“Factor-biased Multinational Production” by Mr. Chang SUN
Mr. Chang SUN
Department of Economics
The standard model of multinational production assumes that firms differ in Hicks-neutral productivities and ignores differences in factor biases. Using a large firm-level dataset, I show that multinational firms differ from local firms in factor biases along two key dimensions. First, multinational firms are on average larger firms and larger firms on average use more capital-intensive technologies. Second, multinational firms from more capitalabundant home countries choose more capital-intensive technologies. I develop a quantitative framework for modeling factor-biased multinational production that incorporates these two features. The model highlights a new channel through which globalization affects the income distribution between capital and labor: liberalizing multinational production reallocates factors across firms with different factor biases and thus changes the aggregate demand for capital relative to labor. Calibrating the model to both firm-level and aggregate moments for 37 countries, I find that in the past decade, the increase in multinational activity explains 60 percent of the average decline in the labor share. Moreover, the model predicts that countries with a larger increase in multinational activity experience a larger decline in their labor share as observed in the data.