Seminar 281, International Trade and Finance: "Accounting for Cross-Country Income Differences: New Evidence from Multinational Firms”

Seminar | November 5 | 4-5:30 p.m. | 597 Evans Hall

 Vanessa Alviarez, Assistant Professor, Sauder School of Business at the University of British Columbia

 Department of Economics

We use data on the cross-border operations of multinational enterprises (MNE) to decompose cross-country differences in output-per worker into differences in ‘country embedded factors’ vs. differences in ‘aggregate firm know-how’. By ‘country-embedded factors’ we refer to the components of productivity that are internationally immobile and impact all firms inside a country, such as institutions, natural amenities, and workers’ quality. In contrast, ‘firm know-how’ encompasses those components that generate differences across firms within a country, and which can be transferred internationally within firm boundaries, such as blue-prints and intangible capital. Our identification builds on the notion that MNEs can use their know-how around the world, but must use the factors that are embedded in the countries in which they produce. This implies that productivity differences between two affiliates of the same MNE that operate in different countries must be driven by country-embedded factors. We find that, across the countries in our sample, differences in aggregate firm know-how account for 40 percent of the cross-country differences in TFP, for 22 percent of the differences in output per-worker, and are strongly correlated to observed difference in income per-capita.