Foreign ownership and productivity: new evidence from the service sector and the R&D lab

This paper examines the relationship between foreign ownership and productivity, paying particular attention to two issues neglected in the existing literature Ö the role of multinationals in service sectors and the importance of R&D activity conducted by foreign multinationals. We review existing theoretical and empirical work, which largely focuses on manufacturing, before presenting new evidence using establishmentlevel data on production, service and R&D activity for the United Kingdom. We find that multinationals play an important role in service sectors and that entry of foreign multinationals by takeover is more prevalent than greenfield investment. We find that British multinationals have lower levels of labour productivity than foreign multinationals, but the difference is less stark in the service sector than in the production sector, and that British multinationals have lower levels of investment and intermediate use per employee. We also find that foreign-owned multinationals conduct a substantial amount of UK R&D. We discuss the implications of these and other findings for the policy debate on incentives to influence multinational firms' location choices.Foreign Investment, Productivity, Knowledge Spillovers

Volatility, employment and the patterns of FDI in emerging markets

The purpose of this paper is to explore the implications of the deepening presence of multinationals in emerging markets on the cost of macroeconomic volatility there. We find that macroeconomic volatility has a potentially large impact on employment and investment decisions of multinationals producing intermediate inputs in developing countries. This is the case even for risk neutral multinationals, as their profit function is non-linear due to price and productivity effects. For industries with costly capacity, the multinationals would tend to invest in the more stable emerging markets. Higher volatility of productivity shocks in an emerging market producing the intermediate inputs reduces the multinationals' expected profits. High enough instability in such a market would induce the multinationals to diversify intermediate inputs production, investing in several emerging markets. This effect is stronger in lower margin industries. We identify circumstances where this diversification is costly to emerging markets. Such a diversification increases the responsiveness of the multinationals' employment in each country to productivity shocks, channeling the average employment from the more to the less volatile location, and reducing the multinationals' total expected employment in emerging markets.

Foreign Ownership and Productivity: New Evidence from the Service Sector and the R&D Lab

This paper examines the relationship between foreign ownership and productivity, paying particular attention totwo issues neglected in the existing literature - the role of multinationals in service sectors and the importanceof R&D activity conducted by foreign multinationals. We review existing theoretical and empirical work, whichlargely focuses on manufacturing, before presenting new evidence using establishment-level data on production,service and R&D activity for the United Kingdom. We find that multinationals play an important role in servicesectors and that entry of foreign multinationals by takeover is more prevalent than greenfield investment. Wefind that British multinationals have lower levels of labour productivity than foreign multinationals, but thedifference is less stark in the service sector than in the production sector, and that British multinationals havelower levels of investment and intermediate use per employee. We also find that foreign-owned multinationalsconduct a substantial amount of UK R&D. We discuss the implications of these and other findings for the policydebate on incentives to influence multinational firms' location choices.Foreign Investment, Productivity, Knowledge Spillovers

On the Globalness of Emerging Multinationals: A Study of Indian MNEs

Contrary to contentions in prior literature that emerging multinationals are only regional players, the evidence on the globalness of Indian firms presented in this study suggests that a number of emerging multinationals are global firms. Their strategies are targeted at both the developed and developing markets with the intensity of their overseas operations comparable or far greater than those of the world’s leading multinationals. Many of these firms have greater sales or capital assets outside their home base. Indeed, many of them qualify as global firms as they have a significant presence (over 10 percent of sales) in each of the four regions (triad and the non-triad developing regions) and no one region accounts for more than 50 per cent of their global sales. The study of the transformation of emerging multinationals into non-home region players provides considerable potential for better understanding management theories and practices.Emerging Multinationals, Globalness, Indian Firms

Exports, International Investment, and Plant Performance: Evidence from a Non-Parametric Test

This paper compares the performance of purely domestic plants, domestic exporters and domestic multinationals. For our empirical analysis we utilise a non-parametric approach based on the principle of first order stochastic dominance. We find that the distributions for multinationals dominate that of domestic exporters and non-exporters, while we do not find clear differences in plant performance between domestic exporters and non-exporters.exporting, FDI, multinationals, productivity, profitability, plant heterogeneity

