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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
Trade
Per cent
Year
Export
Manufactures
Import
Manufactures
Export
to
Europe
Import
from
Europe
1913
75.5
20.2
39.5
44.6
1992
81.9
78.4
63.8
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 effects
2. MNEs are footloose: No home country effects
3. 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∑γsXsk +ek
MNEs in average 17% more productive than National Firms
Causal effect of MNEs
Average
productivity
MNE
Switching firm
Without switch
National firms
Time t
Home country effects on employment and
production
Home and foreign
activities:
Complementary
Substitutes
VFDI
+
HFDI
+
(Demand for
HQservices and
complementary
products produced at
home increase)
_
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 + α₃lnwslk + α₄lnDi + α₅∑Dj +
elk
Demand for skilled labour (skilled-labour share of the
total wage bill) home country i and MNE k)
SHsk = β₀ + β₁lnwUk + 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.