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Simulating Heterogeneous Multinational Firms

Discussion Papers

No.296

by ARITA Shawn and TANAKA Kiyoyasu
April 2011

ABSTRACT

This paper develops a micro-simulation framework for multinational entry and sales activities across countries. The model is based on Eaton, Kortum, and Kramarz’s (2010) quantitative trade model adapted towards multinational production. Using micro data on Japanese manufacturing firms, we first stylize the empirical regularities of multinational entry and sales activity and estimate the model’s structural parameters with simulated method of moments. We then demonstrate that our adapted model is able to replicate important dimensions of the in-sample moments conditioned in our estimation strategy. Importantly, it is able to replicate activity under an economic period with a far different level of FDI barriers than was conditioned upon in our estimation sample. Overall, our research highlights the richness of the simulation framework for performing counterfactual analysis of various FDI policies.

Keywords: Multinational firms, FDI, Firm heterogeneity, Simulation, Model validation
JEL classification: F10, F23, L25, R12, R30

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