Multinational firms: Home-country effects

Primary aim: Examine ip –implications of FDI with special emphasis on new patterns of trade and home country effects

Commodity and Geographical Composition of UK TradePer cent

Year Export Manu-factures

ImportManu-factures

Export toEurope

ImportfromEurope

1913

1992

75.5

81.9

20.2

78.4

39.5

63.8

44.6

63.7

Source: P Krugman, Brookings Paper on Economic Activity 1:1995

Supertrading Economies:

Country Export, percentage of GDP, 1990

Singapore 174

Hong Kong 144

Malaysia 78

Belgium 70

Ireland 64

The Netherlands 52

Source: P Krugman, Brookings Paper on Economic Activity 1:1995

Trends in world FDI inflow, exporte and world GDP

Ip-effects of FDI:

1. Home country effects2. MNEs are footloose: No home country effects3. Host country effects

Home country effects: • Are MNEs more productive than national firms?• Effects of FDI on home output and employment• Effects of FDI on the demand for skilled vis-à-vis unskilled

labour• Technological spillover to the home country 

Multinational Enterprises:

“Firms that engage in direct foreign investments, defined as investments in which the firm acquires a substantial controlling interest in a foreign firm or sets up a subsidiary in a foreign country”

Productivity of MNE k's home activities as compared with national firms

 Lnqk =α+βMNEk +ln∑γsXs

k +ek

MNEs in average 17% more productive than National Firms

Causal effect of MNEs

Time t

MNE

Switching firm

Without switch

Average productivity

National firms

Home country effects on employment and production  

Home and foreign activities:

VFDI HFDI

Complementary + +

(Demand for HQservices and complementary products produced at home increase)

Substitutes _

Home country effects on employment:

A domestic firm has foreign subsidiaries: how do changes in foreign wages affect its labour demand at home?

Price complementarity between employment in countries

with different factor endowments and price substitutability for countries with similar factor endowments

• Complementarity: reduced wages in a poor county with an affiliate increase employment both in the poor and in the rich country

• Substitutability: reduced wages in a country increase employment in the country with a reduction and decrease employment in countries with similar factor endowments

Labour demand function for affiliate I of MNE k:

 

lnLlk =α₀+ α₁lnwi + α₂lnwdlk + α₃lnws

lk + α₄lnDi + α₅∑Dj + elk

 

Demand for skilled labour (skilled-labour share of the total wage bill) home country i and MNE k)

 

SHsk = β₀ + β₁lnwU

k + β₂lnwSk + β₃ln(Kk/Yk) + β₄lnYk + β₅MNEk

+ ek

Technological upgrading at home

• Foreign R&D capital has beneficial effects on domestic productivity and these effects are stronger the more open an economy is to foreign trade.

• Outward FDI flows is a more significant channel for technology spillover between industrialized countries than inward FDI.