Multinational firms: Home-country effects Primary aim: Examine ip –implications of FDI with special emphasis on new patterns of trade and home country effects

Commodity and Geographical Composition of UK Trade Per cent YearExport Manu- factures Import Manu- factures Export to Europe Import from Europe Source: P Krugman, Brookings Paper on Economic Activity 1:1995

Supertrading Economies: CountryExport, percentage of GDP, 1990 Singapore174 Hong Kong144 Malaysia78 Belgium70 Ireland64 The Netherlands52 Source: P Krugman, Brookings Paper on Economic Activity 1:1995

Trends in world FDI inflow, exporte and world GDP

Ip-effects of FDI: 1.Home country effects 2.MNEs are footloose: No home country effects 3.Host country effects Home country effects: Are MNEs more productive than national firms? Effects of FDI on home output and employment Effects of FDI on the demand for skilled vis-à-vis unskilled labour Technological spillover to the home country

Multinational Enterprises: “Firms that engage in direct foreign investments, defined as investments in which the firm acquires a substantial controlling interest in a foreign firm or sets up a subsidiary in a foreign country”

Productivity of MNE k's home activities as compared with national firms Lnq k =α+βMNE k +ln∑γ s X s k +e k MNEs in average 17% more productive than National Firms

Causal effect of MNEs Time t MNE Switching firm Without switch Average productivity National firms

Home country effects on employment and production Home and foreign activities: VFDIHFDI Complementary++ (Demand for HQservices and complementary products produced at home increase) Substitutes_

Home country effects on employment: A domestic firm has foreign subsidiaries: how do changes in foreign wages affect its labour demand at home? Price complementarity between employment in countries with different factor endowments and price substitutability for countries with similar factor endowments Complementarity: reduced wages in a poor county with an affiliate increase employment both in the poor and in the rich country Substitutability: reduced wages in a country increase employment in the country with a reduction and decrease employment in countries with similar factor endowments

Labour demand function for affiliate I of MNE k: lnL lk =α ₀ + α ₁ lnw i + α ₂ lnw d lk + α ₃ lnw s lk + α ₄ lnD i + α ₅ ∑D j + e lk

Demand for skilled labour (skilled-labour share of the total wage bill) home country i and MNE k) SH s k = β ₀ + β ₁ lnw U k + β ₂ lnw S k + β ₃ ln(K k /Y k ) + β ₄ lnY k + β ₅ MNE k + e k

Technological upgrading at home Foreign R&D capital has beneficial effects on domestic productivity and these effects are stronger the more open an economy is to foreign trade. Outward FDI flows is a more significant channel for technology spillover between industrialized countries than inward FDI.