Multinational Expansion in Time and Space

Abstract

This paper studies the expansion patterns of the multinational enterprise (MNE) in time and space. Using a long panel of US MNEs, we document that: MNE affiliates grow by exporting to new markets; the activities of MNE affiliates persist during the affiliate's life, usually starting with sales to their host market and eventually expanding to export markets; and MNE affiliates' entry into new locations does not depend on the location of preexisting affiliates. Informed by these facts, we develop a multi-country quantitative dynamic model of the MNE that features heterogeneity in firm-level productivity, persistent aggregate shocks, and a rich structure of costs that affect MNE expansion. Importantly, MNE affiliates can decouple their locations of production and sales, and endogenously choose to enter or exit the host and the export markets.We introduce a compound option formulation that allows us to capture in a tractable way the rich heterogeneity that is observed in the data and that is necessary for quantitative analysis.Using the calibrated model, our quantitative application to Brexit reveals that export platforms are important for understanding the reallocation of MNE activity in time and space, and that the nature of the frictions to MNE activities matters for aggregate firm dynamics.JEL Codes: F1. Yeaple for very helpful comments in more than one occasion. We have also benefited from comments from 1 affiliates-in other words, the pattern of affiliates' entry does not display "extended gravity", in stark contrast with the facts that Morales et al. (2018) document for exporters.Guided by these facts, we build a multi-country dynamic model of MNE expansion. Home-based firms decide whether, when, and where to open foreign affiliates. Affiliates, in turn, can sell both to their host market and to any other market. Affiliate operations, both in the host and in the export markets, are subject to sunk, fixed, and variable costs. The MNE decisions of whether to set up an affiliate in a market, and whether to export from it, are shaped by the interaction of firm-specific characteristics, persistent aggregate productivity and demand shocks, and the array of MNE costs.Our model's structure is based on two main assumptions. First, guided by the observation that almost all affiliates in the data have some horizontal sales at birth, we assume that firms that decide to do Foreign Direct Investment (FDI) must first set up an affiliate and sell to the local market, and only then can they consider exporting from that affiliate. Since the model is set up in continuous time, the decision of opening an affiliate and the decision of exporting from it can be made virtually simultaneously, generating affiliates with exclusively horizontal sales and affiliates with both horizontal and export sales at birth, as in the data. Second, consistent with the lack of extended gravity in the data, we assume that the decision of opening an affiliate -and eventually exporting from it-is independent across markets. For instance, a firm's decisi...

Regional Investment Pioneers in South Asia: The Payoff of Knowing Your Neighbors

“…Thus, the first destination helps reduce the entry costs of the subsequent investment destinations, but South Asia being the dominant first investment destination does not seem to confine the next investment to the region. This result is line with Garetto, Oldenski, and Ramondo (2019), who find that the location of a new affiliate does not depend on the location of a preexisting affiliate. 14 An example of sequential investing by a regional pioneer is MAS Brands' development of its Amanté brand in India and Sri Lanka, learning from which generated enough comfort for MAS to invest in the established Ultimo brand in the United Kingdom.…”

“…A regional dimension arises if the sunk entry cost in a regional market is lower than that in an extraregional market, making the region the likely first destination. Evidence of sequential exporting has been found , and recent research on US manufacturing affiliates finds that the sunk entry costs are higher for first affiliates compared with subsequent affiliates (Garetto, Oldenski, and Ramondo 2019).…”

The Global Impact of Brexit Uncertainty

“…4 Papers documenting a negative impact of Brexit on UK investments, employment, wages, trade, lending, and competition include Born et al (2019); Berg et al (2019); Van Reenen (2016); Sampson (2017);Breinlich et al (2018); Davies and Studnicka (2018); Dhingra et al (2017); Graziano et al (2018); Garetto et al (2019); Costa et al (2019); McGrattan and Waddle (2017); Steinberg (2019). 5 Campello et al (2018) document the investment and hiring e↵ects of Brexit on a sample of US firms exposed to the UK economy.…”

The Global Impact of Brexit Uncertainty

“…13 Interestingly, this finding mirrors the result in Garetto et al (2019), which uses a model to quantify the total welfare e↵ect of Brexit on EU economies. They find that the Brexit shock most reduces purchasing power (i.e., real income) in Ireland.…”

“…However, this ambiguity does not usually exist at the firm level (i.e., it is conditional on a time fixed e↵ect). In models with adjustment costs, a firm facing a relative increase in firm-level risk should always decrease its investment as compared to other firms.4 Papers documenting a negative impact of Brexit on UK investments, employment, wages, trade, lending, and competition includeBorn et al (2019);Berg et al (2019); Van Reenen (2016);Sampson (2017);Breinlich et al (2018);Davies and Studnicka (2018);Dhingra et al (2017);Graziano et al (2018);Garetto et al (2019);Costa et al (2019); McGrattan and Waddle (2017); Steinberg (2019).5Campello et al (2018) document the investment and hiring e↵ects of Brexit on a sample of US firms exposed to the UK economy.…”