Multinational Firms in the World Economy
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Multinational Firms in the World Economy
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Overview
Depending on one's point of view, multinational enterprises are either the heroes or the villains of the globalized economy. Governments compete fiercely for foreign direct investment by such companies, but complain when firms go global and move their activities elsewhere. Multinationals are seen by some as threats to national identities and wealth and are accused of riding roughshod over national laws and of exploiting cheap labor. However, the debate on these companies and foreign direct investment is rarely grounded on sound economic arguments.
This book brings clarity to the debate. With the contribution of other leading experts, Giorgio Barba Navaretti and Anthony Venables assess the determinants of multinationals' actions, investigating why their activity has expanded so rapidly, and why some countries have seen more such activity than others. They analyze their effects on countries that are recipients of inward investments, and on those countries that see multinational firms moving jobs abroad. The arguments are made using modern advances in economic analysis, a case study, and by drawing on the extensive empirical literature that assesses the determinants and consequences of activity by multinationals. The treatment is rigorous, yet accessible to all readers with a background in economics, whether students or professionals. Drawing out policy implications, the authors conclude that multinational enterprises are generally a force for the promotion of prosperity in the world economy.
Product Details
| ISBN-13: | 9780691214276 |
|---|---|
| Publisher: | Princeton University Press |
| Publication date: | 06/16/2020 |
| Sold by: | Barnes & Noble |
| Format: | eBook |
| Pages: | 352 |
| File size: | 3 MB |
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Read an Excerpt
Multinational Firms in the World Economy
By Giorgio Barba Navaretti Anthony J. Venables Frank G. Barry Karolina Ekholm Anna M. Falzoni Jan I. Haaland Karen Helene Midelfart Alessandro Turrini
Princeton University Press
Princeton University PressAll right reserved.
ISBN: 0-691-12803-0
Chapter One
FACTS AND ISSUESMultinational enterprises (MNEs) are key players in globalized economies. Foreign-owned MNEs employ one worker in every five in European manufacturing and one in every seven in US manufacturing; they sell one euro in every four of manufactured goods in Europe and one dollar in every five in the US (OECD 2001b).
The general public and policy makers around the world have mixed feelings about MNEs: they see them as either welcome bearers of foreign wealth and knowledge or unwelcome threats to national wealth and identity. Policy makers want MNEs to invest in their country, take pride when their firms rank high in Fortune's list of the largest firms in the world, but are unhappy when national firms close down domestic activities and open up foreign ones, or when foreign brands compete successfully with national ones. The Dr Jekyll and Mr Hyde perception of MNEs stems more from the ambiguous feelings often directed towards large market players with no national identity than from rigorous economic analysis. Indeed, the debate on MNEs is rarely grounded in economic arguments and there is little understanding of what MNEs are, and whatthe sound reasons for liking or disliking them are.
MNEs are often different from purely national firms and some of the concerns raised are legitimate. They are relatively large, they have competitive power in the market place and bargaining power in the policy-making arena, particularly in smaller developing countries. They are global players who can circumvent national regulations and policies more easily than can national firms. They are footloose, able to move activities between their plants at relatively low cost, removing benefits as rapidly as they deliver them. They mass-produce standardized products, jeopardizing national product variety.
However, these very features of MNEs also explain why countries compete fiercely to attract them. They often bring scarce technologies, skills and financial resources. They are quick to take advantage of new economic opportunities and thus to contribute to the creation of national wealth. They are bound by international standards and market competition and they often offer better employment conditions and product qualities than national firms.
Moreover, MNEs are not just giant corporations like Microsoft or Coca-Cola. Many small and medium enterprises, firms with limited market power in domestic and foreign markets, have one or more foreign subsidiaries. Investing abroad and thus becoming an MNE is a strategy open to and followed by many types of firms.
