Multinational Production, Innovation Relocation, and the Consequences of Globalization

We propose a multi-country endogenous growth model to understand the innovation relocation led by multinational production (MP). The model squares with the fact that countries with large net outward (inward) MP tend to specialize in product (process) innovation. The calibrated model shows that the decline in the cost of MP over 2004-2015 accounts for 35% of the observed relative decline in process innovation in four large European countries. This relocation of process innovation would hurt production workers in countries that are driven to specialize in product innovation, which is quantitatively important to understanding the welfare consequences of globalization