Multinational Production, Technology Diffusion, and Economic Growth

We develop a tractable growth model to study the dynamic macroeconomic effects of multinational production (MP) across countries. In this model, MP is the vehicle of international idea diffusion: when firms produce in a foreign country, they contribute to the local stock of knowledge. We incorporate idea diffusion into a quantitative framework of trade and MP. The framework yields tractable expressions for bilateral MP flows, trade flows, and the dynamics of technology that we use in our calibration across a set of 54 economies. Counterfactual analysis reveals that reduction in MP costs boosted economic growth, especially in developing economies. We show that a 10-year MP sanction on Russia would reduce the welfare by 7.25%, although the immediate effect is small. We also find that US reshoring policies would have positive wage effects immediately but negative welfare implications in the long run.