Surviving the Global Financial Crisis:
Foreign Ownership and Establishment Performance∗
Harvard Business School and NBER
George Washington University
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. †
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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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