This book addresses the concerns surrounding MNEs and brings clarity to the debate. It provides a thorough assessment of what MNEs are, of why and where they arise and of their economic impact on home and host economies. We conclude that, although none of these concerns have straightforward answers, the balance bends in favour of MNEs: they are a fundamental feature of modern economies and there is no evidence that their actions are generally less beneficial to home and host economies than are the actions of national firms.
1.1 Multinationals: What Are They and How Are They Measured?
Since multinationals are the subject of this book, the first task is to define them. MNEs are firms that own a significant equity share (typically 50% or more) of another company (henceforth subsidiary or affiliate) operating in a foreign country. MNEs include modern corporations such as IBM, General Motors, Intel and Nike, and also small firms such as Calzaturificio Carmens, a shoemaker employing 250 workers divided between Padua (Italy) and Vranje (Serbia).
The activities of MNEs are best measured by firm-level data, such as the number of people they employ and the size of their sales. Unfortunately, these data on firm-level activities are not widely available. Even when aggregated across firms, there are many gaps in the data and they are not always standardized across countries. Instead, the researcher often has to rely on data on flows of foreign direct investment (FDI). These are recorded from balance-of-payment statistics and they are available across time, industrial sectors and for many receiving and sending countries. According to IMF/OECD definitions (IMF 1993; OECD 1996), FDI is an investment in a foreign company where the foreign investor owns at least 10% of the ordinary shares, undertaken with the objective of establishing a 'lasting interest' in the country, a long-term relationship and significant influence on the management of the firm. FDI flows include equity capital, reinvested earnings and other direct investment capital. In other words, they comprise the financing of new investments, retained earnings of subsidiaries, inter-firm loans and cross-border mergers and acquisitions. They are different from portfolio investments, which can be divested easily and do not have significant influence on the management of the firm. Thus, to create, acquire or expand a foreign subsidiary, MNEs undertake FDI. The total direct capital owned by non-residents in a given country each year constitutes the stock of FDI. (See the appendix to the book for a discussion of the statistical definitions of FDI stocks.)
Despite their conceptual differences, we will sometimes use the terms FDI and MNE as if they are synonyms, both acting as a label for the phenomenon studied in this book. We note that other terms are used in the literature-for example, transnational corporation-but we restrict ourselves to terms that have standard usage and exact counterparts in the collection of data.
1.2 The Facts: Empirical Overview
Before embarking on an analysis of MNEs, it is helpful to review the stylized facts about the role of MNEs in the world economy.
Fact 1. FDI grew dramatically in the last 15 years of the twentieth century, far outpacing the growth of trade and income.
The period 1986-2000 saw an enormous growth of activity by multinational enterprises, as measured by flows of foreign direct investment. As shown in Figure 1.1, inflows of FDI grew much faster than either trade or income; whereas worldwide real GDP increased at a rate of 2.5% per year between 1985 and 1999 and worldwide exports by 5.6%, worldwide real inflows of FDI increased by 17.7%. This compares strikingly with pre-1985 data, when real world GDP, exports and FDI were following closer trends. Between 1970 and 1984, real FDI grew at an average yearly rate of 4.2%, worldwide real GDP by 3.1% and world exports by 5.2%. Since 2001, the rise of world FDI was reversed, and real world inflows were back to their 1998 level. This decline is explained by a series of contingent factors: 1999 and 2000 values were anomalous peaks, partly due to the rise of intra-EU investments following the implementation of the single currency and to the rise of share prices (much FDI takes place through acquisitions in the stock exchange); in 2001, the collapse of share prices and the slowing down of the economy reduced the value and the pace of cross-border mergers and acquisitions.
