2006) “The Effects at Home of Initiating Production Abroad: Evidence from Matched French Firms: What Happens to the Biological Kids of Foster Parents?,” mimeo

In the present paper we attempt to estimate the causal effect of initiating production abroad by establishing a foreign affiliate on firm-level employment, skill-intensity and productivity. In order to solve the problem of the missing counterfactual we adopted matching techniques in combination with a difference-in-difference (DID) estimator. We concentrate on the investment decisions of French firms during the period 1987-1999. An important contribution is that we separately analyse the effects of becoming a multinational for manufacturing and services firms. Another important element is that we analyse the causal effect of becoming multinational whilst differentiating between horizontal, vertical or complex investment strategies on the basis of the location of investment and the industry affiliation of the investing firm. Our main conclusion is that differentiating between different investment strategies is crucial if one wants to grasp the effects of outward investment in the home country. Manufacturing firms that make market-seeking investments (firms in comparative advantage industries that invest in high income locations) typically see their employment rise by 25 % after three years relative to their counterfactual outcome. For manufacturing firms that make factor-seeking investments, on the other hand, the picture is more complex. The visual representation of the results suggests that firms that invest in low income locations experience an immediate drop in employment at the time of investment followed by a larger positive effect after two years. However, these findings are not statistically significant. The results for services are more tentative, but overall similar to those for manufacturing