Multinationals and Structural Transformation

We study how multinational corporations (MNCs) shape firm-level and aggregate structural transformation. In a stylized model of multinational production and trade, a host-country liberalization that lowers barriers to foreign investment in manufacturing increases employment in foreign affiliates and shifts parent firms toward headquarters-intensive service activities, including research and development (R&D). We test these implications using confidential microdata from Japan, exploiting a quasi-exogenous reform that expanded foreign-investment opportunities in China, the host country in our empirical setting. In industries opened by the reform, Japanese affiliates expanded employment, while parent firms in Japan shifted out of manufacturing and into higher-value service activities, including R&D. To assess the broader relevance of this mechanism, we use microdata from several advanced and middle-income economies to quantify how much of the decline in manufacturing employment is associated with MNCs versus domestically oriented firms. Across all countries, MNCs account for a sizable share of this reallocation, indicating that the mechanism we highlight is an important global driver of structural transformation.