metadata: authors: 0: author: Alfaro Maykall,Laura
1: author: Chen, Maggie Xiaoyang
count: World
docna: 0: docna: Surviving the global financial crisis :
            foreign ownership and establishment performance
docty: Policy Research Working Paper
subtopic: Economic Theory & Research,Industrial Economics,Construction Industry,Common Carriers Industry,Food & Beverage Industry,General Manufacturing,Pulp & Paper Industry,Plastics & Rubber Industry,Labor Markets,International Trade and Trade Rules,Economic Growth,Employment and Unemployment,Business Cycles and Stabilization Policies
teratopic: Macroeconomics and Economic Growth,Finance and Financial Sector Development,Private Sector Development
abstracts: cdata!: This paper examines how different
            establishments performed during the recent global financial
            crisis, focusing on the role of foreign ownership. The paper
            investigates how foreign ownership affected
            establishments' responses to negative economic shocks,
            using a cross-country panel dataset with detailed
            information on operation, location and industry for more
            than 12 million establishments from 2005-2008. The evidence
            shows that multinational subsidiaries on average fared
            better than local counterfactuals with similar economic
            characteristics. Among multinational subsidiaries,
            establishments with stronger production and financial
            linkages with parent companies showed greater resilience.
            Finally, in contrast to the crisis period, the impact of
            foreign ownership and linkages on an establishment's
            performance was insignificant in non-crisis years.
repnme: repnme: Surviving the global financial crisis :
            foreign ownership and establishment performance
display_title: Surviving the global financial
            crisis : foreign ownership and establishment performance
listing_relative_url: /research/2012/01/15627472/surviving-global-financial-crisis-foreign-ownership-establishment-performance
topicv3: Economic Growth m1326241 471,Manufacturing Sectors m1326521 1281,Trade m1326924 698,Self-Employment m1504000 2698,Labor Productivity m1504060 2756
publishtoextweb_dt: 2012-01-12T00:00:00Z
historic_topic: Macroeconomics and Economic Growth,Finance and Financial Sector Development,Private Sector Development
no_of_pages: 35
author_keys: 0: author_key: 957898
model_extractions: WPS5946 Policy Research Working Paper 5946 Surviving the Global Financial Crisis Foreign Ownership and Establishment Performance _Laura Alfaro Maggie Xiaoyang Chen_ The World Bank Development Research Group Trade and Integration Team January 2012
Policy Research Working Paper 5946

# **Abstract**

This paper examines how different establishments performed during the recent global financial crisis, focusing on the role of foreign ownership. The paper investigates how foreign ownership affected establishments’ responses to negative economic shocks, using a cross-country panel dataset with detailed information on operation, location and industry for more than 12 million establishments from 2005–2008. The evidence shows that multinational subsidiaries on average fared better than local counterfactuals with similar economic characteristics. Among multinational subsidiaries, establishments with stronger production and financial linkages with parent companies showed greater resilience. Finally, in contrast to the crisis period, the impact of foreign ownership and linkages on an establishment’s performance was insignificant in noncrisis years.

This paper is a product of the Trade and Integration Team, Development Research Group. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The author may be contacted at xchen4@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# Surviving the Global Financial Crisis: Foreign Ownership and Establishment Performance<sup>�</sup>

Laura Alfaro<sup>y</sup> Maggie Xiaoyang Chen<sup>z</sup> Abstract This paper examines how di¤erent establishments performed during the recent global ...nancial crisis, focusing on the role of foreign ownership. The paper investigates how foreign ownership a¤ected establishments’ responses to negative economic shocks, using a cross-country panel dataset with detailed information on operation, location and industry for more than 12 million establishments from 2005-2008. The evidence shows that multinational subsidiaries on average fared better than local counterfactuals with similar economic characteristics. Among multinational subsidiaries, establishments with stronger production and ...nancial linkages with parent companies showed greater resilience. Finally, in contrast to the crisis period, the impact of foreign ownership and linkages on an establishment’s performance was insigni...cant in non-crisis years.

JEL codes: F2, F1 Key words: global ...nancial crisis, establishment response, foreign ownership, production linkage, ...nancial linkage Sector board: EPOL

> �We are grateful to two anonymous referees, James Harrigan, James Markusen, Ariell Reshef, and session and seminar participants at the American Economic Association Meeting, the Midwest International Economics Group Meeting, the LACEA Trade, Integration and Growth Network Meeting, University of Virginia, IMF, and the Kiel International Economics Meeting for valuable comments and suggestions. We also thank Dun & Bradstreet and Dennis Jacques for helping with the D&B dataset and HBS and GW CIBER for ...nancial support.

> yHarvard Business School and NBER.

> zGeorge Washington University and World Bank.

1
# 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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demand and credit conditions. Second, why foreign ownership could lead to di¤erential establishment performance often remains unclear. Di¤erent aspects of foreign ownership can exert sharply di¤erent, and even opposing, impact on establishment performance. For example, the ability of multinationals to shift production across countries can lead to more volatile performance while market diversi...cation can lend stronger stability. Assessing only the average e¤ect of foreign ownership can fail to capture these di¤erent mechanisms. Third, foreign ownership can a¤ect establishment performance in both crisis and non-crisis periods. It is important to separate the general e¤ect of foreign ownership from its impact on establishments’ responses to negative economic shocks.

To disentangle the e¤ect of foreign ownership from the e¤ects of other establishment and macroeconomic factors, we adopt in our analysis a matching technique that creates a missing counterfactual for each MNC subsidiary. The matching pairs each MNC subsidiary with a local establishment that shares similar attributes and operates in the same country and industry. Similarity is determined based on establishment-level economic characteristics that have explanatory power in explaining establishments’foreign ownership status. Matching on the basis of characteristic similarity helps control for observable and unobservable di¤erences between MNC subsidiaries and local establishments. Drawing the match from the same country and industry helps control for macroeconomic factors. The e¤ect of foreign ownership is hence inferred from the divergence in the performance paths between MNC subsidiaries and their local matches.

To shed light on why foreign ownership could lead to divergent performance between MNC subsidiaries and local competitors during the Global Financial Crisis, we explore two distinct aspects of foreign ownership that have been highlighted in the theoretical literature of multinational ...rms.