Foreign ownership and productivity: new evidence from the service sector and the R&D lab

This paper examines the relationship between foreign ownership and productivity, paying particular attention to two issues neglected in the existing literature – the role of multinationals in service sectors and the importance of R&D activity conducted by foreign multinationals. We review existing theoretical and empirical work, which largely focuses on manufacturing, before presenting new evidence using establishment level data on production, service and R&D activity for the United Kingdom. We find that multinationals play an important role in service sectors and that entry of foreign multinationals by takeover is more prevalent than greenfield investment. We find that British multinationals have lower levels of labour productivity than foreign multinationals, but the difference is less stark in the service sector than in the production sector, and that British multinationals have lower levels of investment and intermediate use per employee. We also find that foreign-owned multinationals conduct a substantial amount of UK R&D. We discuss the implications of these and other findings for the policy debate on incentives to influence multinational firms’ location choices

Proximity-Concentration versus Factor Proportion Explanation: The Case of Swedish Multinationals in the EU

Both proximity-concentration trade-off and factor proportions explanations have been forwarded to explain the existence of multinational enterprises. This paper analyses to what extent these different explanations are supported empirically, in making a first attempt to distinguish explicitly between horizontally and vertically integrated multinationals. The affiliate production share of horizontally integrated multinationals is mainly explained by low plant-level economies of scale, large host country size and similarities in relative factor endowments. Differences for vertical multinationals appear with regard to firm- and plant-level economies of scale, country size, trade costs and relative factor endowments at the national and sectoral level.Trade Costs; Country Size; Factor Endowments; Horizontal & Vertical Multinationals

Multinational cash management and conglomerate discounts in the euro zone

We discuss the impact of liberalisation, deregulation and the introduction of a single currency on cash management within multinationals in the euro zone. The developments in the euro zone reduce financial market imperfections in transferring cash and diminish the need for separate local cash holdings. This facilitates the centralisation of cash management and headquarters' financial control. Increased financial power of multinational headquarters, moreover, offers opportunities for disintermediation. By exploiting these options multinationals in the euro zone can start to reap additional benefits of internal financing and conglomerate discounts of euro zone multinationals may diminish.

Multinationals and Linkages: An Empirical Investigation

Several recent papers have used plant-level data and panel econometric techniques to carefully explore the existence FDI externalities. One conclusion that emerges from this literature is that it is difficult to find evidence of positive externalities from multinationals to local firms in the same sector (horizontal externalities). In fact, many studies find evidence of negative horizontal externalities arising from multinational activity while confirming the existence of positive externalities from multinationals to local firms in upstream industries (vertical externalities). In this paper we explore the channels through which these positive and negative externalities may be materializing, focusing on the role of backward linkages. In particular, we criticize the common usage of the domestic sourcing coefficient as an indicator of a firm?s linkage potential and propose an alternative, theoretically derived indicator. We then use plant-level data from several Latin American countries to compare multinationals? linkage potential to that of domestic firms. We find that multinational?s linkage potential in Brazil, Chile and Venezuela is higher than for domestic firms. For Mexico, we cannot reject the hypothesis that foreign and local firms have similar linkage potential. Finally, we discuss the relationship between this finding and the conclusions that emerge from the recent empirical literature.Foreign Direct Investment, Multinational Firms, Linkages, Spillovers, Economic Development.

A Unified Treatment of Horizontal Direct Investment, Vertical Direct Investment, and the Pattern of Trade in Goods and Services

This paper contributes to research endogenizing multinational firms in general-equilibrium trade models. We attempt to integrate separate contributions on horizontal multinationals which produce the same final product in multiple locations, with work on vertical multinationals, which geographically fragment production by stages. Previously derived results now emerge as special cases of a more general model. Vertical multinationals dominate when countries are very different in relative factor endowments. Horizontal multinationals dominate when the countries are similar in size and in relative endowments, and trade costs are moderate to high. In some cases, foreign investment or trade liberalization leads to a reversal in the direction of trade. Investment liberalization can also lead to an increase in the volume of trade and produces a strong tendency toward factor-price equalization. Thus direct investment can be a complement to trade in both a volume-of-trade sense and in a welfare sense.