Policy Uncertainty, Multinational Firms, and Reallocation

This paper studies the way multinational firms allocate resources across countries in response to uncertainty shocks. Consistent with a model of internal allocation, I find that multinationals withhold investment in a country with higher (policy) uncertainty, which financially-constrained firms reallocate to other countries. The empirical strategy uses mine-level information and exploits variations in: i) parent-country of neighboring mines; and ii) within-firm mine locations. Limited production linkages across mines allow focusing on allocation-decision of firms, while location-choice of mines restricted to minerals underneath aid credible identification. Overall, this paper concludes that the nature of economic shocks can determine multinationals’ role in propagation