The ...rst aspect concerns the production linkages between MNC subsidiaries and parent ...rms. The existing theoretical literature on the determinants of MNC activities led by Markusen (1984) and Helpman (1984) stresses two main types of MNC subsidiaries: horizontal, which duplicate the production activities of parent ...rms, and vertical, which share an input-output linkage with parent ...rms. While horizontal subsidiaries share a substituting relationship with parent ...rms, the production of vertical subsidiaries complements that of parent ...rms. In a time of crisis, when a host country experiences a decline in demand, the two types of linkages can lead to sharply di¤erent impact. For horizontal MNC subsidiaries, the ability of MNCs to shift production back home will likely result in more volatile performance. For vertical subsidiaries, the intra-...rm demand from parent ...rms will help absorb the negative demand shock in the host country, leading to more resilient responses to the crisis.<sup>3</sup> This stabilizing role of vertical production linkages should be particularly pronounced

> 3 By examining the e¤ect of vertical production linkages on establishment performance, our work adds to the debate on the link between vertical integration and the great trade collapse. Bems, Johnson and Yi (2010),

3
in host countries with large negative demand shocks. We construct a direct measure of production linkages by examining the input-output relationship between the primary products of the subsidiaries and parent ...rms, i.e., the input-cost share of the subsidiary’s primary product category in the parent ...rm’s ...nal-good production. Subsidiaries sharing stronger vertical production linkages with the parents are expected to exhibit more resilience during the crisis.<sup>4</sup> The second aspect of foreign ownership concerns the ...nancial linkages between MNC subsidiaries and parent ...rms. An emerging strand of theoretical studies such as Antras, Desai and Foley (2009) highlights MNCs’internal capital markets and investment ‡ows from parents to subsidiaries. In this analysis, we consider how MNCs’internal capital markets lower subsidiaries’dependence on host-country credit conditions, an advantage particularly important when host countries experience credit crunches. To examine this hypothesis, we construct a measure of ...nancial linkages between parents and subsidiaries in each industry using the ratio of investments in subsidiaries relative to total assets. We also consider an alternative approach by constructing a measure of sectoral ...nancial dependence and investigating how the e¤ect of foreign ownership varies with the reliance on ...nancial capital. According to our hypothesis, the e¤ect of foreign ownership on establishment responses to credit crunches should be more pronounced in industries with stronger intra-...rm ...nancial linkages and greater ...nancial dependence.

To establish the impact of foreign ownership and linkages on establishment responses to negative economic shocks, we explore the time variation of the data and separately consider the non-crisis (2005-2007) and the crisis (2007-2008) periods. This enables us to use the noncrisis period as a benchmark and compare the e¤ect of foreign ownership during the crisis with its e¤ect in non-crisis years. The comparison helps us identify the e¤ects of foreign ownership that are exclusive to crises periods and the unique role of production and ...nancial linkages in lending MNC subsidiaries greater resilience to negative demand and ...nancial shocks.

Our paper o¤ers new ...ndings on the role of foreign ownership in establishments’resilience to economic crises. We ...nd that MNC subsidiaries responded on average better to the Global Financial Crisis than local controls with similar economic characteristics. Moreover, the advantage of foreign ownership was clearly pronounced during the crisis, but relatively muted during non-crisis years. Compared to local controls, MNC subsidiaries exhibited greater resilience to the crisis but not signi...cantly better performance during normal economic periods.

By investigating why foreign ownership led to divergent performance during the crisis, our analysis also provides one of the ...rst micro evidence on the role of production and ...nancial

> investigating the role of global supply chains, argue that increasing vertical specialization contributes to the greater contraction of world trade relative to total output. Bricongne, Fontagnè, et al. (2009) present an alternative argument and show that the extensive presence of supply chains does not automatically explain why world trade overshot the drop in world GDP.

> 4 Albeit previously unidenti...ed, this hypothesis is not entirely unexpected. Bernard et al. (2009) have shown that intra-...rm trade fell less than unrelated-party trade during the Asian ...nancial crisis.

4
linkages in establishment responses to economic crises. We show that establishments sharing stronger vertical production linkages with foreign parent ...rms exhibited more resilient performance during the crisis, especially in host countries with greater negative demand shocks. Horizontally linked establishments, in contrast, performed no better than the control establishments. Further, the role of vertical production linkages is found signi...cant only during the crisis period. In the non-crisis period, vertical MNC subsidiaries did not perform di¤erently than local matches while horizontal subsidiaries fared slightly better.

In examining the ...nancial linkage hypothesis, we ...nd MNC subsidiaries to exhibit a greater advantage over local counterfactuals in industries with stronger ...nancial linkages between parents and subsidiaries. The e¤ect of ...nancial linkages is especially strong when host-country credit conditions worsened signi...cantly and weak when home-country credit conditions declined. Similar to production linkages, ...nancial linkages are not found to exert a signi...cant e¤ect on establishment performance in the non-crisis period. These results suggest that the linkages between foreign subsidiaries and parent ...rms play an important role in establishments’resilience to economic crises, but not necessarily in their growth in normal economic time.

Finally, we show that the estimated e¤ect of foreign ownership and linkages is robust to alternative empirical speci...cations that address issues such as the e¤ect of domestic linkages and unobserved ...rm heterogeneity. When examining whether the production and ...nancial linkages of domestically owned subsidiaries exerted a similar e¤ect during the crisis, we ...nd that compared to domestically owned subsidiaries, foreign owned subsidiaries exhibited a greater advantage over local counterfactuals in the crisis. Moreover, while ...nancial linkages with domestic parents also played a stabilizing role, the e¤ect of foreign ...nancial linkages was signi...cantly greater and only foreign production linkages had a signi...cant and positive e¤ect on establishments’resilience to the crisis. The results are also robust when we control for unobserved MNC heterogeneity and limit the comparison to subsidiaries owned by the same parent ...rm. We ...nd subsidiaries with stronger vertical production linkages to the parents to signi...cantly outperform their peers in the same MNC.

Our ...ndings o¤er important policy implications on the role of FDI during economic crises. Our analysis suggests that FDI exerts an important and positive e¤ect on economic responses to the crises. This e¤ect results from the linkages created between MNC subsidiaries and parent ...rms. Vertical production and ...nancial linkages could signi...cantly lessen the impact of the crisis in host countries.

We organize the rest of the paper as follows. We review the existing literature in Section 2. In Section 3, we describe the dataset and the primary variables used in the analysis. The econometric methodology and main empirical evidence are presented in Sections 4 and 5, respectively, and the additional empirical analysis in Section 6. Section 7 concludes.

