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Multinational firms: Home-country effects

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

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Multinational firms: Home-country effects

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  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

  2. Commodity and Geographical Composition of UK TradePer cent Source: P Krugman, Brookings Paper on Economic Activity 1:1995

  3. Supertrading Economies: Source: P Krugman, Brookings Paper on Economic Activity 1:1995

  4. Trends in world FDI inflow, exporte and world GDP

  5. Ip-effects of FDI: • Home country effects • MNEs are footloose: No home country effects • 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

  6. 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”

  7. 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

  8. Causal effect of MNEs Average productivity MNE Switching firm Without switch National firms Time t

  9. Home country effects on employment and production

  10. 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

  11. Labour demand function for affiliate I of MNE k: • lnLlk =α₀+ α₁lnwi + α₂lnwdlk + α₃lnwslk + α₄lnDi + α₅∑Dj + elk

  12. 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

  13. 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.

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