Multinational Production, Technology Diffusion, and Economic Growth

Abstract

We develop a tractable growth model to study the dynamic macroeconomic effects of multinational production (MP) across countries. In this model, MP is the vehicle of international idea diffusion: when firms produce in a foreign country, they contribute to the local stock of knowledge. We incorporate idea diffusion into a quantitative framework of trade and MP. The model yields tractable expressions for bilateral MP flows, trade flows, and the dynamics of technology that we use in our calibration across a set of 54 economies. Counterfactual analysis reveals that a reduction in MP costs boosts economic growth, especially in developing economies. We also find that reshoring policies have positive short-run effects but negative welfare implications in the long run.

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