The Resilience of FDI to Natural Disasters through Industrial Linkages

TL;DR

This paper models how multinationals' resilience to natural disasters depends on their industrial linkages with local firms and trade costs, highlighting the importance of supply chain connections.

Contribution

It introduces a simple theoretical model linking multinationals' resilience to local supply chain linkages and trade costs, extending understanding of disaster impacts on FDI.

Findings

Multinationals stay if tightly linked with local suppliers.

High trade costs increase likelihood of exit during disasters.

Strong local linkages mitigate disaster impacts.

Abstract

When do multinationals show resilience during natural disasters? To answer this, we develop a simple model in which foreign multinationals and local firms in the host country are interacted through input-output linkages. When natural disasters seriously hit local firms and thus increase the cost of sourcing local intermediate inputs, most multinationals may leave the host country. However, they are likely to stay if they are tightly linked with local suppliers and face low trade costs of importing foreign intermediates. We further provide a number of extensions of the basic model to incorporate, for example, multinationals with heterogeneous productivity and disaster reconstruction.