The Return to Multinational Production and "Global Imbalances"

Using panel data of firms located in Europe (Amadeus), we compare returns of affiliates of US and non-US multinationals, and explore the sources of their differences. It turns out that US affiliates have 14% higher sales to assets than affiliates of non-US multinational, controlling by destination market. The excess return survives after controlling by industry composition effects. However, the trend during the 90's shows some convergence. Third, decomposing the behavior of returns among source and host country, time, and industry effects shows that returns of US firms mainly co-move with business cycle variables in the US. We present a simple stochastic, general equilibrium, multi-country model with multinational production (MP). MP is introduced by allowing firms to open plants abroad and replicate (at a cost) their home technology. Technologies have a fixed country-industry-specific component, and a stochastic time-varying country-specific aggregate component (the only shock we allow for). Additionally, following Melitz and Ghironi (2005), households can invest in bonds (foreign and domestic) and a mutual fund of domestic firms some of which are multinationals. We calibrate the model to the empirical findings above to capture the persistent US current account deficits and the composition of US international assets and liabilities, namely, the high share of direct investment in US assets relative to its liabilities.