"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. 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.
"Global Banks and the International Transmission of Shocks", with Martin Goetz and Jose L. Fillat (December 2014)
Abstract. We explore the importance of the operation mode of global banks for the transmission of shocks across countries, focusing on its effect on lending. To frame our analysis, we present a simple model where banks choose endogenously whether and how to enter a foreign market. After a shock in their home country, branches of foreign banks are more likely to decrease their lending activities in the host country to provide liquidity to the parent via intra-firm transfers. On the other hand, subsidiaries of foreign banks are more resilient to shocks to the parent's country since they have to be capitalized independently. In our empirical analysis, we consider the effect that the southern European sovereign debt crises caused in European banks with presence in the U.S. and compare the consequences of such shock in the lending behavior of their U.S. branches and subsidiaries. Our empirical analysis corroborates the testable implications of the model: we find that branches of European parents who were directly exposed to Greek sovereign debt decrease their assets in the U.S. by 81% while subsidiaries of exposed European parents increased their assets in the U.S. by about 25%. We also find that the probability that a subsidiary sends money to the parent increases by about 44% while the probability that a U.S. branch of an exposed parent sends money back to the European parent increases by more than twice that amount. Our analysis reveals that, while branches of foreign institutions are important players in the U.S. credit markets, they represent a potential source of financial instability given their sensitivity to exogenous foreign shocks. As such, current reforms that advocate the creation of well capitalized intermediate holding companies should address some of the concerns caused by the institutional characteristics of foreign-owned branches.
"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