5
# 2 Related Literature

Our paper is closely related to the existing macro and micro literature that evaluates the e¤ects of foreign investments on economic growth and performance. At the macro level, the literature has primarily focused on the role of FDI in country economic growth, and found only weak support for an exogenous positive e¤ect of FDI. Existing evidence shows the e¤ect of FDI to be strongly conditional on local conditions such as human capital and ...nancial sector development (see, for example, Borensztein et al., 1998; Alfaro et al., 2004; Carkovic and Levine, 2005).

The micro-level literature, evaluating the role of foreign ownership in economic performance at establishment level, has found mainly an adverse e¤ect. Most studies ...nd foreign ownership to have a signi...cant negative e¤ect on plant survival and stability, and argue that MNCs’ footloose nature makes them more volatile than purely domestic ...rms. Görg and Strobl (2003), for example, ...nd Irish establishments with foreign ownership to be more likely than indigenous plants to exit the market after controlling for other plant and industry speci...c characteristics. Gibson and Harris (1996) and Bernard and Sjöholm (2003) reach similar conclusions for New Zealand and Indonesia, respectively. Bernard and Jensen (2007) focus on domestic multinationals in the United State and ...nd them to be more likely than non-multinational ...rms to shut down home-country plants.<sup>5</sup> Relatively few analyses have examined the role of foreign ownership in establishment responses to economic crises. Alvarez and Görg (2007), investigating the response of multinational and domestic ...rms to an economic downturn in Chile, do not ...nd multinationals to react to the economic crisis di¤erently than domestic ...rms. Desai, Foley and Forbes (2008), evaluating the response of multinational and local ...rms to sharp currency depreciations, ...nd sales, assets, and investments to increase signi...cantly more for U.S. multinational a¢ liates than for local ...rms. Kalemli-Ozcan et al. (2011) utilize a ...rm-level database from six Latin American countries between 1990 to 2005 to compare investment undertaken by domestic exporters to that of foreign-owned exporters in the aftermath of currency crises. They ...nd that, conditional on ...rm exposure to short term foreign currency debt, foreign-owned exporters increase investment signi...cantly more than domestic exporters.

Di¤erent from the above studies’ focus on regional economic slowdowns and currency depreciations, our analysis draws from the recent Global Financial Crisis. We look to the global coverage and the considerable heterogeneity of the recent crisis to examine the di¤erent roles of foreign ownership in establishments’ reactions to economic shocks. Furthermore, in contrast to previous studies’focus on evaluating the average e¤ect of foreign ownership, we seek to explore the channels through which foreign ownership can a¤ect establishment

> 5 Another notable literature on the host-country e¤ects of FDI focuses on the productivity spillovers of multinational ...rms. See, for example, Haddad and Harrison (1993), Aitken and Harrison (1999), Blomström and Sjöholm (1999), and Javorcik (2004) for studies in this area.

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performance during economic crises. In doing so, our analysis helps to disentangle some of the ambiguities in previous ...ndings.

Also exploring the recent crisis, Tong and Wei (2009) examine whether the volume and composition of capital ‡ows a¤ected the degree of credit crunch faced by manufacturing ...rms. Using data on 3,823 ...rms in 24 emerging countries, the authors ...nd declines in stock prices to be, on average, more severe for ...rms intrinsically more dependent on external ...nance. The volume of capital ‡ows had no signi...cant e¤ect on the severity of the credit crunch, but the composition of capital ‡ows mattered: pre-crisis exposure to non-FDI capital in‡ows worsened the credit crunch whereas exposure to FDI alleviated liquidity constraints.

In this paper, we investigate both whether and why FDI could lead to better establishment performance during the crisis. We explore the role of production, as well as ...nancial, linkages between MNC subsidiaries and parent ...rms, and evaluate how the relationships led to di¤erential establishment responses to the negative demand and ...nancial shocks. We also compare the results during the crisis with non-crisis years to examine whether foreign ownership exerts a di¤erent e¤ect during economic crises.

# 3 Data Description

## 3.1 The Global Financial Crisis and Establishment Performance

The recent Global Financial Crisis, regarded as the worst ...nancial crisis since the Great Depression of the 1930s, is notable for its speed, severity, and international span. The crisis was triggered by a liquidity shortfall in the U.S. banking system, starting with the collapse of the U.S. subprime industry in 2007 (including the bankruptcy of some of the largest mortgage lenders such as New Century Financial and American Home Mortgage Investment Corporation), and quickly resulted in failures of large ...nancial institutions (such as the ...re sale of Bear Stearns in March 2008 and the bankruptcy of Lehman Brothers in September 2008).<sup>6</sup> The crisis was soon spread to non-...nancial sectors and economies around the world. Almost all industrial countries and a large number of developing and emerging economies were in‡icted in 2008, witnessing substantial declines in total output and employment. Between 2007 and 2008, world GDP fell by 5 percent, unemployment rates rose to 9 percent in industrial nations, and read world exports plunged by 17 percent.

The dramatic shift of the world economy in 2007-2008 constitutes an ideal context for examining micro economic responses to large negative economic shocks. Our analysis draws from this unique episode and exploits its broad coverage as well as considerable heterogeneity, both of which help disentangle the role of foreign ownership in establishment performance

> 6 The National Bureau of Economic Research o¢ cially determined December 2007 as the end of the economic expansion that began in the U.S. in November 2001 and the beginning of the recession.

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from other economic factors.

We employ a new worldwide establishment dataset, WorldBase, that reports the performance of over 12 million establishments in 2005-2008. This dataset provides several distinct advantages over alternative data sources. First, unlike many other sources that lag considerably in assembling data, WorldBase reports updated 2008 operational information for establishments around the world.<sup>7</sup> Although the data coverage still does not re‡ect world population, it enables us to provide one of the ...rst systematic micro-level analysis on the recent crisis.

Second, the dataset, covering establishment activities both before and during the Global Financial Crisis, enables us to compare the role of foreign ownership during the crisis with the non-crisis years. Using the non-crisis period as a counterfactual helps us identify the e¤ect of foreign ownership, including production and ...nancial linkages, on establishment responses to adverse economic shocks.

Third, central to our analysis, the unit of observation in WorldBase is establishment (a single physical location at which production operations or services are performed) instead of ...rm. Establishments have their own addresses, business names, and managers, but might be partly or wholly owned by other ...rms. The database supports the linking of establishments to ...rms using information on domestic and global parents and the DUNS identi...cation.<sup>8</sup> Fourth, the dataset covers a larger number of countries than alternative data sources, enabling a comprehensive analysis of the crisis for both developed and developing nations and for countries at the epicenter as well as on the periphery of the crisis. It also allows us to investigate how the role of foreign ownership varies across countries depending on the incidences of the crisis.

