The Dynamics of Multinational Activity: Evidence from U.S. Firms

This paper examines how the activities performed by multinational firms change over time. Using a panel of US multinational firms over 25 years from the US Bureau of Economic Analysis, we classify affiliate sales as horizontal, vertical, or export platform based on their destination, and we trace the evolution of these three types of affiliate sales within firms over time. We establish two stylized facts. First, affiliate sales, both to the local market and to other countries, grow very little over the life cycle of the affiliate. Second, affiliates of U.S. multinational firms specialize in a core activity at birth, which persists as the main activity during the life cycle. Some diversification is observed later in life, particularly from horizontal to export activities. Informed by these facts, we propose a dynamic model of multinational production that is consistent with them. The model can be calibrated to shed light on the nature of the costs of multinational activity, which are essential ingredients to quantify the gains from openness arising from multinationals’ operations.