Movement of Capital: Multinational Corporations and Foreign Direct Investment (FDI) EC 378 November 30, December 5, 2006

Transcription

1 Movement of Capital: Multinational Corporations and Foreign Direct Investment (FDI) EC 378 November 30, December 5, 2006

2 Motivation Factor movements and trade: o Over one quarter of world trade is intra-firm o Firm relocation may displace trade: produce locally rather than export o Firms that vertically integrate internationally generate trade Foreign investment has grown faster than world trade or world output over the last 15 years

3 Motivation, cont. Multinational Corporations (MNCs) o o o o o o Are catalysts of technology transfer Provide employment opportunities Contribute to growth and development in LDCs Benefit local firms through demonstration effects Benefit local firms through forward and backward linkages Benefit domestic workers through training and education

4 Motivation, cont. Multinational Corporations (MNCs) o o o o o o o o Exploit local workers by paying them lower wages Drive indigenous firms out of the market Drain local coffers by getting tax breaks and other incentives Produce under sweatshop conditions Contribute to a race to the bottom in labor standards Contribute to a race to the bottom in environmental standards Contribute to the global harmonization of culture Are a threat to national security

5 Overview Defining FDI Some Numbers Empirical Evidence

6 What is Foreign Direct Investment? Formal definition: Ownership of assets in one country by residents of another for purposes of controlling the use of those assets Control: What share of ownership brings with it actual control: 10% in the U.S., 20 percent in many other countries A firm that engages in FDI is a multinational enterprise Measurement: Changes in FDI: FDI flows Existing FDI: FDI stock Alternatively: Value of assets in foreign-owned firms; employment in foreign-owned firms; sales by foreign-owned firms

7 Terminology and Data Sources Source (home) country: Where MNC is headquartered Host country: Hosting a foreign affiliate Bureau of Economic Analysis (BEA at U.S. Direct Investment Abroad (outward FDI) Foreign Direct Investment in the U.S. (inward FDI) BEA data: confidentiality issues

8 Greenfield investment Joint ventures Acquisition of local firms (cross-border mergers & acquisitions, M&A) Portfolio investment is not direct investment Forms of FDI

9 Produce the same good in different locations: horizontal investment Organize an international production chain, where each stage is located where best suited: vertical investment E.g.: labor-intensive assembly in low-wage countries, capital- and skilled-labor intensive R&D at home

10 FDI to All Countries UNCTAD: good source for international FDI data

11 Resource Flows to Developing Countries

12 Growth rates of FDI, GDP, Trade worldwide FDI Flows FDI Stocks GDP Exports

13 Effects of FDI Home country effects of outward FDI o FDI and employment o FDI and exports Host country effects of inward FDI o Host country wages o Host country productivity o Host country growth o Host country exports/imports/trade balance o Public finance effects (subsidies, other expenditures) o Technology transfers

14 Some select evidence: Outward FDI and employment at home Matt Slaughter (Dartmouth, currently on CEA): MNCs create 2 jobs in the U.S. for every job they create abroad Why? Lower costs abroad lead to increase in scale and scope of operation

15 Local Effects of FDI, U.S. David Figlio and Bruce A. Blonigen investigate FDI in South Carolina They find that foreign investment raises local real wages much more than does domestic investment Reasons? They find that foreign investment lowers per capita county-government expenditures and redistributes money away from public school expenditures Why?

16 Technology and FDI, U.S. Lee Branstetter investigates technology spillovers (transfers of technological knowledge) from the presence of Japanese firms in the U.S. He finds that there are spillovers both from and to the investing Japanese firm

17 FDI and Wages: Evidence from Aitken, Harrison, Lipsey for Mexico, Venezuela, and the U.S. Does foreign ownership lead to higher wages? o Do higher wages spillover into non-foreign owned firms? Find that higher FDI is associated with higher wages in all countries. In Venezuela and Mexico higher wages are only realized in foreign owned firms: no spillovers into domestic firms; in fact, possibly negative effect on wages in dom. firms

18 Possible Explanations At least for Venezuela: Higher foreign equity participation is strongly correlated with higher plant productivity. (Aitken and Harrison 1993) Higher productivity may be due to higher capital intensity or different skill mix This suggests controlling for capital intensity and skill

19 Model Hypothesis: foreign-owned firms raise the overall marginal productivity of labor. Y = A(DFI)f(X,L) o DFI = share of labor in the market employed by foreign firms. o L = labor employed by the industry o X = all other factors of production

20 Model W = PRICE*MPL = PRICE*[A(DFI)f1(X,L(W))] W= wagel(w) = the labor supply curve Ln W = C + α1dfi + α2ln PRICE + α3ln X α4(v ln W) Ln W = C + [α1/(1 + α4)]dfi + [α2/(1+ α4v)] ln PRICE +[α3/(1 + α4v)]ln X

21 Model, continued Ln Wsk = α0 + α1dfi +α2ln PRICE +α3royalty α4kstock + LOC + SIC + e Ln Wusk = β0 + β1dfi +β2ln PRICE +β3royalty β4kstock + LOC + SIC + e SIC = industry dummy LOC = region dummy

22 Plant-level data Data Mexico: domestic and foreign sales, equity ownership positions by country of origin, price indices on inputs and outputs. Venezuela: foreign ownership, assets, employment, cost information, location and product destination. Data aggregated to industry-level US data did not begin until Used only in crosssectional form

23 Results

24 Results

25 Interpreting the Results Clearly, foreign plants are more productive and thus pay higher wages Results are consistent with poaching of workers by foreign enterprises Moreover, could reflect efficiency wages paid

26 Results for the U.S. Note the different controls: data limitations

27 Survives Numerous Robustness Checks Re-estimated results using plant-level instead of industry level data. Incorporated the impact of plant age on wages. Impact of plant size. Issue of endogeneity of foreign investment and wages.

28 Summary Evidence on many positive effects of MNCs Evidence on some negative effects (local school expenditures, domestic firms, the poorest countries, environmental regulations?!) Much more detailed study with detailed micro-level cross-country data needed: A fertile field of study!