Despite their rapid growth, FDI flows remain much smaller than trade flows. In 2001 world exports were 7666 billion US$, whereas world FDI inflows were 823 billion US$. However, the picture changes if we revert to the activities of MNEs, activities based on the stock of capital rather than the flow of investment. The sales of foreign subsidiaries are in many instances much larger than trade flows. For example, sales of manufacturing products of US subsidiaries in the EU are approximately 3.8 times larger than EU imports from the US and sales of EU subsidiaries in the US are 3.6 times larger than EU exports to the US (US Department of Commerce, Bureau of Economic Analysis and Eurostat). Furthermore, a very large share of world trade is conducted by MNEs. Some commentators have estimated that multinationals-parents and subsidiaries combined-are responsible for 75% of the world's commodity trade (Dunning 1993). According to figures from UNCTAD (1998, 1999a,b, 2000), around one-third of world trade is intra-firm, i.e. between subsidiaries based in different countries or between the subsidiaries and the headquarters of MNEs.
The scale of multinational operations and the role they play in the process of globalization is best gauged by looking at their shares in economic activity. Table 1.1 reports the share of foreign subsidiaries in total manufacturing employment and sales for the G5 countries. These are large, generally above 10% with peaks around 30% for sales in France and the UK. They also grew considerably between 1994 and 1998. Note, however, that these shares vary across the five countries analysed. Japan's economy is virtually closed to foreign MNEs, which account for less than 1% of manufacturing employment; in Germany, MNEs account for a lower share of manufacturing employment and output than in the other large EU countries, a share that even declined between 1994 and 1998. As discussed in what follows, countries' characteristics and policies play a very important role in explaining the geographical distribution of the activities of MNEs.
MNEs are important in services as well as in manufacturing, although data on service activity are limited. In the UK, the share of foreign subsidiaries in service sector employment in 1998 was 8.4% in utilities and construction, 6.7% in trade, repairs, hotels and restaurants, and 8% in finance, insurance and business services (OECD 2001b), levels somewhat less than half that in manufacturing.
Fact 2. FDI originates predominantly from advanced countries.
Where does FDI come from? As shown in Table 1.2, the predominant source of supply of FDI is the advanced countries. Between 1998 and 2000, 92.9% of outward flows originates in an advanced country. Developing countries had increased their share of outward flows through the 1970s and 1980s to a peak of 15.3% of world flows in the mid 1990s, to see it declining again in the late 1990s. Among individual countries, the US is the world's largest foreign investor. The EU as a whole accounted for 71.2% of all outward stocks, a share that has risen sharply partly because of the rise in intra-EU investments associated with deepening integration in the EU and following the creation of the Single Market in 1992. Notice that the EU's FDI is exaggerated relative to the US's, as intra-US investments are classified as domestic investments.
In the developing world, only the Asian countries (especially China, Hong Kong, Taiwan, South Korea and Singapore) supply a significant share of world flows by the mid 1990s. Most of these investments took place within Asia and therefore declined drastically in the aftermath of the Asian crisis in 1997.
Yet, most of the difference between the advanced and developing countries is accounted for by sheer economic size, and the difference in outflows relative to GDP is perhaps less than might be expected. Figure 1.2 maps out the time series of FDI outflows relative to source country GDP (detailed shares are reported in Table 1.8). In the mid 1990s outward flows ranged from an average of 1.3% of GDP for the advanced countries to an average of 0.9% for the developing countries. The noticeable exception is the EU, which moved from a share of 1.3% in the early 1990s to 5.5% by 1997, thus raising the average share of the advanced countries to 2.9%. As argued above, much of the EU increase is driven by intra-EU investments. Although it declined in 2001, the FDI share of GDP remains higher for the EU than for the other regions of the world.
Fact 3. FDI goes predominantly to advanced countries, but the share of developing countries has been rising.
Turning to the destination of FDI, Table 1.3 shows that most goes to the advanced industrial countries. As will be discussed in Chapters 2, 3 and 6, this is not surprising, given that MNEs often seek large and growing markets. The advanced countries' share of world FDI inflows has fluctuated between 58 and 78%. Notice, however, that they account for a lower share than they do as sources of FDI. Among advanced countries, the picture is similar to that for outward investments, with the largest share concentrated in the EU, although the US is the largest individual country of destination.
