# 1 Introduction

In 2007-2008, the world economy entered the deepest ...nancial crisis since World War II. Countries around the globe witnessed major declines in output, employment, and trade. GDP in industrial countries fell by 4.5 percent while average GDP growth in emerging economies dropped from 8.8 percent in 2007 to 0.4 percent. The unemployment rate rose to 9 percent across OECD economies, and reached double digits in a mix of industrial and developing nations. World trade plummeted by over 40 percent in the second half of 2008, collapsing at a rate that outpaced the fall of total output.

The severity of what has been labeled as the Global Financial Crisis led many economists to explore its macro patterns and causes. Rose and Spiegel (2010a, b), for example, investigate the potential causes for the di¤erential extent of the crisis across countries. Using a large country-level dataset, they do not ...nd international trade and ...nancial linkages and other major economic indicators to be clearly associated with incidences of the crisis. Eaton et al. (2009), Levchenko, Lewis and Tesar (2010), and Chor and Manova (2011), among others, examine the potential causes of the great trade collapse, a phenomenon that received particular attention, and ...nd, respectively, manufacturing demand, vertical specialization, and credit conditions to play important roles.<sup>1</sup> Less explored in this debate is the pattern of micro economic responses to the crisis.<sup>2</sup> In this paper, we examine the di¤erential performance of establishments during the global crisis with particular emphasis on the role of foreign ownership. We investigate how foreign ownership a¤ected establishments’resilience to the negative economic shocks using a worldwide establishment panel dataset that reports detailed operation, location, and industry information of over 12 million establishments in 2005-2008. We exploit how multinational corporation (MNC) subsidiaries around the world responded to the crisis relative to local establishments and the underlying mechanisms that led to the di¤erential impact. This question is central to ongoing policy debates over the role of foreign direct investment (FDI) in economic growth and volatility. For many countries, such as Ireland, Slovakia, Singapore, and Malaysia, which have heavily relied on FDI as an engine of economic growth, there are increasing concerns that FDI is more volatile than domestic investments and renders countries greater economic vulnerabilities especially during economic crises.

Evaluating the role of foreign ownership during economic crises poses several challenges. First, it is di¢ cult to disentangle the e¤ect of foreign ownership from other establishmentlevel characteristics such as size and productivity and macroeconomic factors such as market

> 1 Baldwin and Evenett (2009) compile some of the leading explanations.

> 2 One exception is Tong and Wei (2009), who examine whether the volume and composition of capital ‡ows a¤ected the degree of credit crunches faced by a sample of emerging-economy manufacturing ...rms in the recent crisis. See Section 2 for an overview of this study and other papers, such as Alvarez and Görg (2007), Desai, Foley and Forbes (2008), and Kalemli-Ozcan et al. (2011), that explore the role of foreign ownership in establishment responses to past regional economic downturns and currency depreciations.

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