Seminar 6 October 2014

The Birth of a Multinational (With Jim Goldman and Tim Van Zandt)

Abstract

This paper shows how firms become multinationals, and how this relates to productivity and innovation. A lot has been written about the superior performance of multinationals and also about the effect that multinationals have on the firms they acquire. But most of that work is based on "mature" multinationals that have been in existence for a while and are fairly large already. Instead, we focus on "the birth of a multinational" i.e. on firms that start off being purely domestic and that make their first investment abroad so that they own facilities in at least two countries. We study what kind of firms these "baby multinationals" are, where they invest and in particular we focus on how their choice to invest abroad is related to productivity and innovation. First, we show that there is a strong selection effect whereby it is the most productive firms, which are already exporters who decide to invest abroad and we show that the main motive for the investment is market access rather than sourcing new materials. Second, we have data on product and process innovation at these firms and describe how firms sequence their choices to innovate and invest abroad. We find that while process innovation tends to precede investing abroad, product innovation tends to occur after they first invest abroad. Our very detailed data allows us to provide a quite rich picture of how these decisions are made and sequenced.