manufacturing industries in which we observe the largest number of horizontal subsidiaries include, for example, motor vehicle parts and accessories, plastics products n.e.c., electronic components n.e.c., pharmaceutical preparations, and chemicals and chemical preparations.

Vertical subsidiaries refer to subsidiaries that share a vertical production linkage with parent ...rms. Speci...cally, a subsidiary is considered vertical if the direct requirement of the subsidiary’s primary product category in the parent ...rm’s ...nal-good production, measured by the input cost share, exceeds a threshold value 0.1.<sup>10</sup> Note that there are also subsidiaries that are neither horizontal nor vertically linked to their parent ...rms.<sup>11</sup> The production activities of these subsidiaries can be viewed as independent of the production activities of their parents, and are as a result not expected to bene...t from vertical production linkages like vertical subsidiaries during economic crises.

Alternative to dividing subsidiaries to di¤erent groups, we also directly take into account the strength of the production linkages, i.e., the input-cost share of the subsidiary’s primary product category in the parent ...rm’s ...nal-good production. Subsidiaries whose primary products account for a greater share of the parent ...rms’total input costs are considered to exhibit a stronger vertical production linkage with the parent ...rms.

As in Acemoglu et al. (2009) and Alfaro and Charlton (2009), the input-output relationships between product categories are taken from the U.S. 2002 Benchmark Input-Output Accounts published by the Bureau of Economic Analysis. Constructing the production linkage measure using the U.S. input-output accounts data is motivated by three considerations. First, compared to ...rm-level input-output information which is typically unavailable, industry-level input-output relationships re‡ect standardized production technologies and are relatively stable over time, limiting the potential for the production linkage measure to endogenously respond to idiosyncratic shocks. Second, using the U.S. as the reference country further mitigates the possibility of endogenous production linkage measures. Third, the U.S. inputoutput accounts are more disaggregated than most other countries, enabling us to dissect vertical production linkages between detailed product categories.

The manufacturing industry pairs with the strongest vertical production linkages include, for example, (i) motor vehicles and passenger car bodies, and motor vehicle parts and accessories, (ii) plastics materials, synthetic resins, and nonvulcanizable elastomers, and plastics products, (iii) air-conditioning and warm air heating equipment and commercial and industrial refrigeration equipment, and motor vehicles and passenger car bodies.

# 3.3 Financial Linkages

The ...nancial linkages between parent ...rms and subsidiaries are also typically not observed for most ...rms. We thus construct a variable to represent the degree of intra-...rm ...nancial linkages

> 10 We also considered di¤erent threshold values and found the results relatively similar.

> 11 This type of subsidiaries accounts for 6 percent of foreign owned subsidiaries.

10