Factor-biased Multinational Production

The standard model of multinational production assumes that firms differ in Hicksneutral productivities and ignores differences in factor biases. Using a large firm-level dataset, I show that multinational firms differ from local firms in factor biases along two key dimensions. First, multinational firms are on average larger firms and larger firms on average use more capital-intensive technologies. Second, multinational firms from more capital-abundant home countries choose more capital-intensive technologies. I develop a quantitative framework for modeling factor-biased multinational production that incorporates these two features. The model highlights a new channel through which globalization affects the income distribution between capital and labor: liberalizing multinational production reallocates factors across firms with different factor biases and thus changes the aggregate demand for capital relative to labor. Calibrating the model to both firm-level and aggregate moments for 37 countries, I find that in the past decade, the increase in multinational activity explains 60 percent of the average decline in the labor share. Moreover, the model predicts that countries with a larger increase in multinational activity experience a larger decline in their labor share as observed in the data. ∗I would like to thank Steve Redding for his incredible support and encouragement throughout this project. I would also like to thank Rodrigo Adao, Javier Cravino, Aaron Flaaen, Sharat Ganapati, Gene Grossman, Oleg Itskhoki, Eduardo Morales, Ezra Oberfield and Esteban Rossi-Hansberg for helpful discussions. I am grateful to Natalia Ramondo for generously providing her data on multinational production. Financial support from the International Economics Section at Princeton University is greatly appreciated. Contact information: 1226 K.K.Leung Building, School of Business, The University of Hong Kong, Pokfulam Road, Hong Kong. +852 3917 4220. [email protected].