Selection and Market Reallocation: Productivity Gains from Multinational Production
Maggie X. Chen
- American Economic Journal: Economic Policy (Forthcoming)
Assessing productivity gains from multinational production has been a vital
topic of economic research and policy debate. Positive productivity gains are
often attributed to productivity spillovers; however, an alternative, much less emphasized channel is selection and market reallocation whereby competition leads
to factor and revenue reallocation within and between domestic firms and exits
of the least productive firms. We investigate the roles of these different mechanisms in determining aggregate productivity gains using a unifying framework
that explores the mechanisms' distinct predictions on the distributions of domestic firms: Within-firm productivity improvement shifts rightward or reshapes the
productivity distribution, while selection and market reallocation moves the revenue and employment distributions leftward and raises left truncations. Using a
rich cross-country firm-level panel dataset, we find significant evidence of both
mechanisms and effects of competition in product, technology, and labor space.
However, selection and market reallocation account for the majority of aggregate
productivity gains, suggesting ignoring this channel could lead to substantial bias
in understanding the nature of productivity gains from multinational production.
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