FDI and the Multinational Corporation:
New Theories and
Evidence
Training and Mobility of
Researchers Network
Workshops and Conferences
The Network's
second Workshop...
The Network’s second workshop was held in
Vouliagmeni, Greece, 17/18 September 1999. One of the key issues discussed at
the Workshop was how FDI works as a channel for R&D spillovers and the way
multinational enterprises acquire knowledge. Other issues discussed concerned
questions relating to the ownership structure of FDI, its impact on market
value, and the optimal timing of investment.
The
role of inward and outward FDI as channels for international R&D spillovers
was the issue analysed in the first paper, ‘Does FDI Work as a Channel for
R&D Spillovers? Evidence Based on Swedish Data’, presented by Henrik
Braconier (IUI), Karolina Ekholm (IUI, LSE and CEPR) and Karen-Helene Midelfart
Knarvik (Norwegian School of Economics and Business Administration, Bergen, and
CEPR). Using firm and industry level data for Sweden the paper examined the
effect on productivity of the Swedish parts of multinational firms (MNFs), so as
to gain information about the nature of any spillover effects present. The
authors emphasized that spillovers in the case of outward FDI should be observed
mainly at the firm level, whereas for inward FDI it was argued that spillover
effects could be expected to appear primarily at the industry level. The
approach taken to analyze spillover effects, using firm activity data rather
than macroeconomic data, enabled the authors to directly measure the extent of
the MNFs’ foreign involvement. The Swedish MNFs do not transmit through FDI
R&D spillovers. In these firms the only variables affecting the labour
productivity are their own R&D spending and their capital-labour ratio.
Moreover, R&D is more important for high technology firms, whereas capital
intensity is more important for low technology industries. However, outward FDI
is important for productivity for Swedish manufacturing industries. Total Factor
Productivity is higher in industries with high proportions of MNFs, although
inward FDI is totally insignificant for productivity.
The
innovation process of the firm is based mainly on the acquisition of new
knowledge. Until recently this process has been framed as a search for
technology transfers by multinational firms to the host country. The innovation
of the paper presented by Reinhilde Veugelers (Katholieke Universitet Leuven and
CEPR) and co-authored by Bruno Cassiman (UPF), entitled ‘Importance of
International Linkages for Local Know-How Flows: Some Econometric Evidence’,
was that it analysed the different channels through which the host economy may
benefit from these knowledge transfers. Using Belgian data, the authors examined
the technology flows occurring through firms that are internationally active
and/or are accessing internationally available know-how. Moreover, they
attempted to assess the impact of these flows on transfers to the host
economies. Cooperation with local partners and access to the international
technology market emerge as the most important channels for the host economy to
benefit from technology transfers. In addition, a firm’s size and its
innovation profile are also important variables to be taken into consideration.
The results suggest that Belgium is benefiting from being an open economy
because of the technology transfers to the local economy from firms that are
sourcing internationally, even if these firms have no international activities
through exports or foreign affiliates. Further research can be pursued on other
formal and informal channels in addition to the ones analysed in the paper, for
example on the intensity of technology transfers, and on a comparison of the
results provided by this paper with other EC countries.
Anna
Falzoni (CSLA, Universita di Bergamo and CESPRI) presented ‘Multinational
Corporations, Wages and Employment: Do Adjustment Costs Matter?’, which was
co-authored by Giovanni Bruno (Universita Bocconi). The paper investigated the
extent to which the expansion of international production by US multinationals
reduces labour both at home and in other foreign locations. Previous literature
on this subject maintained, along with firms pursuing cost minimizing behaviour,
perfectly variable inputs. This can be, according to the authors, a strong
restriction that may seriously bias the short-run cross-price elasticity
estimates. The paper suggests an alternative approach to the problem that
explicitly allows for the presence of adjustment costs. The model used is a
dynamic one, which is applied to estimate short-run and long-run cross-price
elasticities between home and foreign country labour. The results suggest that
there is evidence of significant adjustment costs for employment in Latin
American and Canadian affiliates. Furthermore, due to the presence of slow input
adjustments, the complementarity/substitutability relationship between
employment in different international locations is reversed from the short run
to the long run.
