Depending on one's point of view, multinational enterprises are either the heroes or the villains of the globalized economy. Governments compete fiercely for foreign direct investment by such companies, but complain when firms go global and move their activities elsewhere. Multinationals are seen by some as threats to national identities and wealth and are accused of riding roughshod over national laws and of exploiting cheap labor. However, the debate on these companies and foreign direct investment is rarely grounded on sound economic arguments. This book brings clarity to the debate. With the contribution of other leading experts, Giorgio Barba Navaretti and Anthony Venables assess the determinants of multinationals' actions, investigating why their activity has expanded so rapidly, and why some countries have seen more such activity than others. They analyze their effects on countries that are recipients of inward investments, and on those countries that see multinational firms moving jobs abroad. The arguments are made using modern advances in economic analysis, a case study, and by drawing on the extensive empirical literature that assesses the determinants and consequences of activity by multinationals. The treatment is rigorous, yet accessible to all readers with a background in economics, whether students or professionals. Drawing out policy implications, the authors conclude that multinational enterprises are generally a force for the promotion of prosperity in the world economy.
Preface ix
List of Contributors xi
CHAPTER 1: Facts and Issues 1
1.1 Multinationals: What Are They and How Are They Measured? 2
1.2 The Facts: Empirical Overview 3
1.3 The Issues 15
1.4 Guide to the Book 20
Statistical Appendix 20
CHAPTER 2: The Multinational Enterprise: an Overview of Theory and Empirical Findings 23
2.1 National and International Production 24
2.2 Internalization and the Boundary of the Firm 35
2.3 Effects of FDI 39
2.4 Conclusions 47
CHAPTER 3: Horizontal Foreign Direct Investment: Product Market Access 49
3.1 A Model 49
3.2 National versus Multinational Supply 55
3.3 Demand and Firm Behaviour 64
3.4 The Effect of FDI on the Host Economy 66
3.5 Extensions 74
3.6 Conclusions 77
Appendix 3.1. Parameters Underlying Figures 78
Appendix 3.2. Section 3.5.1 78
CHAPTER 4: Vertical Foreign Direct Investment: Input Costs and Factor Prices 79
4.1 Cost-Minimizing Locations 80
4.2 Fragmentation and Factor Prices 84
4.3 Fragmentation in General Equilibrium 89
4.4 Factor Price Convergence? 92
4.5 Conclusions 96
Appendix 4.1. Parameter Values in Figures 4.1 and 4.2 97
Appendix 4.2. Parameter Values in Figure 4.6 97
Appendix 4.3. Components Labour Intensive 97
CHAPTER 5: Multinationals: the Firm and the Market 99
5.1 An Analytical Framework 100
5.2 Hold-up 102
5.3 Hold-up in Industry Equilibrium 109
5.4 Dissipation of Intangible Assets 114
5.5 Agency Costs 120
5.6 Conclusions 124
Appendix 126
CHAPTER 6: Determinants of FDI: the Evidence 127
6.1 A General Framework 127
6.2 Industry and Firm Determinants of FDI 131
6.3 Country Determinants of FDI 134
6.4 The Relative Importance of Horizontal versus Vertical FDI 141
6.5 Other Factors Affecting the Location of FDI 144
6.6 Concluding Remarks 150
CHAPTER 7: Host Country Effects: Conceptual Framework and the Evidence 151
7.1 Aggregate Effects of FDI on Economic Growth: Cross-Country Evidence 152
7.2 Firm Effects: Conceptual Framework 153
7.3 Productivity 155
7.4 Factor Markets 162
7.5 Employment Volatility 166
7.6 Multinationals and Local Firms 172
7.7 Conclusions 182
Appendix 183
CHAPTER 8: FDI and the Host Economy: a Case Study of Ireland 187
8.1 Ireland's Success in Attracting FDI 188
8.2 Characteristics of FDI Inflows to Ireland 200
8.3 FDI and the Development of the Irish Economy 207
8.4 Concluding Comments 214
CHAPTER 9: Home Country Effects of Foreign Direct Investment 217
9.1 What are the Effects? Setting the Issues 218
9.2 Foreign Production and Domestic Activities: Substitutes or Complements? 220
9.3 Skill Intensity 227
9.4 Technological Sourcing 230
9.5 Effects on Productivity: Comparing MNEs and National Firms 231
9.6 Conclusions 238
Appendix. Derivation of Empirically Testable Demands for Relatively Skilled Labour 239
CHAPTER 10: Policy Implications and Effects 241
10.1 The Impact of FDI on Economic Policy 242
10.2 FDI Incentives 251
10.3 Policy Competition and Policy Coordination 263
10.4 International Governance of Investment Regimes 268
10.5 Concluding Remarks 275
CHAPTER 11: Conclusions 277
Appendix A Statistical Definitions and Databases on Foreign Direct Investment and the Activities of Multinationals 283
A.1 International Statistics on Foreign Direct Investment 283
A.2 Financial and Operating Data on Multinational Firms 288
Glossary 299
References 303
Index 323
