FDI and the Multinational Corporation:
New Theories and
Evidence
Training and Mobility of
Researchers Network
Workshops and Conferences
European Research
Workshop in International Trade
The
annual European Research Workshop in International Trade (ERWIT) was held
in Bergen on 24/27 June 1999. The workshop, under the auspices of CEPR and
The Norwegian School of Economics and Business, was organised by Richard
E. Baldwin
(Graduate Institute of International Studies, Geneva, and CEPR), Jan
I. Haaland (Norwegian School of Economics and Business Administration,
Bergen, and CEPR) and Karen-Helene
Midelfart Knarvik (Norwegian School of Economics and Business
Administration, Bergen, and CEPR). A total of 17 papers were presented.
James
R. Markusen
(University of Colorado, Boulder, NBER and CEPR) presented
‘Discriminating Among Alternative Theories of the Multinational
Enterprise’, a joint work with Keith E. Maskus. The paper tested three
different models of multi-plant firms: the “vertical” model in which
firms geographically separate activities by stages of production; the
‘horizontal’ model in which firms duplicate roughly the same
activities in many countries; and the ‘knowledge-capital’ model, which
is a hybrid of the above models that allows firms the option of multiple
plants or the geographical separation of a headquarters and a single
plant. The empirical tests gave strong support to the horizontal model,
and rejected the vertical model. The results with respect to the
knowledge-capital model were less conclusive. Victor
D. Norman (Norwegian School of Economics and Business Administration,
and CEPR) raised the issue of multiple equilibria, and noted that this
might cause problems in the econometric analysis.
Karolina
Ekholm
(University of Lund, Stockholm, IUI, and CEPR) motivated her presentation
by asking what effect FDI may have on employment in the home country. Her
paper ‘Swedish Multinationals and Competition from Low-Wage
Countries’, co-authored by Henrik Braconier, uses data on Swedish
multinationals to estimate cross elasticities of labour demand in
different locations. Ekholm found evidence of a substitutionary
relationship between employment in the Swedish parts of the firms and
employment in other high-income locations, but no such substitution from
employment in low-income locations. J.
Peter Neary (University
College Dublin and CEPR) commented on the convergence in wages in the
Swedish plant and high-income foreign plant and the rise in output of the
foreign firm. To him, this suggested that there was a demand effect at
work. Victor Norman responded
that this was not necessarily true, since moving the headquarters from
Sweden to, say, Brussels would reproduce exactly the same picture of
convergence presented in the paper.
Michael
Gasiorek
(University of Sussex, GREQAM) presented ‘Trade Liberalization and
Multiproduct Multinationals’. The main aim of the paper was to compare
the effects of trade liberalization in partial and general equilibrium
type models. Partial equilibrium models are typically used in the study of
multinationals, whereas general equilibrium models are the norm in
economic geography. One of the results of the paper was that larger size
differences between countries may induce firms in the smaller country to
become multinationals. Another result was that lower trade costs may
increase FDI, the reason being that lower trade costs would allow the
foreign plant to profitably export a new variety back to its home country.
James Markusen and Victor Norman commented that tying together the
firms’ locational choice and product space choice was somewhat
problematic, and that a revision of the paper may wish to separate the two
choices.
Rachel
Griffith
(Institute for Fiscal Studies and CEPR) motivated her presentation by
asking whether foreign plants are more productive than domestic firms. Her
paper, ‘Productivity and Foreign Ownership in the UK Car Industry’,
concluded that foreign car producers are no more productive than their UK
counterparts. Foreign firms tend to have higher output and value-added per
worker, but these differences can be explained by different levels of
factor usage: foreign firms invest more in physical capital and use more
intermediate goods. Gordon H.
Hanson (University of Michigan) and Victor Norman noted that the lack
of observed differences in productivity could be consistent with a model
of spillovers and catching up: foreign car-producers may at an initial
stage have been more productive than domestic firms, but over time the
domestic firms have caught up.
