Research

Papers:

Breaking up is hard to do: Why firms fragment production across locations

This paper assesses the role of communication technology, relative to wage differences and transportation costs, in a firm's decisions to (i) break up its production process; and (ii) source its fragmented production offshore. Using an original dataset of U.S. manufacturing plants' decisions to contract for manufacturing services from domestic or foreign suppliers, I uncover a new set of stylized facts about fragmentation. Guided by these facts, I develop a theoretical framework in which firms fragment production to access cheaper labor, but incur communication and transportation costs in doing so. Consistent with the theory, plant use of communication technology is associated with an 18 percentage point increase in the probability of fragmentation, and a ten point increase in the probability of locating fragmented production offshore. While wage differences and distance to suppliers also have statistically significant relationships with plants' sourcing strategies, communication technology accounts for five times more of the explained variation than wages and distance combined. In contrast, for the decision about how MUCH to offshore, wage differences are relatively more important than distance, and technology explains almost none of the observed variation.

Presented at:

International Industrial Organization Conference, April 2011
Rocky Mountain Empirical Trade Conference, May 2011
Georgetown Center for Economic Research, June 2011
European Trade Study Group, September 2011
Midwest Trade Conference, November 2011
Southern Economic Association, November 2011

Foreign direct investment, outsourcing, and firm productivity conferment

(working paper)

A firm's decision on whether to procure inputs from inside or outside the firm is often believed to depend on hold-up problems that arise from incomplete contracts and a firm's ability to pay higher the fixed costs of integration. This paper investigates a new determinant of firms' vertical integration decision: the ability to transfer productivity to new plants. High productivity firms will be more likely to integrate production when they have a higher probability of transferring their productivity to their affiliates. I use U.S. establishment-level data to estimate an industry measure of productivity conferment and assess the relationship between the share of intra-firm imports and productivity conferment. Consistent with a productivity transfer motive, an increase in industry productivity conferment is associated with higher share of intra-firm imports.

Presented at:

U.S. Census Bureau, April 2009

Work in progress:

Who creates jobs and when: How firms respond to business cycle and credit conditions

with John Haltiwanger, Ron Jarmin, and Javier Miranda (working paper)

This paper investigates how firms of different size and age respond to the business cycle and changing credit market conditions. We construct a dataset of all U.S. employer firms and establishments in the non-farm private sector from 1981-2008 and combine it with measures of financial market liquidity and business cycles. We use this rich new dataset to examine when jobs are created or destroyed and by whom. As expected, we find that large and old firms are more sensitive to traditional sources of corporate financing, while young and small firms appear more responsive to alternative sources of financing. In addition, small and young firms appear to be more sensitive to tight credit markets than large and old employers. Our results for standard business cycle measures suggest that large and young employers are the most cyclically sensitive. While the finding for large firms is consistent with the recent empirical literature, the finding for young employers represents an important new distinction between young and old firms.

Presentation at the Annual RDC Conference, November 2010

Firms' motives for foreign mergers and acquisitions and their domestic employment effects

with Wenjie Chen (in progress)

The majority of foreign direct investment is conducted via mergers and acquisitions (M&A). Despite its importance, there is limited evidence on the motives behind foreign M&A or its domestic employment ramifications. We construct a rich new dataset that matches SDC Thomson's outward M&A transactions from 1992-2009 to the universe of private U.S. employer establishments in the non-farm sector. We link these data to firms' trade transactions to distinguish between firms' motives to utilize potentially cheaper labor overseas and their motives to gain access to foreign markets. While the former will result in new imports, the latter is likely to affect firm exports. We then use a difference in difference approach to estimate the effect of new outward M&A on the investing firm's total domestic employment and on the sectoral composition of its domestic employment. We hypothesize that a firm's manufacturing employment response will decline when the firm offshores production, but expect that all foreign M&A will entail an increased need for management services. By using establishment level data within an acquiring firm, we can measure the employment effects of foreign M&A on various margins within the acquiring firm, such as its continuing, newly established, and exiting establishments.