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Essays on Multinational Firms, Financial Frictions, and Income in Developing Countries

  • Author(s): Gu, Yunfan
  • Advisor(s): Ohanian, Lee
  • et al.
Abstract

The dissertation contributes to our understanding of how multinational firms and financial frictions affect income in developing countries. From a policy perspective, I find that as developing countries open up to multinational firms, financial reforms become increasingly beneficial to national income in the countries. I also find that the joint ventures of foreign multinational firms with state-owned firms, an industrial policy in China, prevent technology spillovers and suppress industrial output. The dissertation consists of three chapters.

Chapter 1: Financial frictions, Multinational Firms, and Income in Developing Countries: Theoretical Analysis

Financial frictions create resource misallocation across heterogeneous production units and reduce national income (GNP) in developing countries. Multinational firms, however, can largely circumvent local financial frictions by borrowing from international sources. In this chapter, I theoretically study whether the presence of multinational firms in developing countries alleviates the adverse impact of financial frictions on national income. I show that in a developing economy that is open to multinational firms, if domestic firms produce a sufficiently large (small) share of output, financial frictions will cause a larger (smaller) decline in national income than in an otherwise identical developing economy that is closed to multinational firms. Such result calls for the quantitative analysis in the next chapter.

Chapter 2: Financial frictions, Multinational Firms, and Income in Developing Countries: Quantitative Analysis

In this chapter, I quantitatively study how the presence of multinational firms in developing countries change the adverse impact of financial frictions on national income. Using a calibrated structural model, I find that when a developing economy is open to multinational firms, a modest financial reform that reduces financial frictions in the developing economy will increase national income by 19%, as opposed to only 11% when the economy is closed to multinational firms. Such result indicates that financial frictions become increasingly costly and financial reforms become increasingly beneficial to national income in developing countries as they open up to multinational production.

Chapter 3, Joint Ventures and Technology Spillovers in China

Chinese government actively promotes joint ventures of foreign multinational firms with state-owned firms. In this chapter, I study the effects of the joint ventures in promoting technology spillovers. Using firm-level data in China, I find that higher joint venture presence in a sector leads to higher productivity of firms in the upstream of that sector, but lower productivity of firms in the downstream of that sector. A quantitative analysis suggests that the later force will dominate, and joint ventures will on aggregate prevent technology spillovers and cause a significant decline in total industrial output in China.

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