History of MNEs:
- Colonialism and first ‘commercial’ companies: British East Indian Company, Vereenigde
Oostindische Compagnie, etc.
- After 1945: MNEs number grows but mostly US
- Since 1960s: MNEs from Europe and Japan grow
- Significant growth from the 1980s
Place = geographic unit of analysis and is not restricted to the level of the country. Geographically
defined units where economic activities are located
Space = any characteristics that generates variation and heterogeneity among places. Dimension
including both discrete and smooth discontinuities
Organization = the firm and the activities it performs
Cross-border movement of capital through investments take mostly two forms:
- Portfolio investment = capital flow/investment in foreign firms for financial reasons
- Foreign direct investment (FDI) = investment aiming to take direct control of production
operations carried out locally
Two aspects of multinationality:
- Geographic dispersion of a firm’s activities
- Concentrated ownership or internationalization of these activities -> not outsourcing, but a
foreign subsidiary
Multi-establishment firm (MLE) = a firm that is functionally integrated and spatially dispersed. It is a
firm that has the unique ability to deal with spatial discontinuities.
- Multinational enterprise (MNE) = type of MLE that also involves some of its internal parts
being located in different political jurisdictions.
Distinctive elements characterizing MNEs:
- MNEs are firms
- MNEs’ activities are carried out across national borders
MNEs are larger and sometimes more productive than national firms.
- They tend to operate in capital-intensive sectors
- Foreign-owned subsidiaries are more productive than firms with no foreign affiliates
Negative aspects of MNEs:
- Relatively large
- Have competitive power in the marketplace and bargaining power in the policy-making area,
particular in smaller developing countries
- Global players who can circumvent national regulations and policies more easily than
national firms
, - Are footloose, able to move activities between their plants at relatively low cost, removing
benefits as rapidly as delivering them
- Mass-produce standardized projects, jeopardizing national product variety
Positive aspects of MNEs:
- Often bring scarce technologies, skills, and financial resources
- Are quick to take advantage of new economic opportunities and thus contribute to the
creation of national wealth
- Are bound by international standards and market competition
- Often better employment conditions and product quality than national firms
Three channels through which the impacts of MNEs on the host economy can unfold:
- Local companies can learn and imitate the technologies and procedures used by MNEs
- Domestic firms can acquire specialized knowledge by hiring workers previously employed by
MNEs
- The increase in competition due to MNE entry can force domestic companies to become
more efficient and make better use of existing technologies and resources.
Internationalization through inward FDI is a positive-sum game whereby jobs created outnumber job
losses in the EU.
Place-based policy tools such as investment promotion agencies (IPAs) can significantly stimulate
local employment creation through internationalization.
Effects of FDI on home and host economies:
- Direct = changes in output levels, capital flows, and demand for labor and its skill
composition
- Indirect = occurs because of the presence of a MNE, that generates outcomes accessible to
local firms and these externalities can improve local firms’ productivity and efficiency.
Horizontal / intra-industry spillovers/externalities (= synonymous) = from MNEs to local firms that
operate in the same industry (non-pecuniary)
Vertical / inter-industry spillovers = from MNEs active in industries that are linked with the industry
of the multinational through the supply chain (pecuniary or non-pecuniary)
- Increase in demand for labor and intermediaries (non-pecuniary)
- Production of high-quality or cheap intermediaries (pecuniary)
- Backward & forward linkages (non-pecuniary)
o Backward: MNE -> supplier (from MNE’s point of view) (non-pecuniary)
Contribute positively to the increase of productivity within the local economy
o Forward: MNE -> distributor (non-pecuniary)
o Upstream: consumer -> MNE -> supplier
o Downstream: supplier -> MNE -> consumer
Pecuniary = relates to changes in prices. They are impacts on third parties caused by changes in
relative prices of goods, factors, or assets in response to an economic transaction.
Non-pecuniary = relates to anything but prices. Channels:
- Foreign firms bringing in production, managerial, and management practices
, - Introduction of a new technology
- Labor turnover = employees of MNEs bringing knowledge to another company
- Competition effects
- Demonstration effects = changes in consumer behavior of the people after observing the
behavior and actions of others. These effects rely on the benefits coming from the exposure
to the superior technology of MNE subsidiaries.
