Working Paper | HBS Working Paper Series | 2015

Selection and Market Reallocation: Productivity Gains from Multinational Production

by Laura Alfaro and Maggie X. Chen

Abstract

Assessing the productivity gains from multinational production has been a vital topic of economic research. Positive aggregate productivity gains are often attributed to within-firm productivity improvement; however, an alternative, less emphasized explanation is between-firm selection and market reallocation, whereby competition from multinationals leads to factor reallocation and the survival of only the most productive domestic firms. We investigate the roles of the two different mechanisms in determining the aggregate productivity gains by exploring their distinct predictions on the distributions of domestic firms: within-firm productivity improvement shifts the productivity and the revenue distributions rightward while between-firm selection and market reallocation raise the left truncation of the distributions and shift revenue leftward. Using a rich cross-country firm-level panel dataset, we find significant evidence of both mechanisms, but between-firm selection and market reallocation accounts for the majority of aggregate productivity gains, suggesting that ignoring this channel could lead to substantial bias in understanding the nature of gains from multinational production.

Keywords: Productivity gains; multinational production; selection; Market Reallocation; and within-firm productivity; Multinational Firms and Management; Production; Performance Productivity; Competition; Mathematical Methods;

Citation:

Alfaro, Laura, and Maggie X. Chen. "Selection and Market Reallocation: Productivity Gains from Multinational Production." Harvard Business School Working Paper, No. 12-111, June 2012. (Revised April 2015. Also NBER Working Paper w18207.)