Giorgio
Barba-Navaretti
(Ld’A, Università Bocconi, Milano, and Università di Ancona and
Fondazione Eni Enrico Mattei) presented ‘Import of Technology and Export
Performance’ written with Marzio Galeotti and Andrea Mattozzi. The paper
investigated the link between the import of technologies from the EU and
the export performance of the Central and Eastern European Countries (CEEC),
Turkey and Southern Mediterranean countries. Focusing on the textile
industry, they found that while Turkey has been upgrading its textile
technology, the opposite seems to have happened in CEEC. The paper
nonetheless finds indications that the quality of the exported textile
products from CEEC has increased. The authors explain this apparent
paradox by arguing that foreign direct investment from the EU has been
particularly important in improving CEEC’s export quality. Diego
Puga (University of Toronto and CEPR), Victor Norman, and Gilles
Duranton (London School of Economics and CEPR) questioned the
robustness of the technological indices. Riccardo
Faini (Università di Brescia, IMF and CEPR) pointed out that a
possible explanation might be that the highest quality textile products
are hand-made and do not require advanced technologies.
Diego
Puga
(University of Toronto and CEPR) presented ‘Nursery Cities: Urban
Diversity, Innovation, and the Life Cycle of Products’, which was
co-authored by Gilles Duranton
(London School of Economics and CEPR). The paper provides a theoretical
framework in which to compare the relative advantages and disadvantages of
urban diversity and specialization. The model predicts that new plants
will be created in diverse locations in order to learn from other firms
and thereby stimulate innovation. When an innovation has been made, plants
relocate to specialized cities, which offer lower production costs, in
order to start mass production. Richard Baldwin noted that investment in
innovations introduces a dynamic dimension to the model that should also
be reflected on the demand side by explicit intertemporal utility
maximization. The authors agreed that this was something that needed to be
worked out more carefully in a future version of the paper.
Rikard
Forslid
(University of Lund and CEPR) presented ‘A U-shaped Europe? A Simulation
Study of Industrial Location’, a CGE (Computable General Equilibrium)
study of the effects of European integration on the location of industrial
production. The paper, co-authored by Jan
I. Haaland (Norwegian School of Economics and Business Administration,
Bergen, and CEPR) and Karen-Helene
Midelfart Knarvik (Norwegian School of Economics and Business
Administration, Bergen, and CEPR), shows that for industries where scale
economies and input-output linkages are strong, there are traces of a
U-shaped relationship between economic integration and industrial
concentration. Joseph Francois
(Erasmus Universiteit Rotterdam and CEPR) noted that it would be
interesting to see the results in a purely ‘constant returns to scale’
version of the model. This would allow the results to be compared, in
order see how much of the outcome is due to increasing returns to scale
and linkage-effects, and how much should be attributed to comparative
advantage.
Gianmarco
I. P. Ottaviano
(Università di Bologna, EUI, Firenze, Uniersité Catholique de Louvain
and CEPR) presented ‘Integration, Agglomeration and the Political
Economics of Factor Mobility’, written with Jacques-Francois Thisse. The
paper deals with the issue of optimality of agglomeration in a two-region
economy with skilled/mobile and unskilled/immobile workers. When transport
costs are high or low, the market outcome is Pareto efficient. For
intermediate values of transport costs, however, it yields agglomeration
when dispersion is socially desirable. Competitive lobbying on factor
mobility by the two groups of workers sustains the second best outcome. Steve
Redding (London School of Economics and CEPR) noted that it would be
interesting to endogenize innovation and thereby the number of firms in
the model, thus modeling it as a function of profits. Richard Baldwin
asked what determined the gap between the critical values of trade costs. Philippe
Martin (CERAS-EPNC, Paris, Graduate Institute of International
Studies, Geneva, and CEPR) asked what other policy measures could bring
the economy to a first best outcome. Ottaviano acknowledged that these
were all interesting and relevant comments that he would take into
consideration when revising the paper.