WorldBase is compiled by Dun & Bradstreet (D&B) and covers public and private enterprises in over 100 countries and territories. Dun & Bradstreet has been the leading source of commercial credit and marketing information since 1845, and presently operates in more than a dozen countries and territories either directly or through a¢ liates, agents, and associated business partners. D&B compiles data from a wide range of sources including public registries, partner ...rms, telephone directory records, and websites, and veri...es all information centrally via a variety of manual and automated checks. Early uses of the D&B data include Caves’(1975) size and diversi...cation pattern comparisons between Canadian and U.S. domestic plants and subsidiaries of U.S. multinationals in Canada, and Lipsey’s (1978) comparisons of the D&B data with existing sources with regard to the reliability of U.S. data.

> 7 For example, the latest UNIDO INDSTAT 2009 Database, an authority industry-level data source, reports industrial data only up to 2007. The OECD STAN Database, another widely used industry-level dataset, currently provides 2008 data for only 13 OECD countries.

> 8 To identify businesses numerically for data-processing purposes, D&B introduced in 1963 the Data Universal Numbering System (the D-U-N-S Number). The system supports the linking of plants and ...rms across countries and tracking of plant histories including name changes.

8
Recent research that has used the D&B data includes Harrison, Love, and McMillian’s (2004) analysis of capital ‡ows, Black and Strahan’s (2002) study of entrepreneurial activity in the United States, Acemoglu, Johnson, and Mitton’s (2009) cross-country study of concentration and vertical integration, and Alfaro and Charlton’s (2009) analysis of vertical and horizontal activities of multinationals.

We impose a number of requirements in cleaning the data. First, we drop records that lack primary industry classi...cation and starting year information. Second, we restrict the data to establishments that report sales information for all years. Moreover, we include only establishments with positive sales and employment in 2005. Requiring positive employment helps to exclude establishments registered exclusively for tax purposes as well as self-employment businesses. These types of establishments constitute a signi...cant share of businesses in countries such as the United States. Finally, we drop agricultural and mining industries as well as countries with fewer than 100 observations. These criteria result in a ...nal sample of approximately 12 million establishments in 53 countries.

We use four categories of information for each establishment: (i) industry information including the 4-digit SIC code of the primary industry in which each establishment operates and, for most countries, the SIC codes of as many as ...ve secondary industries, listed in descending order of importance; (ii) ownership information including the establishments’ domestic and global parents, status (joint-venture, corporation, partnership), and position in the hierarchy (branch, division, headquarters); (iii) location information; (iv) operational information including sales, employment, and export status.

Establishment performance is measured in this paper by the annual percentage change of sales. An establishment is considered foreign owned if its parent ...rm is based in a di¤erent country. There are 43,513 foreign owned subsidiaries in the ...nal sample.

# 3.2 Production Linkages

To measure the production linkages between subsidiaries and foreign parent ...rms, we examine the input-output relationship between each subsidiary’s primary product category and the parent ...rm’s ...nal goods.

First, we follow Acemoglu et al. (2009) and Alfaro and Charlton (2009) in considering two main types of MNC subsidiaries: horizontal and vertical. Horizontal subsidiaries refer to subsidiaries that duplicate parent ...rms’...nal-good production. We identify these subsidiaries by comparing their primary product category with the ...nal product categories of their parent ...rms, all reported at SIC 4-digit level. If the subsidiary’s primary product category is listed as one of the parent ...rm’s ...nal products, the subsidiary is considered as horizontal.<sup>9</sup> The

> 9 We also separately considered subsidiaries that produce parent ...rms’core ...nal product and those that produce secondary ...nal products and did not ...nd the two types of horizontal subsidiaries to have di¤erent performance.

9
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
in each industry. We assume that because of heterogeneity in intrinsic industry characteristics such as headquarter intensity and capital intensity, industries incur di¤erent bene...ts and costs from ...nancial integration and thus have di¤erent incentives to invest in subsidiaries. This assumption is consistent with the ...ndings of a growing literature led by Antras (2003) and Antras and Helpman (2004), who show that industries with higher headquarter intensity and capital intensity tend to have greater incentives to engage in integration and subsidiary investment.

To measure the degree of intra-...rm ...nancial linkages in each industry, we use the ratio of investments in subsidiaries relative to total assets for the median ...rm of each industry. This ratio captures the extent of ...nancial integration by the industry of parent ...rms. Given that the information required to compute the variable is not systematically available for private ...rms around the world, the variable is computed based on a dataset of publicly listed companies obtained from the Global COMPUSTAT. The measure is averaged for 2000-2004 to smooth out temporary ‡uctuations.

While identi...cation of our analysis does not require industries to have exactly the same ...nancial linkage levels over time and across countries, it does rely on the ranking of industries to be relatively stable. Otherwise, the proxy could potentially bias us against ...nding any relationship between ...nancial linkages and establishment responses to economic crises. For this reason, we perform two checks on the variable. First, we construct the measure using data from di¤erent time periods and ...nd the ranking of industries to be relatively stable over time. This observation suggests that industries’ranking in the degree of intra-...rm ...nancial linkages is mainly dependent on characteristics innate to each industry and thus unlikely to change structurally in response to short-term idiosyncratic shocks. Second, we compute the variable for each major MNC parent country and ...nd high rank correlations across countries. For our empirical analysis, we do not use country-speci...c measures to mitigate potential endogeneity even though in doing so our estimates could be potentially biased downward.

According to our measure, industries that exhibit the strongest ...nancial linkages between parents and subsidiaries include cut stone and stone products, newspapers: publishing or publishing and printing, fats and oils, ordance and accessories except vehicles and guided missiles, grain mill products, broadwoven fabric mills, manmade ...ber and silk, paperboard mills, and petroleum re...ning.<sup>12</sup> We also consider an alternative approach to examine the ...nancial linkage hypothesis. We follow Rajan and Zingales (1998) and Braun and Larrain (2005) in constructing a measure

> 12 As a robustness check, we also computed the ...nancial linkage variable using the average share of a¢ liate assets ...nanced by parent ...rms in each industry based on the U.S. BEA Direct Investment Abroad Benchmark Data. The results were largely similar. This measure has been considered in Antras, Foley and Desai (2009). Their analysis shows that host-country characteristics can exert a signi...cant e¤ect on the level of ...nancial linkages within MNCs. But to the extent that the e¤ect of country characteristics applies symmetrically across industries as shown in their paper, the ranking of industries is likely to be relatively similar across countries.

