"Input Sourcing and Multinational Production" (April 2010) -
Revision requested by The American Economic Journal: Macroeconomics
Abstract. A large portion of world trade happens within firms’ boundaries. This paper proposes a general equilibrium framework where firms decide whether to outsource or to integrate input manufacturing, and whether to do so domestically or abroad. By outsourcing, firms benefit from suppliers’ good technologies, but pay mark-up prices. By sourcing intrafirm, they save on mark-ups and match domestic productivity with possibly lower foreign wages. Multinational corporations arise endogenously when firms integrate production abroad. The model is calibrated to match aggregate U.S. trade data, and used to quantify the welfare gains from vertical FDI and intrafirm trade. The current gains are about 1% of consumption per capita, and further FDI liberalization can increase them substantially.
"Risk, Returns, and Multinational Production", with Jose L. Fillat (October 2010) - UNDER REVISION
Abstract. This paper starts by unveiling a new empirical regularity: multinational corporations tend to exhibit systematically higher returns and earnings yields than non-multinational firms. Within non-multinationals, exporters tend to have higher earnings 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. Firms can serve the foreign market through trade or foreign direct investment, thus becoming multinationals. Multinational firms are more exposed to risk: following a negative shock, they are reluctant to exit the foreign market because they would forgo the option premium (sunk cost) that they paid to become multinationals. The theory provides a complementary explanation for the cross section of returns by exploiting the production side from an international point of view. We calibrate the model to match U.S. export and FDI dynamics, and use it to explain cross-sectional differences in earnings yields and returns.
"Firms'Heterogeneity and Incomplete Pass-Through" (new version coming soon!!!)
Abstract. A large body of empirical work documents the fact that prices of traded goods typically change by a smaller proportion than the real exchange rates between the trading countries (incomplete pass-through). Moreover, the wedge between exchange rates and relative prices appears to vary across countries (pricing-to-market). While these facts have received a lot of attention in the literature, we know very little on how the extent of pass-through and pricing-to-market vary across firms in a country. This paper presents a model of trade and international price-setting with heterogeneous firms, where firms’ strategic behavior implies that pass-through is incomplete and depends on a firm’s relative productivity (or size) compared to its competitors. Pricing-to-market behavior is also depending on firm’s productivity and on countries’ characteristics. I test the firm-level variation predicted by the model using a panel data set of cars prices in five European markets. Preliminary estimates support the predictions of the theory.
"Large Firm Dynamics", with Bailey Brame and Jose L. Fillat
Abstract. The literature on trade dynamics documents patterns of entry and exit into and out of foreign markets mostly for small firms. This paper documents a similar dynamic behavior for large firms, distinguishing entry via export and via FDI, and switches across different modes of serving foreign markets. Using firm-level data for a sample of U.S.-based, publicly listed manufacturing firms, we find that: 1. the data exhibit significant entry and exit flows also for large firms, both via export and FDI sales; 2. export status is highly persistent, and FDI status is even more persistent. 3. the international status of the firm is linked to stock market-based financial indicators.
"Multinational Banks", with Martin Goetz and Jose L. Fillat