Working Papers

Shielding Firm Value: Employment Protection and Process Innovation

joint with Hernan Ortiz-Molina and Elena Simintzi

Following state-level legal changes that increase labor dismissal costs, firms increase their innovation in new processes that facilitate the adoption of cost-saving production methods, especially in industries with a large share of labor costs in total costs. Firms with high innovation ability exhibit larger increases in process innovation and capital intensity, and larger decreases in employment and employment growth. This allows them to increase labor productivity, operating performance, and to mitigate value losses. Our evidence highlights that, by facilitating the adjustment of the input mix when conditions in input markets change, innovation ability is a key driver of firm performance.

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.

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.