Simulating Heterogeneous Multinational Firms

Author Name Shawn ARITA  (University of Hawaii at Manoa) /TANAKA Kiyoyasu  (Institute of Developing Economies)
Creation Date/NO. March 2011 11-E-025
Research Project Productivity of Industries and Firms and Japanese Economic Growth
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This paper develops a micro-simulation framework for multinational entry and sales activities across countries. The model is based on Eaton, Kortum, and Kramarz's (2010) quantitative trade model adapted towards multinational production. Using micro data on Japanese manufacturing firms, we illustrate the empirical regularities of multinational entry and sales activity and estimate the model's structural parameters with simulated method of moments. We demonstrate that our adapted model is able to replicate important dimensions of the in-sample moments conditioned in our estimation strategy and does a reasonable job in external model validation tests. We can replicate activity under an economic period with a far different level of FDI barriers than was conditioned upon in our estimation sample. Overall, we demonstrate the richness of the simulation framework as a quantitative tool for FDI policy analysis.