Firm Structure, Multinationals, and Manufacturing

¶ … Firm Structure, Multinationals, and Manufacturing Plant Deaths," from the Review of Economics and Statistics, over a typical five-year period, more than 30% of U.S. manufacturing plants shut down, accounting for more than 17% of manufacturing employment" (Bernard & Jensen 2007, p.193). Given the significant impact this has had on the U.S. economy, Andrew B. Bernard and J. Bradford Jensen attempt to explore the role of firm structure in plant shutdowns, which they feel has been insufficiently addressed in the current literature on plant death. Past literature has tended to emphasize individual plant characteristics rather than the parent organization of the plant. True, "if single-plant firms account[ed] for the bulk of employment and output in the U.S. economy or if plants owned by multiunits behave no differently from single units, the exclusion of firm characteristics" in previous studies "would be a minor oversight," however, this is not the case, given the prevalence of "multiunit and multinational firms" today (Bernard & Jensen 2007, p.193). Furthermore, multinational and multiunit plants exhibit different characteristics and have different access to resources than smaller plants, which makes the author's line of inquiry a worthy subject of study.

The author's data indicates that the probability of plant death is substantially reduced for plants that are part of a multiplant firm and "domestic plants owned by U.S. multinationals are far less likely to close than plants in purely domestic firms" (Bernard & Jensen 2007, p. 193). In particular, high productivity exporting plants are significantly less likely to die. "The export status of the plant reduces the probability of shutdown by as much as 15% even after accounting for plant size, productivity, factor intensity, and ownership structure" (Bernard & Jensen 2007, p.194). The authors provide some of the first direct evidence on the link between international investment and domestic labor market outcomes (Bernard & Jensen 2007, p.195). This is despite the fact that multinationals pay higher wages than non-multinationals (Bernard & Jensen 2007, p.194). The authors do not explore why this is the case, although it is possible that higher labor costs are sufficiently offset by the greater profits of the multinationals, or that U.S. multinationals are more likely to close smaller, poorer paying and performing plants.

Theory, principles of journal article

The article supports the classical, microeconomic theory of the superiority of economies of scale (McConnell, Brue, & McPherson, 2006). Large firms tend to have larger plants. Large plants are associated with characteristics that are associated with higher survival probabilities, and that fact alone should lead to lower death probabilities, for plants that are part of both multiplant and multinational firms. Plant attributes that increase survival tend to be present to a greater degree in larger firms, such as the fact that larger firms have more access to venture and lent capital that can help them avoid plant shutdown.

In the face of negative shocks such as a temporary drop in demand for one of their products a plant that is a multiunit or a multinational has increased flexibility to reduce production by closing a plant without exiting the market altogether (Bernard & Jensen 2007, p.196). Single-plant firms cannot cease production entirely and continue to remain solvent, especially if they produce a limited range of goods, for a more limited market.

Data Analysis

We define a plant to have died if it is in the LRD in year t but absent from the Census in year t _ 5 and beyond" the authors state, in explaining the parameters of their research (Bernard & Jensen 2007, p.196). The authors of the study did not include plants with fewer than ten workers, and any industry whose products are categorized as not elsewhere classified leaving 236,000+plants to be studied. The plant's heterogeneity, balance of capital between foreign and domestic assets, skill level of workers, industry and geography were all classified and examined as variables in the research (Bernard & Jensen 2007, p.197). They found that, ownership by a U.S. multinational, or a recent ownership change, were associated with survival. The authors believed they could not conclude that multinational ownership alone conveys benefits to a plant in the form of increased survival and their results may be due to the fact that plants that are part of larger firms as well as are part of multinational groups also have "good" plant characteristics (Bernard & Jensen 2007, p.198). They are more likely to export, employ more capital and more skilled workers, and operate in industries with lower shutdown probabilities (Bernard & Jensen 2007, p.202).

Conclusion