Multinational business groups

This paper provides a primer on European multinational business groups (BGs) and their subsidiaries. Firms in these BGs appear to have higher sales performance than firms in domestic groups (15% higher). This leads us to investigate which elements increase the likelihood that a group will transition towards multinational status. BGs’ characteristics matter for foreign acquisition: groups becoming multinational are usually larger, have a more hierarchical structure with respect to the number of layers in a group, and are more diverse in terms of sectors. Groups tend to expand into bordering countries or countries providing particular advantages, such as a large internal market. The first acquisition is a corporate-level decision that appears to be made by the group’s controlling firm and is often a diversification into a different industry

A framework for assessing the exchange costs in the flax fibre supply chain

Canada has been recognized as the largest exporter of flax seed in the world. Currently, very little flax straw is further processed, despite its potential as a value added product, with only about 7-10% of Canadian flax seed producers harvesting residual flax straw rather than burning the straw. A traditional use of flax straw has been for the production of fibre for the linen industry. Interest in flax fibre has been rekindled with the impetus to seek out bioproducts that replace non-renewal resources and provide value-added opportunities for agricultural producers. Flax fibre also has a range of potential uses in automotive parts, geotextiles, insulation material, etc. Despite this potential, the Canadian flax fibre sector remains largely underdeveloped, with fledgling supply chains and lack of investment in the necessary processing capacity. This paper develops a framework for analysing the relational exchanges at different stage of the supply chain to determine if the paucity in investment is the result of prohibitively high exchange costs. A number of distinct stages in the flax fibre supply chain can be identified: farmers producing flax seed and/or straw; processors who extract the natural fibre from the straw; and manufacturers who use the fibre in their products. The paper develops a framework that draws together insights from Transaction Cost Economics, Agency Theory and Bargaining Theory. The role of institutions in facilitating quality measurement and providing participants with information is also considered. The theoretical framework identifies asset specificity, agency measurement costs, bargaining power and under-developed institutions as key factors in the development of the flax fibre sector. From the theoretical framework, a set of propositions is developed that examine the anticipated effect of these factors on vertical coordination in the sector. The theoretical propositions are explored through a series of semi-structured interviews with parties at each stage of the supply chain (producers, fibre processors, final manufacturers), as well as with industry experts. Information from the interviews is used to identify the transaction characteristics and the institutional framework characterizing the flax fibre sector in Canada. This is analysed through a comparative case study approach with the flax fibre sector in Europe, and the wool fibre sector in New Zealand as an example of a fully developed and long-standing fibre sector. By also noting the different vertical coordination strategies that are present in these supply chains, a connection is drawn between the presence of certain transaction characteristics and the corresponding cost-minimizing exchange relationships. The case studies are used to investigate the propositions developed from the theoretical framework regarding the impact of transaction characteristics on the optimal vertical coordination strategy and the impediments to development and investment in the sector. The propositions developed in the framework are verified to a great extent by the comparative case study. The uncertainty in the exchange environment regarding the future direction of the flax fibre industry and the high measurement costs due to the absent quality and grading regime in the Canadian flax fibre set the two industries apart from each other. Both of these dimensions impact the exchange costs of a transaction and subsequently, the extent to which the parties are closely coordinated. The case studies verify that using a framework to analyze transactions provides additional insights because of the joint consideration of several features of the transaction

Corporate Hierarchies and the Size of Nations: Theory and Evidence

Corporate organization varies within a country and across countries with country size. The paper starts by establishing some facts about corporate organization based on unique data of 660 Austrian and German corporations. The larger country (Germany) has larger firms with flatter more decentral corporate hierarchies compared to the smaller country (Austria). Firms in the larger country change their organization less fast than firms in the smaller country. Over time firms have been introducing less hierarchical organizations by delegating power to lower levels of the corporation. We develop a theory which explains these facts and which links these features to the trade environment that countries and firms face. We introduce firms with internal hierarchies in a Krugman (1980) model of trade. We show that international trade and the toughness of competition in international markets induce a power struggle in firms which eventually leads to decentralized corporate hierarchies. We offer econometric evidence which is consistent with the models predictions

Spillovers from Foreign Direct Investment in Central and Eastern Europe. An index for measuring a country’s potential to benefit from technology spillovers

In the paper, we construct a composite indicator to estimate the potential of four Central and Eastern European countries (the Czech Republic, Hungary, Poland and Slovakia) to benefit from productivity spillovers from foreign direct investment (FDI) in the manufacturing sector. Such transfers of technology are one of the main benefits of FDI for the host country, and should also be one of the main determinants of FDI incentives offered to investing multinationals by governments, but they are difficult to assess ex ante. For our composite index, we use six components to proxy the main channels and determinants of these spillovers. We have tried several weighting and aggregation methods, and we consider our results robust. According to the analysis of our results, between 2003 and 2007 all four countries were able to increase their potential to benefit from such spillovers, although there are large differences between them. The Czech Republic clearly has the most potential to benefit from productivity spillovers, while Poland has the least. The relative positions of Hungary and Slovakia depend to some extent on the exact weighting and aggregation method of the individual components of the index, but the differences are not large. These conclusions have important implication both the investment strategies of multinationals and government FDI policies

