Three essays in international economics

Abstract

The dissertation consists of three essays on international trade and multinational production. Particularly, I focus on the role of firm-level decisions in this context. Firms' decisions in choosing the modes to serve foreign markets, sourcing intermediate inputs and adopting technologies have aggregate implications for the patterns of trade and multinational production, as well as income distribution. The goal of this work is to examine how firms make these decisions and quantify their aggregate impacts.

Chapter 1 examines how trade and multinational production influence the factor biases of firms' technologies, which in turn affect the distribution of income between capital and labor. I find firm-level evidence that larger firms and firms from more capital-abundant countries use more capital-intensive production technologies. I build a quantitative model that incorporates these two features. Using the calibrated model, I show that the decline in FDI costs in the past decade explains up to 60 percent of the average decline in the labor shares. The impact of FDI is particularly large in capital-scarce countries.

Chapter 2, co-authored with Cheng Chen, Tatsuro Senga, and Hongyong Zhang, studies the role of information in determining firms' decisions of exporting and FDI. Using a unique dataset of Japanese multinational firms, we present new evidence that firms learn about the uncertain demand in the foreign markets through either affiliates’ sales or exports. We build a dynamic model of learning and firms’ exporting and FDI decisions. We find the calibrated model can replicate the evidence we find in the data. Counterfactual analyses show that incorporating such information imperfection has new implications for the pattern of trade and multinational production in response to changes in demand uncertainty and trade liberalization.

In Chapter 3, I study the optimal number of suppliers in the context of incomplete contracts. I show that adopting more suppliers can increase both the buyer's and the suppliers' investment incentives ex ante when suppliers’ investments are strategic substitutes. Therefore, changing the number of suppliers, either through domestic or international sourcing, can be one way to correct for the under-investment problem in a world with incomplete contracts.