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Javier Cravino & Andrei Levchenko

Multinational Firms and International Business Cycles

Project Summary

A. Overview

This research project will study how multinational firms contribute to the transmission of economic shocks across countries. In particular, the project will decompose aggregate output shocks into country and firm specific factors, and will measure the extent to which firm specific factors are transmitted across countries by multinational firms.

The project will tackle this question using unique data from ORBIS, a dataset containing ownership and sales information for over 120 million companies around the world. The proposed methodology is to use these data to calculate aggregate correlations in output between country pairs, and to compute what part of these correlations is accounted for by the correlation of output of multinational firms operating in multiple countries. The project will then use these measuresto evaluate how increasing multinational production is likely to affect future business cycles, and to re-examine the aggregate welfare implications of the activities of multinational companies.

B. Statement of Intellectual Merit of the Proposed Activity

Understanding how business cycles are transmitted across countries is one of the central questions in International Macroeconomics. Despite the large and growing importance of multinational firms in global production, the role of multinational firms in business cycle transmission has received little attention, in part because comprehensive firm level data on the activities of multinationals is scarce. This research project will fill this void by providing direct evidence on the cross-border operations of multinational firms, and by measuring how these firms affect output co-movements across countries. To the extent that these effects are important, the project will be able to make predictions on how increasing multinational production will shape international business cycles in the following decades.

An important by-product of the research project will be to provide a global picture of the operations of multinational activities. This information is key to inform theories aiming to explain multinational production patterns.

C. Statement of Broader Impact of the Proposed Activity

The research project will have the broader impact of informing policies promoting and regulating the activities of multinational firms. For example, if multinational firms are an important factor contributing to the transmission of shocks across countries, then, for risk sharing purposes, policies aiming to increase multinational production across distant countries may be preferable to policies aiming to increase multinational production across countries that are already deeply interlinked. In addition, understanding the nature of business cycle synchronization is key for the design of monetary and exchange rate policy. This project will inform policies in a world that is ever more integrated by multinational companies.