11
of ...nancial dependence for each industry. The expectation is that if ...nancial linkages play a signi...cant role in helping establishments attain greater resilience to credit crunch, the role should be particularly pronounced in industries with greater ...nancial dependence.

The ...nancial dependence variable is measured using the share of capital expenditure not ...nanced with cash ‡ows from operations for the median ...rm in each industry, and captures establishments’dependence on other sources of capital supply such as external loans and intra...rm ...nancing. Similar to the ...nancial linkage variable, the ...nancial dependence measure is computed using the 2000-2004 publicly listed company data from Global COMPUSTAT, with the ranking of industries found relatively stable over time and highly correlated across major countries. Rajan and Zingales (1998) and Braun and Larrain (2005) argue that the measure of ...nancial dependence captures a large technological component that is innate to a sector and is therefore a good proxy for ranking industries in all countries. Industries with the greatest ...nancial dependence according to this classi...cation include, for example, electric machinery, textiles, transport equipment, plastic products, and primary metal.

## 3.4 Other Economic Characteristics

A variety of other establishment-level economic characteristics including sales, labor productivity, age, multi-product status, and exporter status, all lagged by two years, are also taken into account. We use lagged sales to control for establishment size, and labor productivity to proxy for e¢ ciency. We also considered alternative measures such as employment size and market share and found similar results. In addition, we take into account each establishment’s age and multi-product status. The latter variable is an indicator variable that identi...es establishments producing more than one product, and helps control for the e¤ect of product diversi...cation. Finally, we use an indicator variable to separate exporting establishments from establishments that sell only domestically. This variable helps capture the role of previous export participation.

# 4 Econometric Strategy

The primary goal of our empirical analysis is to evaluate, ...rst, the net e¤ect of foreign ownership on establishment performance during the crisis and, second, conditional on foreign ownership how production and ...nancial linkages led to the di¤erential responses of MNC subsidiaries.

An empirical issue that can arise when evaluating the net e¤ect of foreign ownership is the potential endogeneity of foreign ownership status. For example, one can argue that foreign MNCs may have performed better during the crisis because they acquired more productive local establishments or due to unobserved characteristics. If this were the case, the estimated 12
e¤ect of foreign ownership could su¤er from selection bias.<sup>13</sup> To mitigate the potential endogeneity of foreign ownership status, we employ a matching technique that creates the missing counterfactual of each foreign owned subsidiary’s performance had the establishment not been owned by foreign MNCs. This is done by matching each foreign owned subsidiary with a local establishment based on economic characteristics, such as lagged sales, labor productivity, age and previous exporter status. Each matched pair thus shared similar economic attributes prior to the evaluation period, except the status of foreign ownership. We then evaluate the e¤ect of foreign ownership by comparing the performance of matched establishments.

Formally, the e¤ect of foreign ownership in a given period can be expressed as follows: where � denotes the estimated e¤ect of foreign ownership, Y represents the outcome of interest, i.e., annual percentage change of sales, the subscript of Y describes the (potentially hypothetical) circumstances under which the outcome is evaluated with 1 denoting the case with foreign ownership and 0 denoting the case without foreign ownership, and foreign ownership = 1 refers to the group of establishments owned by foreign MNCs (i.e., the treatment group). The above equation represents the di¤erence in performance between a foreign owned subsidiary (the ...rst right-hand-side term) and the same establishment had it not been foreign owned (the second term). The latter, however, is an unobserved counterfactual.

The matching method is a strategy of constructing the unobserved counterfactual by identifying a match with similar economic characteristics for each foreign owned subsidiary. The underlying assumption is that the matched pairs, conditioning on the observed characteristics X, would perform similarly under the same circumstances. Hence, the above equation can be rewritten as: The ...rst di¤erence on the right hand side of the above equation represents the observed di¤erence in performance between foreign owned and local establishments. The second di¤erence represents the selection bias, that is, the di¤erence in performance between foreign owned

> 13 The estimated e¤ect of production and ...nancial linkages conditional on foreign ownership is less likely to be subject to the above concern because the identi...cation there is primarily drawn from variations across foreign owned subsidiaries and how they relate to cross-industry variations in the degree of production and ...nancial linkages. As described in Sections 3.2-3.3, both linkage measures re‡ect characteristics intrinsic to each industry and are thus unlikely to depend on unobserved establishment or country factors. As a robustness check, we also did not ...nd a systematic relationship between pre-crisis establishment and parent characteristics, such as size, labor productivity and age, and the observed linkages.

13
subsidiaries, under the hypothetical circumstances that they had not been foreign owned, and local establishments. Our goal is to minimize the selection bias through the matching process and estimate the e¤ect of foreign ownership. Given the large dimension of observable characteristics, we employ propensity score matching.<sup>14</sup> We perform the procedure for non-crisis and crisis periods separately to examine whether the e¤ect of foreign ownership varies during the crisis.

We proceed in two stages. In the ...rst stage, we estimate a probit model of establishment foreign ownership status, with lagged observable establishment characteristics (including size, labor productivity, age, multi-product status, and exporter indicator) as explanatory variables. To increase the precision of the matching, the estimation (and the subsequent matching) is performed for each country and sector. Consistent with the literature, we ...nd a signi...cant and positive relationship between foreign ownership status and establishment size and labor productivity for most countries and sectors.<sup>15</sup> The predicted probability of being foreign owned (or the propensity score), denoted by P (X) = Pr(foreign ownership = 1jX), forms the basis of the matching procedure.

In the second stage, we adopt one-to-one nearest neighbor matching and identify a local establishment l for each foreign owned subsidiary i such that that is, the di¤erence in the predicted probability of being foreign owned in minimized. We impose an additional requirement that the match must come from the same country and sector.<sup>16</sup> To assess how well the propensity score matching performs in our analysis, we undertake tests of the balancing property and ...nd no statistically signi...cant di¤erences between the treated and the control group in terms of lagged economic characteristics (size, labor productivity, age, multi-product status, and exporter indicator). Moreover, our matched pairs of establishments are, on average, 0.02 percentage point apart in terms of the propensity score. These observations give us con...dence that our matching procedure has grouped together relatively homogeneous establishments.

The average treatment e¤ect of foreign ownership can then be inferred from the average

> 14 This technique is proposed in the seminal work of Rosenbaum and Rubin (1983) and has become increasingly popular in recent empirical research along with other matching estimators developed to estimate average treatment e¤ects.

> 15 Given the ...rst-stage estimation is performed for each country and sector, the estimation results are suppressed in the paper because of space consideration and available upon request.

