Global Financial Crisis

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Surviving the Global Financial Crisis:
Foreign Ownership and Establishment Performance∗
Laura Alfaro†
Harvard Business School and NBER

Maggie Chen‡
George Washington University

July 2011

Abstract

We examine the differential response of establishments to the recent global financial crisis with particular emphasis on the role of foreign ownership. Using a worldwide establishment panel dataset, we investigate how multinational subsidiaries around the world responded to the crisis relative to local establishments. We find that, first, multinational subsidiaries fared on average better than local counterfactuals with similar economic characteristics. Second, among multinational subsidiaries, establishments sharing stronger vertical production and financial linkages with parents exhibited greater resilience. Finally, in contrast to the crisis period, the effect of foreign ownership and linkages on establishment performance was insignificant in non-crisis years. JEL codes: F2, F1

Key words: global financial crisis, establishment response, foreign ownership, production linkage, financial linkage



We are deeply grateful to the editor Alan Auerbach and two anonymous referees for many valuable comments and suggestions. We also thank James Harrigan, James Markusen, Ariell Reshef, and session and seminar participants at the American Economic Association Meeting, the Midwest International Economics Group Meeting, the LACEA Trade, Integration and Growth Network Meeting, University of Virginia, IMF, and the Kiel International Economics Meeting for helpful feedback. We are grateful to Dun & Bradstreet and Dennis Jacques for helping with the D&B dataset and HBS and GW CIBER for financial support. †

Email: lalfaro@hbs.edu; Phone: 617-495-7981.

Email: xchen@gwu.edu; Phone: 202-994-0192.

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Introduction

In 2007-2008, the world economy entered the deepest financial crisis since World War II. Countries around the globe witnessed major declines in output, employment, and trade. GDP in industrial countries fell by 4.5 percent while average GDP growth in emerging economies dropped from 8.8 percent in 2007 to 0.4 percent. The unemployment rate rose to 9 percent across OECD economies, and reached double digits in a mix of industrial and developing nations. World trade plummeted by over 40 percent in the second half of 2008, collapsing at a rate that outpaced the fall of total output.

The severity of what has been labeled as the Global Financial Crisis led many economists to explore its macro patterns and causes. Rose and Spiegel (2010a, b), for example, investigate the potential causes for the differential extent of the crisis across countries. Using a large country-level dataset, they do not find international trade and financial linkages and other major economic indicators to be clearly associated with incidences of the crisis. Eaton et al. (2009), Levchenko, Lewis and Tesar (2010), and Chor and Manova (2011), among others, examine the potential causes of the great trade collapse, a phenomenon that received particular attention, and find, respectively, manufacturing demand, vertical specialization, and credit conditions to play important roles.1

Less explored in this debate is the pattern of micro economic responses to the crisis.2 In this paper, we examine the differential performance of establishments during the global crisis with particular emphasis on the role of foreign ownership. We investigate how foreign ownership affected establishments’ resilience to the negative economic shocks using a worldwide establishment panel dataset that reports detailed operation, location, and industry information of over 12 million establishments in 2005-2008. We exploit how multinational corporation (MNC) subsidiaries around the world responded to the crisis relative to local establishments and the underlying mechanisms that led to the differential impact. This question is central to ongoing policy debates over the role of foreign...
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