Multinationals, Technology, and the Introduction of Varieties of Goods∗

Firms that engage in international transactions have been shown to outperform domestic firms in several dimensions. This paper studies the advantages of affiliates of multinationals to grow through an expansion in their range of products. I first develop a monopolistic competition model with multiproduct firms in which firms are heterogeneous in two dimensions: the fixed cost of developing new varieties and the variable cost of production. Multinationals have cost advantages because of economies of scale and learning by doing across countries. Using firm-level data for the Chinese manufacturing sector during 1998-2000, I compare the performance of foreign and domestic firms in terms of the new varieties that they introduce, and, as described in the model, I estimate whether the number of new varieties can be explained by differences in the cost of development and variable productivity. Controlling for size, I find that firms with more than 50 percent of foreign ownership introduce on average more than twice as many more new varieties of goods as private domestic firms. Advantages in productivity account for 33 to 45 percent of the difference in the number and sales of new varieties, while advantages in the cost of development account for 5 to 17 percent of these differences. JEL CODES: F23, F12, F14