> 16 In the matching procedure, we exclude observations outside the common support. The common support is bound by the lowest propensity score of a treatment observation and the highest propensity score of a control observation.

14
performance di¤erence of matched pairs, that is, To examine how production and ...nancial linkages led to the di¤erential performance of foreign owned subsidiaries, we employ the following baseline empirical speci...cation: where Yi � Yl(i) denotes the performance di¤erence between foreign owned subsidiary i and its local match l, Prod Linkagesi and Financial Linkagesi represent, respectively, the extent of sectoral production and ...nancial linkages between subsidiary i and its parent ...rms, �1 and �2 represent, respectively, the e¤ect of production and ...nancial linkages on foreign owned subsidiaries’performance relative to local matches’, and "i denotes the residuals. Given that the dependent variable is constructed from the matching analysis, the standard errors are bootstrapped with industry clustering.<sup>17</sup>

# 5 Main Empirical Evidence

In this section, we ...rst present the estimated average e¤ect of foreign ownership in crisis and non-crisis periods, and then examine the role of production and ...nancial linkages in explaining the e¤ect of foreign ownership.

## 5.1 The Average E¤ect of Foreign Ownership

Table 1 reports the average treatment e¤ect of foreign ownership, E (Yi) � E �Yl(i)�, for crisis and non-crisis years, respectively. The results indicate that foreign owned subsidiaries exhibited on average higher sales growth rates than their local matches in 2007-2008. The performance di¤erence between the matched pairs of establishments is both statistically and economically signi...cant, and estimated around 3 percentage points. In contrast to the crisis period, the average treatment e¤ect of foreign ownership is signi...cantly moderate in non-crisis years. Foreign owned subsidiaries displayed merely 0.2 percentage point higher sales growth rates than local matches in 2005-2007. The di¤erence between crisis and non-crisis years in the estimated treatment e¤ect of foreign ownership is statistically signi...cant as indicated by the last column of Table 1.

[Table 1 about here]

> 17 See Pagan (1984) for a seminal analysis on regressions with generated regressors. The standard errors are clustered at the industry level because the key explanatory variables are measured at the industry level.

15
These results suggest that foreign ownership exerted a positive e¤ect on establishments’ resilience to the Global Financial Crisis, but a very limited e¤ect on establishment performance in non-crisis years. In the following sub-sections, we investigate the di¤erent mechanisms that can lead to performance di¤erence between foreign owned and domestic establishments, especially during economic crises.

# 5.2 The Role of Production Linkages

First, we evaluate the role of production linkages. Table 2 breaks down the estimated e¤ect of foreign ownership by the type of production linkages, including horizontal subsidiaries, vertical subsidiaries and neither category. The estimates suggest that foreign MNC subsidiaries with vertical production linkages to parent ...rms signi...cantly outperformed their local matches during the crisis, exhibiting 23 percentage points higher growth rates. This performance di¤erence is observed only during the crisis period. Foreign MNC subsidiaries and local counterfactuals showed similar percentage changes of sales in 2005-2007, despite the former’s vertical production linkages. In contrast, MNC subsidiaries with horizontal production linkages to their parents fared slightly better than their local matches during non-crisis years, while the two groups did not di¤er signi...cantly in the crisis. But the performance gap between horizontal subsidiaries and local counterfactuals is not signi...cantly di¤erent between crisis and non-crisis periods. Finally, subsidiaries with neither type of production linkages did not perform di¤erently than local matches in both crisis and non-crisis periods.

## [Table 2 about here]

In Table 3, we systematically assess the role of vertical production linkages by regressing MNC subsidiaries’performance di¤erence from local matches, i.e., Yi � Yl(i), on the strength of their input-output relationship with parent ...rms, i.e., Prod Linkagesi, measured by the input-cost share of the subsidiary’s primary product category in the parent ...rm’s ...nal-good production. The results suggest that subsidiaries sharing a stronger vertical production linkage with their parents tended to exhibit a greater advantage over local counterfactuals during the crisis. According to column (3), a one-percentage-point increase in the input-output linkage is associated with 1.06 percentage points higher growth rates. This e¤ect is found only during the crisis period, however. In contrast to the crisis period, we do not observe a signi...cant relationship between the strength of input-output linkages and MNC subsidiaries’performance in non-crisis years. The above result suggests that vertical production linkages lead to greater resilience to negative economic shocks, but not necessarily superior performance in the absence of negative shocks. In columns (2) and (4), we control for the e¤ect of country characteristics on the relative performance of MNC subsidiaries by limiting the analysis to within-country 16
# variations.<sup>18</sup> The ...ndings are largely similar.

# [Table 3 about here]

The vertical production linkage between foreign owned subsidiaries and parent ...rms also determines that the former should exhibit a greater advantage over local competitors when host countries experience a greater incidence of the crisis, in particular, a larger negative demand shock. MNC subsidiaries sharing an input-output relationship with their parent ...rms tend to engage in more intra-...rm trade, thereby less dependent on host-country domestic demand conditions. When the demand in host countries contracts, the intra-...rm demand will help absorb part of the shock, leaving the subsidiaries less a¤ected by the crisis. This advantage of vertical MNC subsidiaries is particularly important when the demand shocks in the host countries are relatively large.

The above mechanism conversely implies that the advantage of vertically linked MNC subsidiaries should be negatively associated with the incidence of the crisis in MNCs’home countries. A better demand condition at home will enhance the advantage of vertical subsidiaries abroad, while a worse incidence of the crisis in home markets adversely a¤ects those MNC subsidiaries’performance overseas.

We examine the above hypotheses in Table 4. The incidence of the crisis, in particular, the degree of the demand shock is proxied here by the average percentage decrease of sales in each host country and industry. The measure was constructed using either all establishments in the entire WorldBase dataset or the subset that excludes MNC subsidiaries and their local matches. The results were similar.<sup>19</sup> The estimates obtained with the latter measure are reported in Table 4.

# [Table 4 about here]

We ...nd that, ...rst, the e¤ect of vertical production linkages on MNC subsidiaries’ relative performance increases in the incidence of the crisis in host countries. Vertical MNC subsidiaries exhibited a greater advantage over local counterfactuals in countries with larger negative demand shocks. In contrast, the e¤ect of vertical production linkages is not signi...cantly associated with the incidence of the crisis in MNCs’home countries.

> 18 Recall that country-industry speci...c factors that uniformly a¤ect the performance of foreign owned and domestic establishments have been controlled for in the matching analysis by the pairing of foreign owned subsidiaries and local establishments from the same country and industry. Estimated parameters of country dummies and intercepts are suppressed in the table because of space consideration.

