Adaptation and the Boundary of Multinational Firms

What determines the boundary of multinational firms? According to Williamson (1975), a potential rationale for vertical integration is to facilitate adaptation in a world where uncertainty is resolved over time. This paper offers the first empirical analysis of the impact of adaptation on the boundary of multinational firms. To do so, we first develop a ranking of sectors in terms of their groutinenessh by merging two sets of data: (i) ratings of occupations by their intensities in gproblem solvingh from the U.S. Department of Labor's Occupational Information Network; and (ii) U.S. employment shares of occupations by sectors from the Bureau of Labor Statistics Occupational Employment Statistics. Using U.S. Census trade data, we then demonstrate that, in line with adaptation theories of the firm, the share of intrafirm trade tends to be higher in less routine sectors. This result is robust to inclusion of other variables known to influence the U.S. intrafirm import share such as capital intensity, R&D intensity, relationship specificity, intermediation and productivity dispersion. Our most conservative estimate suggests that a one standard deviation decrease in average routineness raises the share of intrafirm imports by 0.26 standard deviations, or an additional 7% of import value that is intrafirm.

Adaptation and the Boundary of Multinational Firms

This paper offers the first empirical analysis of the impact of adaptation on the boundary of multinational firms. To do so, we develop a ranking of sectors in terms of “routineness” by merging two sets of data: (i) ratings of occupations by their intensities in “solving problems” from the U.S. Department of Labor’s Occupational Information Network; and (ii) U.S. employment shares of occupations by sectors from the Bureau of Labor Statistics Occupational Employment Statistics. Using U.S. Census trade data, we then demonstrate that the share of intrafirm trade tends to be higher in less routine sectors

Adaptation and the Boundary of Multinational Firms

What determines the boundary of multinational firms? According to Williamson (1975), a potential rationale for vertical integration is to facilitate adaptation in a world where uncertainty is resolved over time. This paper offers the first empirical analysis of the impact of adaptation on the boundary of multinational firms. To do so, we first develop a ranking of sectors in terms of their "routineness" by merging two sets of data: (i) ratings of occupations by their intensities in "problem solving" from the U.S. Department of Labor's Occupational Information Network; and (ii) U.S. employment shares of occupations by sectors from the Bureau of Labor Statistics Occupational Employment Statistics. Using U.S. Census trade data, we then demonstrate that, in line with adaptation theories of the firm, the share of intrafirm trade tends to be higher in less routine sectors. This result is robust to inclusion of other variables known to influence the U.S. intrafirm import share such as capital intensity, R&D intensity, relationship specificity, intermediation and productivity dispersion. Our most conservative estimate suggests that a one standard deviation decrease in average routineness raises the share of intrafirm imports by 0.26 standard deviations, or an additional 7% of import value that is intrafirm.

Export versus FDI and the communication of complex information

Abstract Traditional proximity-concentration models of the decision to serve foreign markets through exports or FDI sales tend to overemphasize physical transport costs and market size while underemphasizing the cost of transmitting information. I augment those models with the importance of interacting with customers and communicating complex information within firms and use these characteristics to predict the location of production. Goods and services requiring direct communication with consumers ar

Separating the Opposing Effects of Bilateral Tax Treaties

Bilateral tax treaties (BTT) are intended to promote foreign direct investment and foreign affiliate activity through double taxation relief. However, BTTs also typically contain provisions that facilitate sharing of tax information between countries intended to curtail tax avoidance by multinational firms. These provisions should disproportionately affect firms that intensively use inputs for which an arms-length price is easily observed, since strategic transfer practices that manipulate tax liabilities are no longer effective with information sharing between countries. Using BEA firm-level data we are able to separately estimate the impacts of double-taxation relief and sharing of tax information on investment behavior of US multinational firms. We find a significant positive effect of new tax treaties on foreign affiliate activity between member nations that is offset (and even reversed) the more a firm relies on inputs traded on an organized exchange (i.e., inputs for which the arms-length price is easily observed). We find these opposing BTT effects for both the intensive margin (sales of existing affiliates) and the extensive margin (entry of new affiliates).

Adaptation and the Boundary of Multinational Firms

What determines the boundary of multinational firms? According to Williamson (1975), a potential rationale for vertical integration is to facilitate adaptation in a world where uncertainty is resolved over time. This paper offers the first empirical analysis of the impact of adaptation on the boundary of multinational firms. To do so, we first develop a ranking of sectors in terms of their "routineness" by merging two sets of data: (i) ratings of occupations by their intensities in "problem solving" from the U.S. Department of Labor's Occupational Information Network; and (ii) U.S. employment shares of occupations by sectors from the Bureau of Labor Statistics Occupational Employment Statistics. Using U.S. Census trade data, we then demonstrate that, in line with adaptation theories of the firm, the share of intrafirm trade tends to be higher in less routine sectors. This result is robust to inclusion of other variables known to influence the U.S. intrafirm import share such as capital intensity, R&D intensity, relationship specificity, intermediation and productivity dispersion. Our most conservative estimate suggests that a one standard deviation decrease in average routineness raises the share of intrafirm imports by 0.26 standard deviations, or an additional 7% of import value that is intrafirm.

Offshoring and the Polarization of the U.S. Labor Market

Using firm-level data on offshoring paired with occupation-level data on employment and wages, the author estimates the impact that offshoring has had on U.S. workers from 2002 to 2008. She finds that offshoring by U.S. firms has contributed to relative gains for the most high-skilled workers and relative losses for middle-skilled workers. An increase in offshoring in an industry is associated with an increase in the wage gap between workers at the 75th percentile and workers with median earnings in that industry, and with a decrease in the gap between workers earning the median wages and those at the 25th percentile. This pattern can be explained by the tasks performed by workers. Offshoring is associated with a decrease in wages for occupations that rely heavily on routine tasks and an increase in wages if the occupation is nonroutine and communication-task intensive. The results hold in both ordinary least squares (OLS) and instrumental variable specifications

Nonroutine tasks in international trade

Chapter 1 shows that standard predictors of the export versus FDI decision hold for manufacturing but not for service industries. I develop an alternative model which decomposes each industry into tasks and uses these tasks to predict the location of production for that industry. Industries requiring direct communication with consumers are more likely to be produced in the destination market. Production of more nonroutine activities is more likely to occur at the multinational's headquarters for export, especially when the destination market has weak contract- enforcing institutions. The task-based approach performs well for both manufacturing and services, has greater explanatory power than alternative models, and is robust to a variety of specifications. Chapter 2 offers an empirical analysis of the impact of adaptation on the boundary of multinational firms. We first develop a ranking of sectors in terms of their routineness by merging ratings of occupations by their intensities in "problem solving" and U.S. employment shares of occupations by sectors. We then demonstrate that, in line with adaptation theories of the firm, the share of intrafirm trade tends to be higher in less routine sectors. This result is robust to inclusion of other variables known to influence the intrafirm import share. In chapter 3, I explore the extent to which horizontal exports and FDI by US multinationals are complements. I use host-country restrictions on capital investment in service industries that were in place in 1993 as an instrument for FDI flows in service industries for 1994 to 2004. I find that increased FDI flows in a given service industry by US multinationals significantly increase US exports in that industry to the country receiving those FDI flows. This holds for exports and FDI of final services as well as for overall FDI flows. I also present evidence that the complementarity between exports and FDI is stronger for service industries than it is for manufacturing by using the existence of bilateral investment treaties at the country level as an instrument and estimating the relationship on separate samples of manufacturing and services

Replication Data for: "The Labor Market Effects of Offshoring by U.S. Multinational Firms"

Review of Economics and Statistics: Forthcomin