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 new empirical regularity: multinational corporations systematically exhibit higher stock market returns and earnings yields than non-multinational firms. Within non-multinationals, exporters tend to exhibit 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 selling abroad are exposed to risk: following a negative shock, they are reluctant to exit the foreign market because they would forgo the sunk cost that they paid to start investing abroad. Multinational firms are the most exposed due to the higher sunk costs they have to pay to enter. The model, calibrated to match aggregate U.S. export and foreign direct investment data, is able to replicate the observed cross-sectional differences in earnings yields and returns.
"Firms'Heterogeneity and Incomplete Pass-Through" (April 2012), submitted
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 little on how the extent of pass-through and pricing-to-market varies 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 i) pass-through is incomplete, ii) the extent of pass-through is positively related to a firm's size compared to its competitors, and iii) exchange rate fluctuations affect both the prices of traded goods and the prices of goods sold domestically. I test the predictions of the model using a panel data set of cars prices in five European markets. The estimates broadly support the predictions of the theory.
Abstract. This paper investigates theoretically and empirically the relationship between the geographic structure of a multinational corporation and its stock market returns. We use a structural model to identify two main channels through which the fact of being a multinational firm affects returns. On
the one hand, multinational activity offers diversification potential. On the other hand, there is cash flow risk arising from hysteresis and potential losses induced by sunk entry costs and fixed costs. To identify these channels empirically, we merge Compustat/CRSP data on stock returns with the
Bureau of Economic Analysis data on the operations of multinational corporations. Preliminary empirical results confirm the predictions of the theory.
Abstract. 15% of the loans in the US are held by foreign banking institutions, headquartered in more than 50 countries. While earlier research documented the entry mode of foreign institutions in the United States, very little is known about foreign banks' motive to enter the U.S. We address this gap by asking: why do foreign banks enter in the US market? And what drives the institutional form they adopt upon entry? Using bank-level data, we present novel stylized facts describing characteristics of foreign institutions and compare then to the incumbent set of banks. Our findings suggest that several factors affect the form of entry: demand, business type, differences between countries' regulatory requirements, and access to funding. We incorporate these facts into a structural model of entry in the banking sector where profit maximizing foreign banks decide whether and how to enter the US market. The model sheds light on the relationship between market access, capital flows, regulation, and entry, and has implications for the risk exposure that different organizational forms entail.
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.
"The Long-Run Risk of Foreign Direct Investment", with Jose L. Fillat