> 19 We also used countries’GDP growth rates and import growth rates as alternative proxies and found similar results.

17
# 5.3 The Role of Financial Linkages

Now we consider the role of ...nancial linkages in explaining MNC subsidiaries’di¤erent performance relative to local competitors. Unlike local establishments, MNC subsidiaries have an additional source of capital supply, i.e., internal capital ‡ow from parent ...rms. This internal capital support from home enables MNC subsidiaries to achieve greater resilience to host-country ...nancial shocks than local establishments.

Table 5 reports the estimated e¤ect of parent-subsidiary ...nancial linkages, i.e., Financial Linkagesi, on MNC subsidiaries’performance di¤erence from local counterfactuals Yi � Yl(i). We ...nd that in industries with stronger ...nancial linkages between parents and subsidiaries, MNC subsidiaries fared better than their local matches during the crisis. A one-percentagepoint increase in the ratio of investments in subsidiaries is associated with 4.6 percentage points higher growth rates. This result does not change when we control for the e¤ect of vertical production linkages and estimate the full equation (5). Like production linkages, the e¤ect of ...nancial linkages is observed only during the crisis period. The degree of ...nancial linkages does not appear to a¤ect establishment performance during non-crisis years. This sharp contrast of results suggests that the linkages between foreign subsidiaries and parent ...rms play an important role in helping MNC subsidiaries better respond to negative economic shocks, but not necessarily in achieving superior growth in the absence of economic shocks.

## [Table 5 about here]

Another way to investigate the role of ...nancial linkage is to examine whether the e¤ect of foreign ownership increases in the level of ...nancial dependence. In Table 6, we ...nd a positive relationship between MNC subsidiaries’performance di¤erence from local matches and industries’ ...nancial dependence level. A one-percentage-point increase in the level of ...nancial dependence is associated with 0.27 percentage point higher growth rates in 2007-2008. The relationship between ...nancial dependence and e¤ect of foreign ownership is signi...cantly weaker in the non-crisis period. A one-percentage-point increase in the level of ...nancial dependence is associated with 0.02 percentage point higher growth rates. Again, vertical production linkages did not play a signi...cant role in non-crisis years.

## [Table 6 about here]

The role of ...nancial linkages in establishment responses to the crisis is also expected to increase in the incidence of the crisis in host countries’...nancial markets. The internal capital supply from parent ...rms overseas should be particularly valuable when the host-country credit conditions worsen. MNC subsidiaries in industries with stronger intra-...rm ...nancial linkages are thus expected to exhibit a greater advantage over local competitors when host countries experience greater negative ...nancial shocks.

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Conversely, the role of intra-...rm ...nancial linkages in helping MNC subsidiaries attain greater resilience should depend on the incidence of the crisis in MNCs’home-country ...nancial markets. A worse credit condition at home will weaken the capital supply from parent ...rms, adversely a¤ecting MNCs’performance overseas.

Following Rose and Spiegel (2009a), the incidence of the crisis in ...nancial markets is measured here by countries’drop in credit ratings during 2007-2008. Countries that experienced a bigger drop in credit ratings are considered to have a greater incidence of the crisis in ...- nancial markets. As in Rose and Spiegel (2009a), we adopt country credit ratings from the Institutional Investor magazine, which ranks 177 countries on a scale from 0 to 100 with 100 representing the least likelihood of default (as of March 2009, Switzerland was the most highly ranked country with a score of 94.0, while Zimbabwe rated at the rear with a score of 4.6). According to this rating, countries such as New Zealand, Ireland, Greece and Singapore were among the group with the largest decline in credit conditions while countries such as Brazil, Peru and Ecuador showed a lesser incidence of the ...nancial crisis.

[Table 7 about here] Table 7 reports the results. We ...nd that the e¤ect of ...nancial linkages on establishment resilience to the crisis increases in host countries’incidence of ...nancial crisis. MNC subsidiaries exhibited a greater advantage over local competitors in host countries that experienced a larger decline in credit ratings. In contrast, the positive e¤ect of ...nancial linkages is smaller when MNC home countries experienced large negative ...nancial shocks. MNC subsidiaries performed less satisfactorily when their home countries’credit conditions worsened.

# 6 Additional Analysis

## 6.1 Foreign v.s. Domestic Linkages

So far our analysis has emphasized on the e¤ect of cross-country production and ...nancial linkages between foreign owned subsidiaries and their foreign parents. But would the same e¤ect exist for the production and ...nancial linkages between domestically owned subsidiaries and their domestic parents?

Similar to foreign parent ...rms, domestic parents can engage in intra-...rm trade with subsidiaries and provide the latter internal capital supply. These linkages can help subsidiaries sustain resilience to local demand and ...nancial shocks. However, when the shocks occur at the country level, the e¤ect of these linkages will be much weaker than the linkages of foreign owned subsidiaries because the former are located within the same country and exposed to the same shocks. The linkages between subsidiaries and foreign parents, in contrast, can provide more stability in this case, because the parent ...rms are not directly a¤ected by the host-country crisis.

19
To compare the e¤ect of foreign and domestic linkages, we expand our ...nal sample to include establishments owned by domestic parents. Similar to Section 4, we perform a matching analysis to match each domestically owned subsidiary with a local stand-alone establishment from the same country and industry based on economic characteristics. The matched pairs share similar attributes such as lagged size, lagged labor productivity, age, and previous exporter status, except the status of domestic parent ownership. We then compare the performance of the matched pairs to establish the e¤ect of having domestic parents. As in the analysis of foreign owned subsidiaries, we identify the extent of production and ...nancial linkages between the establishments and their domestic parents and investigate how they a¤ect subsidiaries’performance during the crisis.

Table 8 reports the results. First, we ...nd in column (1) that compared to domestically owned subsidiaries, foreign owned subsidiaries exhibited a greater advantage over local counterfactuals. The performance gap between the latter two groups is 18 percentage points higher than the gap between domestically owned subsidiaries and their local stand-alone matches. In column (2), we allow the e¤ect of production and ...nancial linkages to vary between domestic and parent ...rms. The results show that while ...nancial linkages with domestic parents also played a stabilizing role during the crisis, the e¤ect of foreign ...nancial linkages was signi...cantly greater. Furthermore, only foreign production linkages are found to exert a signi...cant and positive e¤ect on establishments’resilience to the crisis; domestic production linkages did not signi...cantly a¤ect establishment performance.