As for developing countries, the share of worldwide FDI received by the developing and transition economies jumped from 24.6% in the period 1988-93, to more than 40% in the period 1992-97, before falling again to 21.33%, following the Asian crisis. These flows go overwhelmingly to Asia and Latin America, and China alone took around one-quarter of the total. Indeed, China accounts for much of the increase in flows to developing countries, with its share of world total FDI flows rising from 4.6% for the period 1988-93, to 9.2% for 1994-99.7 The share of world investment going to sub-Saharan Africa remains low, although has increased somewhat, from around 1.1% between 1988 and 1993 to around 1.5% between 1994 and 1997.
The increase of FDI flows to developing countries reflects the growing importance of FDI as a source of financing of these economies. Figure 1.3 reports FDI inflows relative to the GDP of the host economy (detailed shares can be found in Table 1.9). During the five years from 1988 to 1992, advanced countries received FDI inflows at an average annual rate of 0.90% of their GDP, while the average for developing and transition countries was 0.78% of their GDP. By 1993 to 1999, the inflow rate for the advanced countries had increased to 2.3% of GDP, while that of developing and transition countries as a whole had more than doubled to 3.4% of GDP, with Asia and Latin America taking the lion's share. This finding is not surprising: developing countries lack sufficient domestic resources and they need foreign capital to finance their investments. FDI accounts for a share of roughly 61% of the total financial flows going from OECD to developing countries in 2001 (OECD 2003).
Fact 4. Mergers and acquisitions account for the dominant share of FDI flows, especially to high-income countries.
The establishment of a foreign subsidiary may take place in one of two ways. Either as a 'greenfield investment', where a new plant is set up from scratch, or as a merger with or acquisition of an existing firm (M&A).As shown in Table 1.4, the majority of FDI takes place through M&A activity rather than through greenfield investments, and the share of M&A has increased steadily since the mid 1980s from 66.3 to 76.2% in the period 1998-2001. The share of M&A is much smaller in developing than in advanced countries: 35.7 against 89% in 1998-2001. This reflects the role of FDI in financing new investment projects in developing countries, as well as the scarcity of takeover targets in these countries.
Fact 5. Most FDI is concentrated in skill- and technology-intensive industries.
The most noticeable trend in the sectoral distribution of FDI stocks in the OECD countries is the increase in the share of services (from 41.2% in 1982-86 to 53.2% in 1998-2000) and the parallel decline of the primary sector (from 15.1 to 5.65%) (see Table 1.10). This trend reflects the overall shift of world GDP from the primary sector and agriculture towards services. The share of manufacturing in FDI, approximately 40%, is larger than the share of manufacturing in world GDP, which is approximately 30%.
If we look at the distribution of world FDI inward stocks in 2001 (Table 1.5), the share of services is 50.3%, that of manufacturing is 41.6% and the primary sector accounts for the remaining share of 8.1%. Within manufacturing, the largest shares are in chemicals, electrical and electronic equipment, transport equipment, etc. Even more revealing is the analysis of the share of employment of foreign subsidiaries in total national employment for the US, UK, Germany and France, the world's largest recipients of FDI (Table 1.6). This indicator relates the activities of MNEs to national activities by sector. Consistent with the sectoral distribution of FDI stocks, we see that foreign subsidiaries account for a larger share of employment in industries like chemicals, machinery and transportation equipment.
(Continues...)
