Title: Essays in Trade and Factor Markets
Description: This dissertation examines the impact of globalization on firms’ organization, and documents how these organizational changes impact employment, efficiency and welfare in the domestic economy. In the first chapter, I study the impact of Chinese imports on employment of US manufacturing firms. Previous papers have found a negative effect of Chinese imports on employment in US manufacturing establishments, industries, and regions. However, I show theoretically and empirically that the impact of offshoring on firms, which can be thought of as collections of establishments – differs from the impact on individual establishments – because offshoring reduces costs at the firm level. These cost reductions can result in firms expanding their total manufacturing employment in industries in which the US has a comparative advantage relative to China, even as specific establishments within the firm shrink. Using novel data on firms from the US Census Bureau, I show that the data support this view: US firms expanded manufacturing employment as reorganization toward less exposed industries in response to increased Chinese imports in US output and input markets allowed them to reduce the cost of production.

More exposed firms expanded employment by 2 percent more per year as they hired more (i) production workers in manufacturing, whom they paid higher wages, and (ii) in services complementary to high-skilled and high-tech manufacturing, such as R&D, design, engineering, and headquarters services. In other words, although Chinese imports may have reduced employment within some establishments, these losses were more than offset by gains in employment within the same firms. Contrary to conventional wisdom, firms exposed to greater Chinese imports created more manufacturing and nonmanufacturing jobs than non-exposed firms. The second chapter proposes a new channel through which financial shocks affect firms – imported intermediate inputs – and investigates its empirical implications for firms' production decision in a panel of Hungarian firms and banks. In a model of liquidity-constrained heterogeneous firms, only the most productive firms import the higher productivity foreign intermediates because these firms are the only ones that can afford the necessary financing.

In this model, a financial liberalization results in lower interest rates on bank loans that reduces the relative cost of imported intermediates, induces firms to become importers and leads continuing importers to import more. Thus capital market liberalization acts like trade liberalization. Using the last stage of Hungarian financial account liberalization in 2001 as a natural experiment, I find that, as predicted by the theory, firms whose banks were given access to new international sources of credit increased their intermediate import shares of production. Moreover, this increase was financed by the short-term liquidity arising from the liberalization. These findings support the hypothesis that positive credit supply shocks reduce the relative cost of imported intermediates, and induce firms to import and increase the share of imports in their intermediate input use. The third chapter, co-authored with Richard Clarida, shows that the financial channel can substitute in a welfare-improving way for the trade channel in small open economies’ external adjustment.

Countries can adjust internationally through the trade and the financial channel. Gourinchas and Rey (2007) have shown that the financial channel can complement, or even substitute, for the traditional trade adjustment channel via a narrowing of the country’s current account imbalance. However, they only use a log linearization of a net foreign asset accumulation identity without reference to any specific theoretical model of international financial adjustment (IFA). In this chapter we calibrate the importance of IFA in a standard open economy growth model (Schmitt-Grohe and Uribe, 2003) with a well-defined steady state level of foreign liabilities. In this model there is a country specific credit spread which varies as a function of the ratio of foreign liabilities to gross domestic product. We find that allowing for an IFA channel results in a very rapid convergence of the current account to its steady state, relative to the no IFA case. While on the long term, all of the adjustment is via the IFA channel of forecastable changes in the cost of servicing debt and in appreciation of the real exchange rate.

By contrast, in the no IFA case, current account adjustment by construction does all the work, and this adjustment is at a slow rate.