This paper studies the impact of foreign ownership on the wage skill premium by endogenizing skill biased technological change with intangible skill complementarity in production. Increased intangible investment raises the relative demand for skilled labor, which in turn raises the wage skill premium. Foreign owned firms, who are more intangible intensive, amplify this effect. I provide supporting empirical evidence from Spain, documenting aggregate increases in intangible investment and skilled labor compensation. Foreign owned firms operate at a large scale and I show that a change to foreign ownership leads to a scaling up of production, as well as, higher relative employment of skilled workers. I develop a quantitative firm dynamics model with intangible skill complementarity in production and heterogeneity in ownership. Foreign multinationals endogenously enter through acquisition and their subsidiaries receive a technology transfer prompting them to invest at higher levels. An exogenous decline in the intangible investment price triggers the mechanism and further increases foreign entry. Upon matching the decline to the data, the model accounts for nearly forty percent of the increase in the wage skill premium between 2002 and 2017 where about a quarter is attributed to foreign ownership. Through the lens of the model, intangible investment subsidies exclusively for foreign owned firms can increase aggregate output and total factor productivity, but also have welfare implications.

We demonstrate that the measurement of economic profits and the labor share is theoretically biased due to the omission of intangibles. This bias is further exacerbated by the dramatic rise of acquired intangibles, an issue largely overlooked in the economics literature. We first show how business accounting rules create obstacles for the measurement of intangibles and cannot be relied upon to provide economic measures of intangibles. Specifically, business accounting distinguishes between two types of intangibles, which are treated differently: those produced in-house, which are always expensed in financial statements (eg R&D), and acquired intangibles (obtained through mergers or acquisitions), which underwent an accounting change in 2001. Before 2001, firms could choose whether to capitalize acquired intangibles, but afterward, capitalization became mandatory. We show how the theoretical bias from omitting intangibles affects economic profits and the labor share using a firm dynamics model with strategic business accounting. Firms can produce in-house intangibles or acquire them through mergers and acquisitions, where the decision to capitalize the latter is often influenced by CEOs' short-term focus on reporting high accounting profits. We then propose a methodology to recover economic business intangibles. In this context, we document a widespread structural shift from in-house to acquired intangibles. Using firm-level data from the US and our model to infer economic intangibles, we find that economic profits and the labor share are relatively trendless, in contrast with recent findings.

We quantitatively assess the impact of mergers and acquisitions (M&A) for the allocation of resources. Existing macroeconomic research often relies on firm characteristics only at the time of an M&A deal and uses selected samples to develop and estimate quantitative models. We construct a representative dataset that covers about 63% of the Spanish firm population over the span of 26 years and provide new insights into the dynamics of transacting firms before and after an M&A deal. At the time of birth, both acquirers and targets are significantly larger than the average firm, particularly in terms of assets, employment, and value added. At the time of the deal, both parties tend to be mature and rank among the largest firms in the economy, with acquirers being slightly larger. We find no evidence that either party is financially constrained. In the years following the M&A, we document TFP increases of up to 2-3% and a scaling up of production. We develop a quantitative general equilibrium firm dynamics model with endogenous entry/exit and an M&A market in which firms (but not all) select into to search. M&A directly affects TFP through synergies which improves allocative efficiency. It also has indirect effects by influencing firms' incentives to enter or exit the economy and their investment decisions. These indirect effects lead to resource misallocation for two reasons: first, less productive firms remain in the economy in hopes of being acquired; second, firms anticipate the possibility of acquiring or being acquired, leading to increased investment compared to a model without M&A. This effect is further intensified when firms actively search. This leads to an overaccumulation of capital if a firm never merges, and most ultimately do not. Considering these positive and negative factors, we quantify the net effect of M&A activity on resource allocation.