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Table of Contents
| Preface | ix | |
| List of Contributors | xi | |
| 1 | Facts and Issues | 1 |
| 1.1 | Multinationals: What Are They and How Are They Measured? | 2 |
| 1.2 | The Facts: Empirical Overview | 3 |
| 1.3 | The Issues | 15 |
| 1.4 | Guide to the Book | 20 |
| Statistical Appendix | 20 | |
| 2 | The Multinational Enterprise: an Overview of Theory and Empirical Findings | 23 |
| 2.1 | National and International Production | 24 |
| 2.2 | Internalization and the Boundary of the Firm | 35 |
| 2.3 | Effects of FDI | 39 |
| 2.4 | Conclusions | 47 |
| 3 | Horizontal Foreign Direct Investment: Product Market Access | 49 |
| 3.1 | A Model | 49 |
| 3.2 | National versus Multinational Supply | 55 |
| 3.3 | Demand and Firm Behaviour | 64 |
| 3.4 | The Effect of FDI on the Host Economy | 66 |
| 3.5 | Extensions | 74 |
| 3.6 | Conclusions | 77 |
| Appendix 3.1 | Parameters Underlying Figures | 78 |
| Appendix 3.2 | Section 3.5.1 | 78 |
| 4 | Vertical Foreign Direct Investment: Input Costs and Factor Prices | 79 |
| 4.1 | Cost-Minimizing Locations | 80 |
| 4.2 | Fragmentation and Factor Prices | 84 |
| 4.3 | Fragmentation in General Equilibrium | 89 |
| 4.4 | Factor Price Convergence? | 92 |
| 4.5 | Conclusions | 96 |
| Appendix 4.1 | Parameter Values in Figures 4.1 and 4.2 | 97 |
| Appendix 4.2 | Parameter Values in Figure 4.6 | 97 |
| Appendix 4.3 | Components Labour Intensive | 97 |
| 5 | Multinationals: the Firm and the Market | 99 |
| 5.1 | An Analytical Framework | 100 |
| 5.2 | Hold-up | 102 |
| 5.3 | Hold-up in Industry Equilibrium | 109 |
| 5.4 | Dissipation of Intangible Assets | 114 |
| 5.5 | Agency Costs | 120 |
| 5.6 | Conclusions | 124 |
| Appendix | 126 | |
| 6 | Determinants of FDI: the Evidence | 127 |
| 6.1 | A General Framework | 127 |
| 6.2 | Industry and Firm Determinants of FDI | 131 |
| 6.3 | Country Determinants of FDI | 134 |
| 6.4 | The Relative Importance of Horizontal versus Vertical FDI | 141 |
| 6.5 | Other Factors Affecting the Location of FDI | 144 |
| 6.6 | Concluding Remarks | 150 |
| 7 | Host Country Effects: Conceptual Framework and the Evidence | 151 |
| 7.1 | Aggregate Effects of FDI on Economic Growth: Cross-Country Evidence | 152 |
| 7.2 | Firm Effects: Conceptual Framework | 153 |
| 7.3 | Productivity | 155 |
| 7.4 | Factor Markets | 162 |
| 7.5 | Employment Volatility | 166 |
| 7.6 | Multinationals and Local Firms | 172 |
| 7.7 | Conclusions | 182 |
| Appendix | 183 | |
| 8 | FDI and the Host Economy: a Case Study of Ireland | 187 |
| 8.1 | Ireland's Success in Attracting FDI | 188 |
| 8.2 | Characteristics of FDI Inflows to Ireland | 200 |
| 8.3 | FDI and the Development of the Irish Economy | 207 |
| 8.4 | Concluding Comments | 214 |
| 9 | Home Country Effects of Foreign Direct Investment | 217 |
| 9.1 | What are the Effects? Setting the Issues | 218 |
| 9.2 | Foreign Production and Domestic Activities: Substitutes or Complements? | 220 |
| 9.3 | Skill Intensity | 227 |
| 9.4 | Technological Sourcing | 230 |
| 9.5 | Effects on Productivity: Comparing MNEs and National Firms | 231 |
| 9.6 | Conclusions | 238 |
| Appendix | Derivation of Empirically Testable Demands for Relatively Skilled Labour | 239 |
| 10 | Policy Implications and Effects | 241 |
| 10.1 | The Impact of FDI on Economic Policy | 242 |
| 10.2 | FDI Incentives | 251 |
| 10.3 | Policy Competition and Policy Coordination | 263 |
| 10.4 | International Governance of Investment Regimes | 268 |
| 10.5 | Concluding Remarks | 275 |
| 11 | Conclusions | 277 |
| Appendix A | Statistical Definitions and Databases on Foreign Direct Investment and the Activities of Multinationals | 283 |
| A.1 | International Statistics on Foreign Direct Investment | 283 |
| A.2 | Financial and Operating Data on Multinational Firms | 288 |
| Glossary | 299 | |
| References | 303 | |
| Index | 323 |
What People are Saying About This
This book presents a comprehensive analysis of the economics of multinational enterprises. It thoroughly assesses what they are, why they exist, and what their economic impact on home and host countries is. It is a well-rounded analysis. Representing a rare attempt to bring together several important strands in the literature on the economics of multinationals, combining theory and rigorous econometric work, it will be of wide interest not only to researchers of these issues but also to students, policy makers, and interested general readers.