Richard
E. Baldwin
(Graduate Institute of International Studies, Geneva, and CEPR) presented
‘European Integration and Tax Harmonization’, co-authored with Paul
Krugman. The aim of the paper is to challenge the view common in the tax
competition literature that economic integration necessarily leads to a
‘race to the bottom’. Baldwin claimed that the empirical evidence from
Europe did not lend much support to such a hypothesis: on the contrary,
average tax rates in Europe have increased since the 1960s, and there are
no clear signs of harmonization of tax rates between countries. One of the
main results of the model is that tax competition is fierce for
intermediate trade costs, and more limited for both high and low trade
costs. Rachel Griffith questioned the stylized facts presented in the
paper, and stated that tax rates in Europe had in fact gone down over
time, particularly tax rates on mobile capital. Riccardo Faini suggested
that it would be helpful to separate tax rates on mobile and immobile
capital, since the tax competition literature predicts an increase in
taxes on immobile capital and a reduction in taxes on mobile capital.
James Markusen raised the issue of credibility of policy; whether or not
it was possible for the government to commit credibly to a policy of low
taxation. Baldwin replied that he did not consider the issue of
credibility to be problematic in the present context.
Dermot
Leahy
(University College Dublin and CEPR) presented ‘Rivalry in Uncertain
Export Markets: Commitment Versus Flexibility’, written with
Gerda Dewit (University of Glasgow). The purpose of the paper was to
examine optimal trade policy in a two-period setting when the timing of
competitors’ investment decision is endogenous and demand is uncertain.
This demand uncertainty, which is resolved in period two, gives rise to a
trade-off between strategic commitment and flexibility in the firms’
investment decision. When the government can commit to an export subsidy
it may choose to over- or under-subsidize to deter private-sector capital
commitment. It is shown that when the government cannot commit to its
trade policy the value of commitment to the unsubsidized foreign firm is
greater than that to the subsidized home firms. Jan Haaland asked whether
the results of the paper would change if both the home and the foreign
government participated in a strategic trade policy game. Leahy replied
that the results would merely be strengthened if there were two active
governments. With reference to existing literature on strategic trade
policy, Richard Baldwin
argued that the results obtained might crucially depend on the chosen
form of the demand functions.
Henrik
Horn
(World Trade Organization, Geneva, and CEPR) presented ‘Equity in the
WTO Dispute Settlement System: Participation’, written with Petros C
Mavroidis and Håkan Nordström. The paper seeks to shed light on the
question of why large countries dominate the WTO Dispute Settlement (DS)
system. The fundamental question, according to
Horn, is whether the dominance is due to the simple fact that rich
countries are likely to encounter more objectionable measures than other
countries, or whether the legal activities reflect some form of
exploitation of ‘power’. Horn concludes that the bias is driven by
structural rather than power-based factors. However, he also notes that in
the presence of high litigation costs, poorer developing countries may
effectively be excluded from bringing their trade grievances to the WTO.
With reference to the neoclassical optimal tariff hypothesis, Victor
Norman argued that we should expect large countries to have greater
benefits of import restrictions than small countries. Hence we should not
be surprised by an overrepresentation of large countries in the DS. Dermot
Leahy noted that the bias may reflect the consideration of a dynamic
process, and that the WTO is a relatively young organization.
It may therefore be useful to examine the extent of the bias over
time as the juridical system in WTO has started with the biggest cases, as
large countries are – presumably – relatively more important. In this
case the bias may be reduced over time.
In
the early 1990s Israel experienced a large and concentrated surge of
immigration from the former Soviet Union. Despite the size of the
immigration shock, existing research had found only mixed evidence that
this had exerted downward pressure on the wages of Israeli workers. In the
paper ‘Rybczynski Effects and Adjustment to Immigration in Israel’,
which was co-authored with Neil Gandal and Matthew J Slaughter, Gordon
H. Hansen (University of Michigan) examined whether Israel absorbed
the Russian immigrant inflow by altering the mix of goods that the country
produces, as opposed to altering wages or production technology. The paper
found that the first explanation gives a far better fit to the data, and
that the theoretical rationalization for this may be found in the
Rybczynski theorem. Victor Norman pointed out that the former Soviet Union
was presumably overmarketing the education level of its labour force. This
may create empirical problems when the adjustment of the Israeli labour
market to the Russian immigration shock is examined, such that the actual
education level of the immigrants may be hard to determine. However,
Hansen did not see this as a major problem.
