Working Paper | HBS Working Paper Series | 2016

Selection and Market Reallocation: Productivity Gains from Multinational Production

by Laura Alfaro and Maggie X. Chen

Abstract

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 reallocation both 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 the productivity distribution rightward while selection and market reallocation shifts the revenue and employment distributions leftward and raises left truncations. Using a rich cross-country firm 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 that ignoring this channel could lead to substantial bias in understanding the nature of productivity 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. (Updated November 2016. Also NBER Working Paper w18207.)