— Holger Gorg, University of Nottingham
This fine book contributes substantially to the large and rapidly growing literature on multinational corporations. It goes beyond other recent work in providing a much broader review of the theory, empirical aspects, and the impact on home and host nations. Its integration of theory and evidence is particularly nice; and its discussion of policy is also very welcome, since this is often overlooked in the serious literature.
— Richard E. Baldwin, Graduate Institute of International Studies, Geneva, coauthor of "Economic Geography and Public Policy", managing editor of the journal "Economic Policy"
This work is a valuable addition to the literature and will be of tremendous service to graduate students, scholars, and policy makers interested in multinational enterprises and foreign direct investment.
— Gordon Hanson, University of California, San Diego
"This work is a valuable addition to the literature and will be of tremendous service to graduate students, scholars, and policy makers interested in multinational enterprises and foreign direct investment."—Gordon Hanson, University of California, San Diego"This fine book contributes substantially to the large and rapidly growing literature on multinational corporations. It goes beyond other recent work in providing a much broader review of the theory, empirical aspects, and the impact on home and host nations. Its integration of theory and evidence is particularly nice; and its discussion of policy is also very welcome, since this is often overlooked in the serious literature."—Richard E. Baldwin, Graduate Institute of International Studies, Geneva, coauthor of Economic Geography and Public Policy, managing editor of the journal Economic Policy"This book presents a comprehensive analysis of the economics of multinational enterprises. It thoroughly assesses what they are, why they exist, and what their economic impact on home and host countries is. It is a well-rounded analysis. Representing a rare attempt to bring together several important strands in the literature on the economics of multinationals, combining theory and rigorous econometric work, it will be of wide interest not only to researchers of these issues but also to students, policy makers, and interested general readers."—Holger Görg, University of Nottingham
Recipe
"This work is a valuable addition to the literature and will be of tremendous service to graduate students, scholars, and policy makers interested in multinational enterprises and foreign direct investment."—Gordon Hanson, University of California, San Diego
"This fine book contributes substantially to the large and rapidly growing literature on multinational corporations. It goes beyond other recent work in providing a much broader review of the theory, empirical aspects, and the impact on home and host nations. Its integration of theory and evidence is particularly nice; and its discussion of policy is also very welcome, since this is often overlooked in the serious literature."—Richard E. Baldwin, Graduate Institute of International Studies, Geneva, coauthor of Economic Geography and Public Policy, managing editor of the journal Economic Policy
"This book presents a comprehensive analysis of the economics of multinational enterprises. It thoroughly assesses what they are, why they exist, and what their economic impact on home and host countries is. It is a well-rounded analysis. Representing a rare attempt to bring together several important strands in the literature on the economics of multinationals, combining theory and rigorous econometric work, it will be of wide interest not only to researchers of these issues but also to students, policy makers, and interested general readers."—Holger Görg, University of Nottingham