Multinational Firms’ Entry, Productivity, and Inefficiency

Despite the microeconomic evidence supporting the superior idiosyncratic productivity of multinational firms (MNFs) and their affiliates, cross-country studies fail to find robust evidence of a positive relationship between foreign direct investment and growth. In order to study the aggregate implications of MNFs entry and production, I develop a dynamic stochastic general equilibrium model with firm heterogeneity where MNFs sort according to their own productivity. Entry and production of MNFs contribute to aggregate productivity growth at decreasing rates and affect domestic producers due to increased product and factor market competition. I argue that the heterogeneous composition of the population of affiliates can help explain the conflicting evidence on the impact of foreign direct investment on growth