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Multi-Market Service Firms

Multi-Market Service Firms. Antoine Gervais University of Notre Dame J. Bradford Jensen McDonough School of Business, Georgetown University Peterson Institute for International Economics NBER. Background / Context.

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Multi-Market Service Firms

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  1. Multi-Market Service Firms Antoine Gervais University of Notre Dame J. Bradford Jensen McDonough School of Business, Georgetown University Peterson Institute for International Economics NBER

  2. Background / Context • We have learned a great deal over the past 15 years regarding the role of firms in international trade • New areas of research being opened up by incorporation of transaction level trade data to economic census data • One shortcoming is the vast majority of the research to date has focused on goods • I have devoted a significant share of my time over the past 5 years to examining the prospects of analyzing trade in services

  3. Composition of U.S. Employment, 2007 Source: 2007 Economic Census and Census of Governments

  4. Business and Personal Services Source: U.S. Census Bureau

  5. How are services traded? • Modes of service trade: • Mode 1 – Cross-border provision, e.g. software produced in one region and shipped via internet to another region • Mode 2 – Consumption abroad, e.g. consumer travels to resort to consume service • Mode 3 – Commercial presence in foreign region, e.g. restaurant opens local branch to serve foreign demand • Mode 4 – Temporary movement of natural persons, e.g. consultant travels to customer to deliver services

  6. How are services traded? • Modes of service trade: • Mode 1 – Cross-border provision, e.g. software produced in one region and shipped via internet to another region • Mode 2 – Consumption abroad, e.g. consumer travels to resort to consume service • Mode 3 – Commercial presence in foreign region, e.g. restaurant opens local branch to serve foreign demand • Mode 4 – Temporary movement of natural persons, e.g. consultant travels to customer to deliver services

  7. Data Available

  8. Data Available

  9. Data Available

  10. Data Available

  11. Previous Work on Trade in Services • Jensen and Kletzer (2006), Jensen (forthcoming), and Gervais and Jensen (on-going) • Exploit mismatch of production and consumption to identify activities that can be provided at a distance • Quick summary of findings: • A significant share of employment is in tradable service activities • These activities are qualitatively different from non-tradable services and manufacturing • The empirical results have important implications for US comparative advantage and US trade policy

  12. How are services traded? • Modes of service trade: • Mode 1 – Cross-border provision, e.g. software produced in one region and shipped via internet to another region • Mode 2 – Consumption abroad, e.g. consumer travels to resort to consume service • Mode 3 – Commercial presence in foreign region, e.g. restaurant opens local branch to serve foreign demand • Mode 4 – Temporary movement of natural persons, e.g. consultant travels to customer to deliver services

  13. Headquarters and FDI • “Classic” question • Early focus on “horizontal” FDI, but literature moves on to “vertical” FDI • Caves (1971), Hymer (1976), and Dunning (1977) • Helpman (1984), Markusen (1984) • Antras (2003) • Limited empirical analysis • Brainard (1993), Yeaple (2003) • Hanson, Mataloni, Slaughter (2005) • Nunn and Trefler (2008), Bernard, Jensen, Redding, and Schott (2010) • Desai, Foley, and Hines (2009)

  14. Overview • Consider the relationship between headquarters activity and multi-market operation (FDI) in the service sector • Develop a model of market seeking entry in the face of prohibitive trade costs for final output • Firms choose level of headquarters activity and number of markets • Focus on non-tradables, but interested in potential for trade policy to affect employment in U.S. via headquarters supporting FDI • Identify industries where FDI is likely • Investigate relationship between FDI and headquarters • Hope ultimately (not here today) to estimate domestic headquarters employment impact of increased FDI

  15. Empirical Approach • International FDI data shortcomings • Use detailed microdata on the wholesale, retail, and service sectors collected by the U.S. Census Bureau • Domestic data, but mechanism similar to FDI • Investigate: • Prevalence of/relationship between multi-market and headquarters activity • Changes over time • Industry and firm level relationships

  16. Preview of Findings • Significant variation in headquarters and multi-market activity across industries and firms within industries • Positive correlation between headquarters activity and multi-market firms across industries • Positive correlation between industry characteristics and increases in number of markets firms operate in • Firm HQ activity positively associated with firms’ number of markets and increases in firms’ number of markets

  17. Data • Economic Census data for 1987, 1997 • Census of Services • Census of Wholesale • Census of Retail • Headquarters Activities • Census of Auxiliaries 1987

  18. Data Issues • Census of Manufactures • Firm ownership • Location • Industry classification • Employment • Payroll • Revenue • Non-production/ production • Capital stock by type • Materials, energy inputs • Periodic information on other inputs (technology…) • Census of Services • Firm ownership • Location • Industry classification • Employment • Payroll • Revenue

  19. Data Issues • Industry Classification changes • Restricts us to 1987 to 1997 (both available on 1987 SIC basis) • Finance, Insurance, and Real Estate sector and Telecommunications and Broadcasting industries not included in 1987 Economic Census

  20. Measures • Measures of number of markets: • Number of BEA labor market areas (183 regions) • Number of establishments • HQ activity measures • Total firm headquarters activity allocated across industries based on an industry’s share of firm revenue • Headquarters dummy • Other inputs = Revenue – Payroll • Very large number of very small service producers • To construct industry level measures and to characterize firm characteristics, use revenue weighted means • Cross-industry and regression results are un-weighted

  21. Prevalence of Multi-Market Firms

  22. Variation across Industries

  23. Change over Time • Take information and communications technology changes as a “general purpose technology” • Decrease in cost of opening/managing affiliates • Related literature on growth of national retail chains • Basker (2005) • Foster, Haltiwanger, and Krizan (2006) • Jarmin, Klimek, and Miranda (2009)

  24. Variation across Industries

  25. Changes over Time in Number of Markets

  26. Model • Develop a simple general equilibrium model of the decision to enter new markets. • We assume that the final “output” of the firm is nontradable – to serve additional consumers firms need to enter new markets. • We assume that firms can make investments in an asset that is non-rivalrous within the firm. • Firms endogenously choose the optimal level of headquarters services and the number of locations in which to operate, conditional on demand characteristics and cost of managing multiple establishments.

  27. Model: Preferences and Demand

  28. Model: Technology and Production Costs

  29. Model: Key Relationship

  30. Firm Characteristics

  31. Firms Add and Drop Markets

  32. Firm Number of Regions

  33. Firm Number of Estabs

  34. Change in Number of Regions

  35. Change in Number of Estabs

  36. Change in Log(Number of Regions)

  37. Change in log(Number of Estabs)

  38. Alternative HQ Measure: Other Inputs

  39. Alternative HQ Measure: Other Inputs

  40. Preliminary Conclusions • Significant variation in headquarters and multi-market activity across industries and firms within industries • Positive correlation between headquarters activity and multi-market firms across industries and increases in number of markets • Firm HQ activity positively associated with firms’ number of markets and increases in firms’ number of markets • Approach holds promise for investigating effect of increased liberalization of FDI on US employment

  41. Thank You

  42. Geographic Concentration of Industries Mfg EMP – 86% T Ag/Min EMP – 100% T Prof Svc EMP – 70% T Ed/Health EMP – 98% N-T Oth Svc EMP – 80% N-T Source: Jensen and Kletzer (2006)

  43. Tradable Services are Different Source: Author’s calculations, 2007 American Community Survey

  44. Potential Labor Market Impact Source: Author’s calculation using 2007 County Business Patterns data.

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