Transaction
cost theory together with bargaining power considerations can lead to the
explanation of an issue not usually addressed in the FDI literature – that of
the ownership structure that MNFs select when investing abroad. This subject was
presented by Helen Louri (Athens University of Economics and Business and CEPR)
and Natàlia Barbosa (School of Economics and Management, University of Minho)
in their paper ‘Determinants of Ownership Structure: A Comparative Analysis of
MNF’s Preferences in Greece and Portugal’. The ownership structure can
affect the profitability of the invested assets and the general performance of
the host economy through spillovers. Two peripheral EC countries provided the
evidence for this analysis. Greece and Portugal, despite their similarities,
display totally different ownership structures: full ownership is preferred when
investing in Portugal and minority ownership when investing in Greece. In
Portugal, size, labour costs and R&D intensity affect the foreign ownership
while industry profitability and growth are insignificant in the multinominal
logit model used to estimate the determinants of ownership structure. In Greece,
however, profitability, growth and concentration, and the domestic market
characteristics significantly influence the ownership structure. R&D
intensity is not significant and MNFs are pushed to minority positions by the
higher bargaining power of Greek firms. The only factor affecting the two
similarly is capital intensity, which forces the MNF into minority ownership.
This issue offers many opportunities for future research on the entry mode and
the ownership structure, on the differences between economic performance due to
ownership preferences, and on the comparisons of FDI between different sectors
of the economy.
A
second paper that focused on a European peripheral economy was that presented by
Marina Papanastassiou, Frangiskos Filippaios and Antonis Demos (all Athens
University of Economics and Business), entitled ‘Measuring the effect of
outward FDI Announcements on the Market Price of the Firm: Empirical evidence
for Greek FDI’. The purpose of the paper was twofold: First, it attempted to
estimate the possible impact of FDI announcements on the market value of firms
participating in the Athens Stock Exchange. The use of CAPM, for risk-adjusted
returns, shows a strong relationship between an FDI announcement and the
variation in share prices. Second, the paper seeks to explain through the
international investment framework the size and direction of returns. This
target is attained through a cross-sectional analysis with abnormal returns,
acquired from the CAPM, tested against a set of dummy variables suggested from
different theoretical strands of the international investment framework. Despite
the limitations of this analysis, namely the small size of the sample and the
fact that Athens Stock Exchange is considered as an emerging market, the results
indicate that the returns of such an investment decision are influenced equally
by a multiple set of country, firm and industry variables. The authors note that
a single theoretical framework does not fully explain FDI at a firm level. What
makes this approach interesting is that it deals with investors coming from a
small EU economy that is becoming a significant economic partner of neighbouring
emerging markets.
Chiara
Fumagalli (Universita Pompeu Fabra) presented ‘On the Welfare Effects of
Competition for Foreign Direct Investments’. The paper uses a technical model
based on game theory that reveals the welfare effects of subsidy competition for
FDI. The model is constructed with two regions, one being more advanced than the
other, which compete against each other for selection by a MNF for investment.
Allowing for subsidies offered from these two countries, the less advanced one
never loses while the more advanced never gains. Moreover, the subsidy
competition increases total welfare if the less advanced region obtains the
investment. In such a case, subsidy competition leads the investment to where it
would otherwise not have gone, namely in the region where it generates the
largest welfare gain, so large as to outweigh the costs in terms of rents
transferred to the MNF and of losses to the other country. It is argued that the
existence of an institution concerned with total welfare can make the two
countries collude to transfer the MNF the lowest subsidy compatible with the aim
of leading the project to where it is most valued. Although the analysis is
based on the implicit assumption that the MNF has less bargaining power than the
competing countries, and on a static model, the results produced can offer
propositions on regulation issues of subsidy competition.