Power in the Multinational Corporation in Industry Equilibrium

Recent theories of the multinational corporation introduce the property rights model of the firm and examine whether to integrate our outsource firm activities locally or to a foreign country. This paper focus instead on the internal organization of the multinational corporation by examining the power allocation between headquarters and subsidiaries. We provide a framework to analyse the interaction between the decision to serve the local market by exporting or FDI, market acces and the optimal mode of organization of the multinational corporation. We find that subsidiary managers are given most autonomy in their decision how to run the firm at intermediate levels of local competition. We then provide comparative statics for changes in fixed FDI entry costs and trade costs, information technology, the number of local competitors, and in the size of the local market

Firms' Main Market, Human Capital and Wages

Recent international trade literature emphasizes two features in characterizing the current patterns of trade: efficiency heterogeneity at the firm level and quality differentiation. This paper explores human capital and wage differences across firms in that context. We build a partial equilibrium model predicting that firms selling in more-remote markets employ higher human capital and pay higher wages to employees within each education group. The channel linking these variables is firms’ endogenous choice of quality. Predictions are tested using Spanish employer-employee matched data that classify firms according to four main destination markets: local, national, European Union, and rest of the World. Employees’ average education is increasing in the remoteness of firm’s main output market. Market–destination wage premia are large, increasing in the remoteness of the market, and increasing in individual education. These results suggest that increasing globalization may play a significant role in raising wage inequality within and across education groups

Sizing Up the Impact of Embassies on Exports

The purpose of this study is to test for the effects of trade promotion via the foreign service. We develop a Melitz-based model where firms are heterogeneous with respect to productivity and must pay a beachhead cost to enter a foreign market, which can be reduced by government spending on trade promotion. The model predicts that unilateral trade promotion allows medium-sized firms to export. We test this prediction using Swedish firm-level data and information on the opening and closing of Swedish embassies abroad using Norwegian firms as control group. Our results lend support to the predictions of the model, with large and medium-sized firms responding most strongly to the opening of embassies

Multi-product firms and exporting: a developing country perspective

In this paper we make the distinction between single-product and multi-product firms to contribute to our understanding of the complex relationship between multinational enterprises (MNEs), exporting and economic development. Using firm-level data for Thailand we show that the number of goods produced causes a larger variation in exports volumes than production volumes. Whilst the number of products and the total volume of exports are positively correlated we find, in contrast to US studies, a negative correlation between the number of products produced and the volume of production per product. We then investigate the characteristics associated with multi-product firms and find a distinction between foreign-owned and domestic firms. The presence of foreign firms producing single products solely for the domestic market as well as those producing many products for export demonstrates the diversity of behaviour of foreign-owned firms in developing countries

The Impact of 3D Printing on Trade and FDI

This paper analyzes the effects of 3D printing technologies on the volume of trade and on the structure of FDI. A standard model with firm-specific heterogeneity generates three main predictions. First, 3D printers are introduced in areas with high economic activity that also face high transport costs. Second, technological progress related to 3D printing machines leads to a gradual replacement of FDI that relies on traditional production structures with FDI based on 3D printing techniques. At this stage international trade stays unaffected. Finally, at later stages, with 3D printing machines being widely used, further technological progress in 3D printing leads to a gradual replacement of international trade. Empirical evidence indicates that countries subject to higher transport costs and with high levels of economic activity are indeed among the ones that import more 3D printers. Anecdotal evidence also supports the second and third predictions of the model

Higher productivity in importing German manufacturing firms: self-selection, learning from importing, or both?

This paper uses a newly available comprehensive panel data set for manufacturing enterprises from 2001 to 2005 to document the first empirical results on the relationship between imports and productivity for Germany, a leading actor on the world market for goods. Furthermore, for the first time the direction of causality in this relationship is investigated systematically by testing for self-selection of more productive firms into importing, and for productivity-enhancing effects of imports ('learning-by-importing'). We find a positive link between importing and productivity. From an empirical model with fixed enterprise effects that controls for firm size, industry, and unobservable firm heterogeneity we see that the premia for trading internationally are about the same in West and East Germany. Compared to firms that do not trade at all two-way traders do have the highest premia, followed by firms that only export, while firms that only import have the smallest estimated premia. We find evidence for a positive impact of productivity on importing, pointing to self-selection of more productive enterprises into imports, but no clear evidence for the effect of importing on productivity due to learning-by-importing