The Multinational Enterprise

1
The Multinational Enterprise

• An Overview of Theory and Empirical Findings

2
Index

• Discussion of the costs and benefits to the firm
  of splitting production.
• Whether these foreign activities are internal to
  the firm or outsourced to independent operators.
• The effects of multinational activity on the host
  and home countries.

3
1. costs and benefits to the firm of splitting
production

• What is the profit maximizing way for this firm
  to organize its activities?
• Geographical concentration and dispersion
• Resolving the trade-offs determinants of FDI
• Determinant of FDI Empirical Evidence

4
1. costs and benefits to the firm of splitting
production

• Geographical concentration and dispersion
• The Cost of geographical dispersion
• Economies of scale foregone.
• Horizontal Investment
• Economies of integration foregone.

5
1. costs and benefits to the firm of splitting
production

• Geographical concentration and dispersion
• The benefits of geographical dispersion
• Market access and competition
• Factor costs

6
1. costs and benefits to the firm of splitting
production

• Resolving the trade-offs determinants of FDI
• HFDI. (Horizontal)
• Between returns to scale foregone and the
  benefits of access to market.
• VFDI. (Vertical)
• Between disintegration costs and the benefits of
  producing in countries with low factor costs.

7
1. costs and benefits to the firm of splitting
production

• Determinant of FDI Empirical Evidence
• Horizontal or Vertical FDI?
• Firm and plant level economies of scale
• Country determinants of FDI
• Trade costs
• size of the market
• Factor cost differentials
• Tax differentials and policies

8
2. Internalization and the Boundary of the Firm

• To keep its functions internal
• To choose to rely on market relations

9
2. Internalization and the Boundary of the Firm

• The costs of external market transactions
• The hold-up problem
• Dissipation of firm-specific assets
• Knowledge capital
• Brand image
• Agency costs

10
2. Internalization and the Boundary of the Firm
11
3. Effects of FDI

• Transmission Mechanism
• Empirical Literature

12
3. Effects of FDI

• Transmission Mechanisms
• Product market effects
• Factor market effects
• Spillovers

13
3. Effects of FDI
14
3. Effects of FDI

• Empirical Literature
• Differences in performance
• higher labor productivity
• Wages and skills
• wages increases by 3.4 after the acquisition of
  national firms by foreign investors
• Employment volatility
• Employees of MNEs are less likely to lose their
  jobs
• Technological sourcing
• Effects on competition in local markets

15
Conclusion

• determinants of FDI
• Multinationals are likely to be characterized by
  intangible firm-specific assets from which
  firm-level economies of scale originate.
• Access to foreign markets (prevalent in the case
  of HFDI) or reducing production costs (prevalent
  in the case of VFDI).
• When FDI is horizontal, the main trade-off faced
  by firms is one between increased sales and
  foregone economies of scale.
• In the case of vertical investment the trade-off
  is between lower input costs and increased trade
  costs.
• Both horizontal and vertical FDI are important
  components of investment flows.

16
Conclusion

• FDI is not the only transnational entities but
  also relying on market relationship with foreign
  third parties.
• Firms will choose to internalize their activities
  via
• The hold-up problem Technical knowledge or
  reputation
• Agency costs
• Effects of MNE
• product markets, factor markets and by spillovers
  to national firms.
• favorable, enhancing economic activity and the
  long-term income prospects of both home and host
  economies.

17
Thank you