Working Papers

Machines Could Not Compete with Chinese Labor: Evidence from U.S. Firms' Innovation

(joint with Elena Simintzi)
We study how an improvement in contracting institutions due to the 1999 U.S.-China bilateral agreement affects U.S. firms' innovation. We show that U.S. firms operating in China decrease their process innovations—innovations that improve firms' own production methods—following the agreement. We obtain the same result using the inter-temporal variation in ownership restrictions on foreign investment in China across industries. These findings suggest that a better ability to source labor cheaply across borders affects the types of technologies that are being developed—less process innovation aimed at reducing production cost. More broadly, a decrease in the effective price of labor due to the removal of frictions affects corporate innovation.
Working paper

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 International Transmission of Negative Shocks Through Multinational Companies: The Real Economy Channel

(joint with Serdar Dinc and Isil Erel)
We study how non-financial multinational companies transmit negative shocks from their subsidiaries located in countries experiencing a negative shock to subsidiaries in countries not experiencing one. We find that investment is 18% lower in 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 country experiencing a negative shock. 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

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)