Working Paper

Multinationals Expansion, Shareholding Choice, and Local Know-How Link

The shareholdings of French multinational enterprises (MNE) differ across destination countries and across individual MNE's life cycles. The average shareholdings are larger in countries that are highly-developed, geographically, and culturally closer to France; productive MNEs match with productive local firms; MNEs follow a gradual internationalization process where foreign experience increases the average shareholdings of following affiliates and the probability of wholly-owning. I build and calibrate a dynamic model featuring heterogeneous firms in both mobile know-how (MKH), transfer of local know-how (LKH) from partners, and accumulation of LKH for future entries. The composition of LKH and MKH determines MNE's entry decision. The distribution of LKH and MKH generate a positive assortative matching pattern as in the data. Compared with a static model, the dynamic model predicts a much larger contribution of LKH and production loss to ownership restriction, which cannot be recovered using static data. In a counterfactual where the LKH transfer cost of Romania is set equal to Germany, French MNE production will increase by 80%, where 30% comes from dynamic effects.



Agglomeration Externalities and Industry Concentration Dynamics, with Dan Lu Link

Manufacturing industries are highly concentrated geographically, and firms in larger regions are larger and grow faster. We focus our study on the effect played by the agglomeration: producers benefit from the existence of nearby producers. Empirically, this paper uses Chinese Census of Industries data to provide evidence of region-size premium on entrant number, sales and sales growth rate, and a changing industrial concentration. Theoretically, this paper builds a dynamic model where firms make location choices, and the agglomeration effect determines how fast firms update their technology. In the calibration, we infer natural advantage changes from observed entrant shares and identify the model-based agglomeration effect using the correlation between the average sales growths and entrant share growths. We simulate the model to match China's entrant share changes from 1998 to 2007. Quantitatively, we show that agglomeration effects can explain one-fourth of the firm-level productivity growth, one-eighth of the sales growth, and two-thirds of the average productivity difference in the largest regions (5th quantile) versus the smallest regions (1st quantile).


Work in Progress:

What Do Alibaba Data Tell Us about Quality Growth in China, with Mark Bils, Min Fang, & Zinbin Huang

Does the Consumer Price Index (CPI) inflation for consumer durables reflect quality growth or inflation? This well-known question lies at the core of evaluating inflation and quality growth over time, which are essential for macroeconomics. In this project, we try to account for quality growth in measuring inflation. As we know, households can substitute for low-quality goods with high-quality ones. If we do not account for quality changes when calculating the inflation, it can lead to an overestimation of the "pure" price increase. The problem is even more severe in developing countries with fast economic growth. In this study, we participate in the Huoshui Research Plan in Alibaba Group and get detailed sales data for different brands and models of mobile phones in different regions. We first measure quality growth and how much it contributes to the mobile phone’s overall price growth. In the next step, we want to use data set with a broad category of commodities from Alibaba and quantify the quality and price growth for China’s whole retailing market.

Conglomerate Market Power, with Min Fang, & Xiaomei Sui

We study how firms exert market power through their ownership network and its macroeconomics implications. We first document such empirical evidence using European firm-level data. We then build a dynamic model with heterogeneous firms, ownership networks, and endogenously variable markups. In the model, a controlling parent firm expands through both intensive margin in own production and extensive margin in acquiring/establishing subsidiaries. It then influences the production and pricing decisions of its subsidiaries through its corresponding voting right. As a result, a controlling parent firm exerts market power through its ownership network. We calibrate our model to match European firm-level data and quantify the mechanism. We find that market power is substantially underestimated without accounting for the ownership network. Finally, we show how the conglomerate market power affects the aggregate economy with respect to aggregate shocks and policy interventions.