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.