Enrico
Pennings and Leo Sleuwaegen (both Katholieke Universiteit Leuven and Erasmus
Universiteit Rotterdam) presented ‘The Choice and Timing of Foreign Market
Entry under Uncertainty’. The authors used real option pricing theory to
construct a model for the choice and timing of foreign market entry under
uncertainty. They assumed that every entrant to a foreign market has some fixed
costs and the profitability of the project becomes more and more uncertain as
the time horizon expands. The paper, starting from the full commitment case
under FDI, moves to more flexible entry modes of joint venture formation,
licensing and finally exporting. It then compares these alternative methods of
entry and after taking into account exogenous factors such as taxation,
regulatory regimes and bargaining power, it draws a number of conclusions about
the best method of entry for a specific company in a specific market.
Strategic
interaction between firms and their decision to invest or to export among
different countries was the purpose of the paper presented by Stephen Pavelin
(University College Dublin), entitled ‘Strategic Interaction and the Domestic
Market Effect’. Multinationals, according to the author, can not only
influence the investment behaviour of their rivals but also their choice of
exporting or investing abroad. The premise for this is that FDIs are
strategically motivated. A firm has a greater incentive to expand abroad at a
certain time because it can deter other firms from investing. In this case,
being a MNF brings higher profits in the domestic market than does exporting.
Hence, a firm may choose to become multinational even if an export strategy
would maximize foreign market profits. The model presented clearly illustrates
the potential for interdependencies and strategic motives and applies these with
great success to the real world.
Whether
the European Union, or more precisely European integration, influences the
industrial pattern in Europe is an issue that often focuses on whether
peripheral countries specialize in labour-intensive sectors such as tourism and
services while the manufacturing production concentrates in the centre of
Europe. The model used by Helen Jakobsson (Research Institute of Industrial
Economics (IUI), Stockholm) in ‘Economic Integration and Industrial Location:
An Empirical Study of the European manufacturing Sector’ is similar to that
constructed by Krugman and Venables (1990). The main purpose of the model is to
study the effects of decreasing trade costs on production in two countries that
differ in size. It predicts that as long as trade costs are high, market access
considerations will cause firms to locate in the large countries. The
econometric results show that membership of the EC influences peripheral
countries in different ways. Also, industries with large economies of scale tend
to concentrate in central countries, while a large degree of differentiation
decreases production in central countries. The study finds evidence of a
decrease in peripheral manufacturing production induced by events taking place
during 1987 and onwards.
The
paper presented by Henrik Braconier (IUI, Stockholm) and Rikard Forslid
(Stockholm University, NHH and CEPR) entitled ‘Multinationals, Endogenous
Growth and Technological Spillovers: Theory and Evidence’, and co-authored by
Richard Baldwin, covers an issue which has previously had little attention in
the literature. The main purpose of the paper was to associate FDI with the
degree of openness in an economy and its growth rate. The authors present a
theoretical growth model where MNFs directly affect the endogenous growth rate
via technological spillovers. The appeal of the paper lies in the fact that
despite other endogenous growth models with MNF presence, such as the Grossman-Helpman
model which assumed away the knowledge-spillover aspect of FDI, this work takes
the knowledge-spillover aspect into account. Using industry level data from
seven OECD countries the authors present econometric evidence that supports the
model. They found industry level scale effects and international knowledge
spillovers that are unrelated to FDI and also bilateral spillovers that are
boosted by bilateral FDI. Braconier and Forslid concluded by suggesting that
more theoretical and empirical work needs to be done on the growth effects of
MNFs, as their results are far from conclusive.
The Workshop left many issues open for further research: almost every speaker concluded with this remark. Multinational Corporations with their increasing role in economic activity offer a wide field with many interesting questions still to be answered, some of which will be addressed in future meetings of this Network.
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