Demand Uncertainty and the Joint Dynamics of Exporters and Multinational Firms
This project studies the demand uncertainty exporters and multinational firms face when they engage in foreign activities. In particular, we focus on how learning about underlying demand through market experiences helps firms resolve such uncertainty over their life cycles. We first use a dataset on Japanese multinational affiliates’ sales forecasts and present unique evidence that older affiliates, as well as affiliates whose parent firms have previous exporting experience, tend to make smaller mistakes when forecasting future sales. This provides direct evidence for firm learning, a mechanism which has been suggested by previous studies using indirect evidence. We plan to go one step further to quantify the importance of learning in determining the joint dynamics of exporters and multinational firms. The quantification involves solving heterogeneous-firm dynamic optimization models, with firms’ endogenous choices of entries into exporting, foreign direct investment (FDI) and exits. The model can be used to calibrate important parameters for the learning mechanism, and can then be used to answer policy questions such as how demand uncertainty affects the intensive and extensive margins of trade and FDI, and whether the government should subsidize the young exporters or multinational firms because it takes time for them to learn about the foreign demand.