Anders
N. Hoffman
(University of Copenhagen and Ministry of Business and Industry, Denmark)
raised two important questions in his paper ‘Education, Trade and
Investment Liberalizations: How do they interact?’. First, how does
liberalization of investment affect the incentive to get an education? And
second, can developing regions use education subsidies to attract FDI and
obtain a sustainably higher number of skilled workers? The paper
demonstrated how investment liberalization can magnify the effects of an
education subsidy in a developing country and lock the economy in a
higher-income equilibrium with more skilled workers. Gordon H. Hanson
referred to empirical evidence showing that MNCs typically employ high
skilled workers, which would support the model. Kjetil
Bjorvatn (The Norwegian School of Economics and Business
Administration, Bergen, and The Center for Research in Organization and
Management) argued that more targeted policy measures, such as FDI-subsidies,
could probably move the economy to a higher-income equilibrium more
efficiently. Hoffman agreed that this was probably true.
Philippe
Martin
(CERAS-ENPC, Paris, Graduate Institute of International Studies, Geneva,
and CEPR) presented ‘Financial Super-Markets: Size Matters for Asset
Trade’, co-authored by Hélène Rey. A multi-country model of asset
markets was developed, in which the number of financial assets is
endogenously determined. There
are international transaction costs, and assets are imperfect substitutes.
This implied that the asset returns and number of assets are higher in the
larger markets. Reducing
transaction costs between markets led to the development of more projects,
as the price of assets is increased (through the demand effect); thus the
possibility of risk diversification is also increased. Welfare in the
integrating countries increases, whereas the welfare effect on outside
countries is ambiguous. Richard Baldwin wondered about the possibility of
multiple equilibria, to which Martin responded that this was a possible
outcome. James Markusen
thought that the question of where to issue shares would be an interesting
extension of the paper. With higher fixed issuing costs in the foreign
market than in the home market, there is a trade-off between the higher
fixed costs and the higher price of assets in large markets.
Ian
Wooton
(University of Glasgow and CEPR) presented ‘Trade in Transport Services:
The Role of Competition’, co-authored by Joseph
Francois (Tinbergen Institute and CEPR). The paper was concerned with
the effect of an imperfectly competitive intermediate sector on both trade
flows and the allocation of the gains from trade. As firms in the
intermediate sector exploit their market power, the sector becomes less
competitive and the quantity traded is reduced. The allocation of the
gains from trade liberalisation is also affected, as the intermediate
sector captures some of the gains from trade. Richard Baldwin pointed out
that the results were sensitive to the functional forms of demand and
supply, and James Markusen added that the chosen form of trade
liberalisation is crucial for the results to hold. Using quotas instead of
tariffs would reverse the results. Several
participants were concerned with the substitutability between the maritime
sector – which in the paper is used to illustrate the intermediate
sector – and other sectors.
Stephen
Redding
(London School of Economics and CEPR) presented ‘The Dynamics of
International Specialisation’. Using data on twenty industries in seven
OECD countries, he studies the evolution of patterns of trade over time,
and the role of factor endowments in explaining the observed changes. The
analysis revealed that there are differences across countries in the
pattern of international specialisation, both at a point in time and in
terms of changes over time. Factor endowments were shown to have a
restraining effect on changes in the pattern of international
specialisation. Victor Norman wondered what the results would have been
had factor endowments explained all of the observed specialisation. Rachel
Griffith pointed out that, if so, only white noise would remain.
Simon J. Evenett (Rutgers University, The Brooking Institute and World Bank) presented ‘Have Changes in Technology Increased Trade by OECD Nations?’, co-authored by Simeon D. Djankov and Bernard Yeung. Evenett looked at how and why the pattern of trade changes as the differences in production techniques between countries becomes narrower. Relative productivity differences have become smaller. These changes are part of an international supply side shift that has reduced the specialisation of production and decreased trade flows. The increase in imports due to reduced tariffs by themselves exceeds the observed increase in imports. Richard Baldwin argued that the high elasticity of import shares with respect to tariffs, which form the basis of the results, could be due to the exclusion of non-tariff barriers in the data set. Evenett agreed that this could be important, and that it should be explored in an extension of this analysis.
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