"Diversification, Cost Structure, and the Risk Premium of Multinational Corporations", with Jose L. Fillat and Lindsay Oldenski (2015). Forthcoming in the Journal of International Economics.
Abstract. We investigate theoretically and empirically the relationship between the geographic structure of a multinational corporation and its risk premium. Our structural model suggests two channels. On the one hand, multinational activity offers diversification benefits: risk premia should be higher for firms operating in countries where shocks co-vary more with the domestic ones. Second, hysteresis and operating leverage induced by fixed and sunk costs of production imply that risk premia should be higher for firms operating in countries where it is costlier to enter and produce. Our empirical analysis confirms these predictions and delivers a decomposition of firm-level risk premia into individual countries' contributions.
Abstract. I propose a general equilibrium framework where firms decide whether to outsource or integrate input manufacturing, domestically or abroad. By outsourcing, firms may benefit from suppliers' technologies, but pay mark-up prices. By sourcing intrafirm, they save on mark-ups and pay possibly lower foreign wages. Multinational corporations arise when firms integrate production abroad. The model predicts that intrafirm imports are positively correlated with the mean and variance of the firms' productivity distribution, and with the degree of input differentiation. I use the model to quantify the U.S. welfare gains from intrafirm trade, which amount to about 0.23 percent of consumption per-capita.
Abstract. This paper starts by unveiling a strong empirical regularity: multinational corporations exhibit higher stock market returns and earning yields than non-multinational firms. Within non-multinationals, exporters exhibit higher earning yields and returns than firms selling only in their domestic market. To explain this pattern, we develop a real option value model where firms are heterogeneous in productivity, and have to decide whether and how to sell in a foreign market where demand is risky. Selling abroad is a source of risk exposure to firms: following a negative shock, they are reluctant to exit the foreign market because they would forgo the sunk cost that they paid to enter. Multinational firms are the most exposed due to the higher costs they have to pay to invest. The calibrated model is able to match both aggregate US export and foreign direct investment data, and the observed cross-sectional differences in earning yields and returns.
Abstract. A large body of empirical work documents that prices of traded goods change by a smaller proportion than real exchange rates between the trading countries (incomplete pass-through). The wedge between exchange rates and relative prices also varies across countries (pricing-tomarket).
I present a model of trade and international price-setting with heterogeneous firms, where firms' strategic behavior implies that: 1) firm-level pass-through is incomplete and a U-shaped function of firm market share; 2) exchange rate fluctuations affect both the prices of traded goods and the prices of goods sold domestically; and 3) firm-level pass-through varies across destination countries. Estimates from a panel data set of cars prices support the predictions of the model.
Abstract. This paper starts by establishing a set of stylized facts about global banks with operations in the United States. First, we show evidence of selection into foreign markets: the parent banks of global conglomerates tend to be larger than national banks. Second, selection by size is related to the mode of foreign operations: foreign subsidiaries of global banks are systematically larger than foreign branches, in terms of deposits, loans, and overall assets. Third, the mode of foreign operations affects the response of global banks to shocks and how those shocks are transmitted across countries. We develop a structural model of entry into global banking whose assumptions mimic the institutional details of the regulatory framework in the US. Heterogeneous, profit-maximizing banks decide whether and how to enter a foreign market. While shedding light on the relationship between market access, capital flows, regulation, and entry, the model rationalizes the observed stylized facts and can be used as a laboratory to perform counterfactual analysis.
"Real Options in International Economics" [slides available upon request]
"Becoming a Multinational", with Jose L. Fillat
"The Long-Run Risk of Foreign Direct Investment", with Jose L. Fillat