Accounting for Cross-country Income Differences: New Evidence from Multinational Firms
Abstract: We develop a new accounting framework to decompose cross-country differences in output-per worker into differences in ‘country-embedded factors’ and differences in ‘aggregate firm know-how’. By country-embedded factors we refer to the components of productivity that are internationally immobile and affect all firms in a country, such as institutions, natural amenities, and workers’ quality. In contrast, firm know-how encompasses those components that generate differences across firms within a country, and that can be transferred internationally, such as blue-prints, management practices and intangible capital. Our approach relies on data on the cross-border operations of multinational enterprises (MNEs). It builds on the notion that MNEs can use their know-how around the world, but they must use the factors from the countries where they produce. We find a strong positive correlation between our measure of aggregate firm know-how and external measures of TFP and output per worker across countries. In our sample, differences in aggregate firm know-how account for about 30 percent of the observed cross-country differences in TFP, and for more than 20 percent of the differences in output per-worker.
