Input Linkages and the Transmission of Shocks: Firm-Level Evidence from the 2011 Tōhoku Earthquake

Abstract

Using novel firm-level microdata and leveraging a natural experiment, this paper provides causal evidence for the role of trade and multinational firms in the crosscountry transmission of shocks. Foreign multinational affiliates in the U.S. exhibit substantial intermediate input linkages with their source country. The scope for these linkages to generate cross-country spillovers in the domestic market depends on the elasticity of substitution with respect to other inputs. Using the 2011 T¯ohoku earthquake as an exogenous shock, we estimate this elasticity for those firms most reliant on Japanese imported inputs: the U.S. affiliates of Japanese multinationals. These firms suffer large drops in U.S. output in the months following the shock, roughly proportional to the drop in imports and consistent with a Leontief relationship between imported and domestic inputs. Structural estimates of the production function for these firms yield disaggregated production elasticities that are similarly low. Our estimates suggest that global supply chains are sufficiently rigid to play an important role in the cross-country transmission of shocks.Support for this research at the Michigan RDC from NSF (ITR-0427889) is also gratefully acknowledged. Any opinions and conclusions expressed herein are those of the authors and do not necessarily represent the views of the U.S. Census Bureau. All results have been reviewed to ensure no confidential information is disclosed