In this paper, Branstetter and Drev use a rich panel of the universe of Slovenian manufacturing firms in the period 1994-2010 to explore how receiving foreign investment impacts the subsequent scale and scope of recipient firms' activities. The empirical analysis is motivated with a theoretical model in which local firms endogenously chose their product mix and export destinations. The model details how receiving foreign investment affects the way firms alter their ex-post behavior, and then shows that predictions of the model align closely with the empirical results. Using a variety of estimation techniques that allow for foreign investors' strategic selection of local firms for investment, it finds that receiving investment significantly affects the product and export market choices of local firms, leading them to expand both the scale and scope of their activities. In addition, the paper explores how heterogeneity in investor origin and the intensity of investment modulate the effects of receiving foreign investment. It finds that targets of high-intensity investment from advanced country investors subsequently outperform similar domestically owned peers to the greatest degree along measures of both scale and scope, indicative of the notion that foreign investors transfer their superior management and technology practices to the recipient firms. The findings in this paper suggest that incorporating investor heterogeneity and the multi-product, multi-destination nature of firms yields important insights for furthering the understanding of how foreign investment impacts recipient firms.
Dix-Carneiro and Kovak empirically study the dynamics of labor market adjustment following the Brazilian trade reform of the 1990s. The researchers use variation in industry-specific tariff cuts interacted with initial regional industry mix to measure trade-induced local labor demand shocks, and then examine regional and individual labor market responses to those one-time shocks over two decades. Contrary to conventional wisdom, the authors do not find that the impact of local shocks is dissipated over time through wage-equalizing migration. Instead, they find steadily growing effects of local shocks on regional formal sector wages and employment for 20 years. This finding can be rationalized in a simple equilibrium model with two complementary factors of production, labor and industry-specific factors such as capital, that adjust slowly and imperfectly to shocks. Next, they document rich margins of adjustment induced by the trade reform at the regional and individual level. Workers initially employed in harder hit regions face continuously deteriorating formal labor market outcomes relative to workers employed in less affected regions, and this gap persists even 20 years after the beginning of trade liberalization. Negative local trade shocks induce workers to shift out of the formal tradable sector and into the formal nontradable sector. Non-employment strongly increases in harder-hit regions in the medium run, but in the longer run, non-employed workers eventually find re-employment in the informal sector. Working age population does not react to these local shocks, but formal sector net migration does, consistent with the relative decline of the formal sector and growth of the informal sector in adversely affected regions.
This paper examines the importance of buyer-supplier relationships, geography and the structure of the production network in firm performance. Bernard, Moxnes, and Saitodevelop a simple model where firms can outsource tasks and search for suppliers in different locations. Firms located in close proximity to other markets, and firms that face low search costs, will search more and find better suppliers. This in turn drives down the firm's marginal production costs. The authors test the theory by exploiting the opening of a high-speed (Shinkansen) train line in Japan which lowered the cost of passenger travel but left shipping costs unchanged. Using an exhaustive dataset on firms' buyer-seller linkages,they find significant improvements in firm performance as well as creation of new buyer-seller links, consistent with the model.
Customs data and firm-level production data reveal both the heterogeneity and the granularity of individual buyers, and sellers. Eaton, Kortum, and Kramarz seek to capture these firm-level features in a general equilibrium model that is also consistent with observations at the aggregate level. The researchers' model is one of product trade through random meetings. Buyers, who may be households looking for final products or firms looking for inputs, connect with sellers randomly. At the firm level, the model generates predictions for imports, exports, and the share of labor in production broadly consistent with observations on French manufacturers. At the aggregate level, firm-to-firm trade determines bilateral trade shares as well as labor's share of output in each country.
The trade-and-environment literature often begins with a generic base case. Sectors differ in pollution intensities and countries have sectoral comparative advantage. Pollution comes from production, not consumption, and consumers have identical, homothetic preferences over goods and environmental quality. Policy instruments are Pigouvian taxes and tariffs. Markusen argues that this model is counter-empirical in some ways and assumes away other crucial features. The researcher offers a simple alternative base case, in which global pollution is proportional to all economic activity, and where environmental quality has an income elasticity of demand exceeding one. An income tax can fund an abatement activity, diverting resource from production and creating a terms-of-trade externality that passes some costs of abatement to the other country. The author contrasts cooperative and non-cooperative outcomes between governments of two countries differing in per-capita incomes. Leakage takes a very different form called "policy leakage" and border taxes are counter-productive. When per-capita income differences are large, a poor country may be worse off when the large country abates (reversing the usual argument on free riding) and cooperative bargaining over abatement levels may offer no gains. Finally, Markusen examines "issue linking" in bargaining when one country is both large and rich, and hence has both a high tariff and a high abatement effort in a non-cooperative equilibrium.