Working Papers

Shielding Firm Value: Employment Protection and Process Innovation

(joint with Hernan Ortiz-Molina and Elena Simintzi)
We show that an increase in labor dismissal costs leads firms to increase their process innovation, especially in industries with a large share of labor costs. Firms with a greater stock of knowledge capital adjust their production methods and mitigate the effects of increased labor rigidity. They exhibit larger increases in process innovation, larger decreases in employment and employment growth rates, and larger increases in capital intensity. These adjustments allow them to increase labor productivity, operating performance, and ultimately to avoid value losses.
Working paper

The Dark Side of Multinational Companies: The International Transmission of Negative Shocks

(joint with Serdar Dinc and Isil Erel)
We study how non-financial multinational companies transmit negative shocks from their subsidiaries located in crisis countries to subsidiaries in non-crisis countries. We find that investment is 18% lower in non-crisis subsidiaries of these parents relative to the same-industry, same-country subsidiaries of parents that are headquartered in the same parent country but do not have a subsidiary in a crisis country. Employment growth rate in the affected subsidiaries is zero or negative while it is 1.4% in the subsidiaries of unaffected parents. The aggregate industry-level sales and employment are also negatively impacted in the countries of the affected subsidiaries.
Working paper

Globalization of Work and Innovation: Evidence from Doing Business in China

(joint with Elena Simintzi)
We study how access to “cheap” offshore labor due to the 1999 U.S.-China bilateral agreement affects U.S. firms’ innovation. To this end, we decompose innovations into new goods (product innovations) and new production methods (process innovations). We find that U.S. firms operating in China decrease their share of process innovations by 12% and that this adjustment is purely driven by a lower quantity of process innovations. We obtain the same result using the inter-temporal variation in ownership restrictions on foreign investment in China across industries. Our findings suggest that using cheap and abundant offshore labor substitutes for labor-saving innovation.
Working paper

Corporate Innovation and Returns

(joint with Lorenzo Garlappi)
Among U.S. public firms, technological innovation is concentrated in a small set of large players, with innovation "leaders" having considerably lower market betas than "laggards." To understand this fact, we build a model to study how competition in innovation affects rival firms' expected returns. In the model, a firm's expected return decreases in its innovation output and increases in the innovation output of its rival. We find strong support for these predictions using a comprehensive firm-level panel of information on patenting activity in the 1976-2006 period. Our findings suggest that the imperfect nature of competition has important implications for firms' expected returns.
Corporate Innovation and Returns (PDF, 500 kB)