## [Table 8 about here]

# 6.2 Network E¤ect

In addition to production and ...nancial linkages with foreign parent ...rms, MNC subsidiaries exhibit another distinct feature compared to domestic establishments. That is, most multinationals today operate a multilateral network. Having a larger multilateral network enables multinationals to diversify both product and ...nancial markets. In this subsection, we take into account this aspect of multinational ...rms and examine how a larger multinational network can potentially amplify the e¤ect of production and ...nancial linkages. To do so, we ...rst construct two variables to represent the number of countries in the MNC networks. First, we control for the total number of countries outside the subsidiary in which MNCs operate. Operation in a larger number of countries implies greater product market diversi...cation and potentially greater intra-...rm demand, lending subsidiaries stronger resilience to negative host-country demand shocks. Furthermore, a larger network outside the subsidiary country means that multinationals can o¤er subsidiaries internal capital ‡ows from more sources, mitigating subsidiaries’vulnerabilities to host-country ...nancial shocks.

20
However, within the aggregate network, the subset that performs identical production activities as the subsidiary of interest should be considered separately. A larger network of duplicate production means that multinationals can more easily substitute production across countries. In a time of negative demand and ...nancial shocks, multinationals are more likely to react to the shocks by shifting production to the rest of the network, resulting in greater volatility. Our second variable hence measures the number of countries in which MNCs duplicate the subsidiary’s production, also referred to as the subsidiary’s horizontal network.

Alternative to the simple country counts, we can also take into account the relative size of the MNC network outside the subsidiary. We compute the share of multinationals’revenue received from third and parent countries relative to the share of revenue from the subsidiary of interest, in either all product categories or just the product category of the subsidiary. A larger share of total revenue from third and parent countries o¤ers subsidiaries stronger intra...rm demand and capital supply, enhancing subsidiaries’resilience to host-country demand and ...nancial shocks. But a relatively larger horizontal network that may substitute the subsidiary’s production can lead to footloose behavior and more volatile performance.

Table 9 reports the results. We ...nd that a greater aggregate network outside the subsidiary is associated with better subsidiary performance compared to local matches. This result lends support to the positive role of overall market diversi...cation in times of economic volatility. In contrast, the size of the subsidiary’s horizontal network did not play a signi...cant role, suggesting that the opposing e¤ects of this type of network lead to an ambiguous net e¤ect. Comparing the crisis with non-crisis years, we again ...nd that, similar to production and ...nancial linkages, the stabilizing role of networks is pronounced only during the crisis.

## [Table 9 about here]

# 6.3 Unobserved MNC Heterogeneity

The matching technique adopted in the paper helps us identify the e¤ect of foreign ownership by limiting the comparison to establishments with similar economic characteristics. There could, however, remain unobserved heterogeneity across MNCs that is correlated with the degree of production and ...nancial linkages.

We take two steps to address this issue. First, we control for potential correlations of residuals between establishments owned by the same parent ...rm, as well as between establishments in the same industry. Cameron, Gelbach and Miller’s (2006) multi-way clustering method is employed for this purpose. As shown in Table 10, the standard errors remain similar. Both production and ...nancial linkage measures continue to play a signi...cant role in explaining the performance di¤erence between MNC subsidiaries and their local matches.

## [Table 10 about here]

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Second, we control for all ...rm-level characteristics by including a parent ...rm ...xed e¤ect and limiting the comparison to establishments owned by the same parent ...rm. Multinationals with only one foreign subsidiary are hence dropped from the sample. In doing so, we establish the role of production linkages by comparing the performance of subsidiaries that belong to the same multinational but with di¤erent degrees of input-output linkages. The e¤ect of ...nancial linkages cannot be estimated in this speci...cation because our measure of ...nancial linkages does not vary within each parent ...rm.

## [Table 11 about here]

Table 11 reports the results. We continue to ...nd vertical production linkages to exert a signi...cant e¤ect on MNC subsidiaries’performance during the crisis. A one-percentage-point increase in the input-output relationship is associated with 1.28 percentage points higher growth rates, exceeding the estimated e¤ect in Table 3. Again, the production linkages do not appear to systematically a¤ect establishment performance in non-crisis years.

# 7 Conclusion

We investigate in this paper the role of foreign ownership in establishment performance during the recent Global Financial Crisis. Using a worldwide establishment panel dataset, we examine whether foreign ownership led to di¤erent resilience to the crisis between establishments with similar economic attributes and how the role varies from non-crisis periods. Moreover, we examine how, conditional on foreign ownership, production and ...nancial linkages explain the di¤erential responses of MNC subsidiaries.

We ...nd that MNC subsidiaries responded on average better to the recent crisis than local controls with similar economic characteristics. The advantage of foreign ownership was clearly pronounced during the crisis, while relatively muted in non-crisis years. Production and ...nancial linkages played critical roles in explaining the di¤erential responses of MNC subsidiaries. Establishments sharing stronger vertical production linkages with foreign parent ...rms exhibited more resilient performance during the crisis, especially in host countries with a greater incidence of the crisis. Horizontally linked establishments, in contrast, performed no better than the control establishments. The same pattern is not observed in non-crisis years. Vertical MNC subsidiaries did not perform di¤erently than their local matches in the noncrisis period, while horizontal subsidiaries fared slightly better. Financial linkages similarly played an important role during the crisis. MNC subsidiaries operating in industries with greater intra-...rm ...nancial linkages exhibited a greater advantage over local counterfactuals. Similar to production linkages, the role of ...nancial linkages was signi...cant only during the crisis period, especially in host countries with signi...cantly worsened credit conditions.

22
Our results identify important bene...ts associated with the linkages created by foreign ownership. While multinationals’footloose behavior might lead to greater volatility, vertical production and ...nancial linkages between MNC subsidiaries and parent ...rms could potentially alleviate the impact of the crisis in host countries. These ...ndings are central to academic and policy debates centered on the role of foreign direct investment in economic growth and volatility, and have critical implications for policy making that in‡uence the ‡ow of foreign investments.

A promising avenue of future research comprises, for example, analysis on the role of multinational linkages in cross-country economic interdependence, in particular, how the linkages may serve as international transmission mechanisms in a time of economic crises. Our results show that the performance of MNC subsidiaries is conditional on the incidence of the ...nancial crisis in parent countries. Further research on how multinationals’intra-...rm production and ...nancial linkages could transmit shocks from parent to host countries and vice versa and between di¤erent host nations could o¤er useful academic and policy insights.

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