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Multinational Production and Innovation in Tandem

October 2024

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  China's WTO accession offers a rare opportunity to observe multinationals' response to changes in property rights in a developing country. WTO accession reduced incentives for joint ventures while reducing constraints on wholly owned foreign subsidiaries. Concomitant with these changes was a more liberal investment environment for indigenous investors. An adaptation of Feenstra and Hanson's (2005) property rights model suggests that higher the productivity and value added of the joint venture, but the lower its domestic sales share, the more likely the venture is to be become wholly foreign owned following liberalization. Theory also suggests that an enterprise with lower productivity but higher value added and domestic sales will be more likely to switch from a joint venture to wholly domestic owned. Using newly created enterprise-level panel data on equity joint ventures and changes in registration type following China's WTO accession, we find evidence consistent with the property rights theory. More highly productive firms with higher value added and lower domestic sales shares are more likely to become wholly foreign owned, while less productive firms focused on the Chinese market are more likely to become wholly domestic owned rather than remain joint ventures. In addition to highlighting the importance of incomplete contracts and property rights in the international organization of production, these results support the view that external commitment to liberalization through WTO accession influences multinational and indigenous firms' behavior.
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• Working Paper

  
  
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  This paper examines the differences in characteristics between outsourcers and nonoutsourcers with a particular focus on productivity. The measure of outsourcing comes from a question in the 1987 and 1992 Census of Manufactures regarding plant-level purchases of foreign intermediate materials. There are two key findings. First, outsourcers are 'outstanding.' That is, all else equal, outsourcers tend to have premia for plant and firm characteristics, such as being larger, more capital intensive, and more productive. One exception to this outsourcing premia is that wages tend to be the same for both outsourcers and non-outsourcers. Second, outsourcing firms, but not plants, have significantly higher productivity growth.
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• Working Paper

  
  
  Import Competition from and Offshoring to Low-Income Countries: Implications for Employment and Wages at U.S. Domestic Manufacturers
  

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  Using confidential linked firm-level trade transactions and census data between 1997 and 2012, we provide new evidence on how American firms without foreign affiliates adjust employment and wages as they adapt to import competition from low-income countries. We provide stylized facts on the input sourcing strategies of these domestic firms, contrasting them with multinationals operating in the same industry. We then investigate how changes in firm input purchases from low-income countries as well as domestic market import penetration from these sources are correlated with changes in employment and wages at surviving domestic firms. Greater offshoring by domestic firms from low-income countries correlates with larger declines in manufacturing employment and in the average production workers' wage. Given the negative association, however, the estimated magnitudes are small, even for a narrow measure of offshoring that includes only intermediate goods. Import penetration of U.S. markets from these sources is associated with relatively larger changes in employment for arm's length importing firms, but has no significant correlation with employment changes at firms that do not trade. Given differences in the degree of both offshoring and import penetration, we find substantial variation across industries in the magnitude of changes associated with low-income country imports.
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