Job Market Paper
This study proposes a general equilibrium model to describe innovative R&D location decisions by multinational firms. Using two countries, a developed North and a developing South, the model examines Northern firms employing researchers in the South in order to produce new varieties of a good. The Northern firms risk their product being imitated when offshoring research. Southern researchers may take in- formation learned while employed by the Northern firm and start their own competing firm. The model’s main predictions are supported empirically by a dataset constructed with US patent data. For high-tech industries, stronger IPR-protection in the South increases both industry-level and firm-level offshoring at a rate faster than low-tech industries. Southern import tariffs do not affect firm-level innovative R&D offshoring.
Explaining the Current Innovative R&D Outsourcing to Developing Countries
While multinational firms from developed countries have used researchers from emerging areas to assist in the adaption of an existing product, few multinational firms have carried out innovative R&D, or R&D for the creation of a new product, in these areas. Using the threat of imitation and wage differences of researchers across regions, this study proposes a partial equilibrium model to explain the lack of innovative R&D in developing countries. I build a North-South model examining a single firm’s choice of research locations. The model predicts that weak IPR-protection in developing countries does not necessarily explain the lack of Southern research. In some situations, reduced IPR-protection can even increase Southern research. Harsh competition resulting from information leaks coupled with weak IPR-protection can explain much of the lack of innovative research investment in the developing world. My model also predicts that firms with low research needs, or firms in low-tech industries, locate their R&D in the North. Firms with medium research needs locate in both countries while the firms with the largest research needs, or firms in high-tech industries, locate research in just the South.
Using a North-South framework, this study proposes a theoretical general equilibrium model with multiple Northern firms offshoring innovative R&D to the South. Northern firms vary in ability to manage Southern researchers, and Southern researchers vary in quality. Southern researchers of higher quality are more productive but also more likely to leave the firm and start a competing firm through imitation of the product. A strengthening of Southern IPR-protection increases offshoring and innovation while eliminating employment opportunities for skilled Southern researchers. Therefore, stronger Southern IPR-protection contributes to the emigration of highly qualified researchers. The model predicts the effects of changes to the Northern country as a result of this increased emigration. Increases in Northern technology increase offshoring and innovation while decreasing the amount of technology transferred. The effect of an increase in Northern researcher quality depends on the elasticity of the Northern wage.
As countries are becoming increasingly connected with one each other, it is essential to study the influence multinational firms have on political outcomes in the countries where they locate. This paper examines the effects of US multinational investment on party vote shares of OECD countries. We use a measure of linguistic distance as an instrumental variable, capturing the difficulty with which US firms can readily establish their presence in host countries, for multiple multinational activity measures. Our results indicate that increased US investments result in an increase in vote shares for major political parties as well as for ideologically centrist or right leaning pro-trade parties, specifically parties of the Liberal ideology. In addition, our findings suggest that ideologically extreme, fringe parties, on the right or the left, lose vote shares in the presence of US investment. The largest negative effect is on Right Populist parties. Our results are consistent across various measures of US multinational activity as well as an alternate instrumental variable specification.
Work in progress
Terrorism and US Multinational Activity (with Alberto Ortega)
Terrorism and conflict have been shown to deter multinational firm activity due to an increased risk. In this paper, we explore the effect that US multinational firm activity has on terrorism within a host country. Increased investment from multinational corporations can expand some industries while contracting others. Thus, increased US multinational firm activity could increase goodwill towards the government while also fostering contempt. We use data on terrorist activity in 154 countries from 1997 to 2016 along with US multinational investment data from the BEA. We use a measure of linguistic distance between English and a host country’s primary language as an instrumental variable in our analysis.
Fragmenting Innovation: The Effect of Offshoring R&D on Welfare in a Three Country Model
Using a three-country general equilibrium model, this study determines the effect of fragmenting innovation across developed countries and developing countries as a method of protecting an innovation. As multinational firms start using more researchers from developing areas to decrease labor costs, the firm must employ strategies to prevent the imitation of new products. Multinational firms protect their innovations by fragmenting the innovation process between multiple different sites. Therefore, no one employee has access to all of the knowledge required to make the new product. In this model, firms locate research and development (R&D) tasks in their home country and also have the opportunity to locate in two other host countries. The probability of imitation decreases as firms fragment their R&D tasks; however, focusing tasks in a developing country increases the probability of imitation. The model explores the effects of a number of exogenous shifts on welfare.