameter of product-level productivity distribution BACK Product-level sales to market m are distributed Frechet with dispersion parameter θ σ 1. θ Ideally I would estimate σ 1 from firm-product bilateral export data or sales data in particular country. Data for entire manufacturing sector would be most appropriate. When using car model sales data in five European countries available from Goldberg and Verboven (2001) I find an estimate of θ σ 1 = 1.02.

135 Multinational production is large Value of U.S. multinational firms manufacturing production abroad is more than twice as large as the value of aggregate U.S. manufacturing exports

136 Multinational production is large Value of U.S. multinational firms manufacturing production abroad is more than twice as large as the value of aggregate U.S. manufacturing exports U.S. multinationals also account for half of aggregate U.S. exports in goods

137 Multinational production is large Value of U.S. multinational firms manufacturing production abroad is more than twice as large as the value of aggregate U.S. manufacturing exports U.S. multinationals also account for half of aggregate U.S. exports in goods In North America and Western Europe, between 47 percent (Belgium) and 14 percent (U.S.) of output is produced by affiliates of foreign multinationals.

138 Multinational production is large Value of U.S. multinational firms manufacturing production abroad is more than twice as large as the value of aggregate U.S. manufacturing exports U.S. multinationals also account for half of aggregate U.S. exports in goods In North America and Western Europe, between 47 percent (Belgium) and 14 percent (U.S.) of output is produced by affiliates of foreign multinationals. Foreign output of U.S. multinationals have been growing faster than U.S. trade over the last decade.

139 German and American multinational firm sales versus agg. exports Table: Trade and foreign affiliate sales Country Exports Foreign affiliate sales USA ,560 Germany Note: In billion US dollars; data are for the manufacturing sector in year Majority owned foreign affiliates only.

140 Rewriting the conditional density of revenues BACK g(r t Z t, φ; w) = J t (φ; w) ( ) ψt,l ( w) h σ ɛ φ l Z t

141 Probability of location choice Probability that firm with core productivity φ selects vector Z t : = Pr(Z = Z t φ t ; w, σ ɛ, µ η, σ η ) {E ɛ (Π(φ t, Z, ɛ, η; σ ɛ, w)) E ɛ (Π(φ t, Z, ɛ, η; σ ɛ, w)) Z Z i } η df ( η; µ η, σ η ) Taking into account selection of the data: Pr (Z = Z t φ t ; w, σ ɛ, µ η, σ η ) = Pr(Z = Z t φ; w, σ ɛ, µ η, σ η ) 1 Pr(Z = Z domestic φ; w, σ ɛ, µ η, σ η ) BACK

142 Preliminary evidence for barriers to multinational production Table: Foreign production shares Cardinality Number Mean share Mean share production of firms of foreign of foreign locations firm production gross production all Note: Statistics for German MNE activities in 12 Western European and North American countries.

143 German multinationals activities by country Country Number Mean Median output output Austria Belgium Canada Switzerland Germany Spain France United Kingdom Ireland Italy Netherlands United States Notes: Output in million Euro. Source: MiDi database. Parameter Estimates

144 BACK Model Estimation Calibration G.E. Counterfactuals Conclusion BACK-UP Fixed costs in Euro Country Mean fixed cost of firms who set up a plant in the respective country in million Euro Austria (1.338) Belgium (7.515) Canada (6.497) Switzerland (2.715) Spain (2.474) France (1.423) United Kingdom (1.966) Ireland (1.665) Italy (1.041) Netherlands (2.332) United States (1.257)

145 Trade shares: Data and Model data model Figure: Bilateral trade shares - data and model

146 International production shares: Data and Model data model Figure: Bilateral international production shares - data and model

147 Variable production costs: Data and Model Estimates from micro data Calibrated in model Figure: Variable production costs for German firmsl BACK