Transcript Slide 1
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.