Multinational Firms in the World Economy

Giorgio Barba Navaretti is Professor of International Economics at the University of Milan and Scientific Director of the Centro Studi Luca d'Agliano. He has coauthored and coedited a number of books, most recently "Labour Markets, Poverty, and Development" (Oxford University Press, 1999). Anthony J. Venables is Chief Economist, Department for International Development, London, Professor of International Economics, at the London School of Economics and a research fellow at the Centre for Economic Policy Research. He is the coauthor (with Masahisa Fujita and Paul Krugman) of "The Spatial Economy: Cities, Regions and International Trade".

"This lucid, authoritative and comprehensive book will be of great value to anyone interested in the role of multinational enterprises in the modern world."--John Driffill, Times Higher Education Supplement "[This book] is an extremely welcome addition to the literature and profession... [Multinational Firms in the World Economy] fills a very important niche of bringing together our current knowledge of multinational firm behavior and their economic effects on parent and host countries."--Bruce A. Blonigen, Journal of International Economics

• 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