Factors of foreign firms that favor spillovers:
- Technology rich (rather than poor)
- M&A (rather than Greenfield)
- Minority of foreignness
- Greater autonomy and broad functional mandate
- Horizontal (rather than vertical)
- Manufacturing until late 1990s, services now
Factors of domestic firms that favor spillovers:
- Medium absorptive capacity
- Small firm size
- Private-owned (rather than state-owned)
Factors of the local context that favor spillovers:
- High level of development (rather than low)
- Well-developed financial market
- Export-oriented (rather than import)
- High institutional quality
- Large physical distance between sending and receiving countries because of local sourcing
- Small institutional distance
- Medium technological distance
- Small socio-cultural distance
Institutional entrepreneurship from MNEs historically occurred in three ways:
- Avoidance: MNEs keeping out from areas with low-quality institutions
- Adaptation: changes internal to MNEs to better fit the context
- Co-evolution: direct actions of MNEs to affect the institutional context
Horizontal FDI (NOTE: DIFFERENT FROM EXTERNALITIES) = when the MNE duplicates the same set of
production activities in multiple countries in order to save on transport and trade costs
- Foreign production of goods and services roughly similar to those produced at home. Seen as
a substitute for exports.
- Most common reason -> market-seeking
Vertical FDI = when the MNE fragments the production process internationally, locating each stage
of production in the location where it can be done at the lowest cost in order to improve efficiency.
- Colonialism and first ‘commercial’ companies: British East Indian Company, Vereenigde
Oostindische Compagnie, etc.
- After 1945: MNEs number grows but mostly US
- Since 1960s: MNEs from Europe and Japan grow
- Significant growth from the 1980s
Place = geographic unit of analysis and is not restricted to the level of the country. Geographically
defined units where economic activities are located
Space = any characteristics that generates variation and heterogeneity among places. Dimension
including both discrete and smooth discontinuities
Organization = the firm and the activities it performs
Cross-border movement of capital through investments take mostly two forms:
- Portfolio investment = capital flow/investment in foreign firms for financial reasons
- Foreign direct investment (FDI) = investment aiming to take direct control of production
operations carried out locally
Two aspects of multinationality:
- Geographic dispersion of a firm’s activities
- Concentrated ownership or internationalization of these activities -> not outsourcing, but a
foreign subsidiary
Multi-establishment firm (MLE) = a firm that is functionally integrated and spatially dispersed. It is a
firm that has the unique ability to deal with spatial discontinuities.
- Multinational enterprise (MNE) = type of MLE that also involves some of its internal parts
being located in different political jurisdictions.
Distinctive elements characterizing MNEs:
- MNEs are firms
- MNEs’ activities are carried out across national borders
MNEs are larger and sometimes more productive than national firms.
- They tend to operate in capital-intensive sectors
- Foreign-owned subsidiaries are more productive than firms with no foreign affiliates
Negative aspects of MNEs:
- Relatively large
- Have competitive power in the marketplace and bargaining power in the policy-making area,
particular in smaller developing countries
- Global players who can circumvent national regulations and policies more easily than
national firms
, - Are footloose, able to move activities between their plants at relatively low cost, removing
benefits as rapidly as delivering them
- Mass-produce standardized projects, jeopardizing national product variety
Positive aspects of MNEs:
- Often bring scarce technologies, skills, and financial resources
- Are quick to take advantage of new economic opportunities and thus contribute to the
creation of national wealth
- Are bound by international standards and market competition
- Often better employment conditions and product quality than national firms
Three channels through which the impacts of MNEs on the host economy can unfold:
- Local companies can learn and imitate the technologies and procedures used by MNEs
- Domestic firms can acquire specialized knowledge by hiring workers previously employed by
MNEs
- The increase in competition due to MNE entry can force domestic companies to become
more efficient and make better use of existing technologies and resources.
Internationalization through inward FDI is a positive-sum game whereby jobs created outnumber job
losses in the EU.
Place-based policy tools such as investment promotion agencies (IPAs) can significantly stimulate
local employment creation through internationalization.
Effects of FDI on home and host economies:
- Direct = changes in output levels, capital flows, and demand for labor and its skill
composition
- Indirect = occurs because of the presence of a MNE, that generates outcomes accessible to
local firms and these externalities can improve local firms’ productivity and efficiency.
Horizontal / intra-industry spillovers/externalities (= synonymous) = from MNEs to local firms that
operate in the same industry (non-pecuniary)
Vertical / inter-industry spillovers = from MNEs active in industries that are linked with the industry
of the multinational through the supply chain (pecuniary or non-pecuniary)
- Increase in demand for labor and intermediaries (non-pecuniary)
- Production of high-quality or cheap intermediaries (pecuniary)
- Backward & forward linkages (non-pecuniary)
o Backward: MNE -> supplier (from MNE’s point of view) (non-pecuniary)
Contribute positively to the increase of productivity within the local economy
o Forward: MNE -> distributor (non-pecuniary)
o Upstream: consumer -> MNE -> supplier
o Downstream: supplier -> MNE -> consumer
Pecuniary = relates to changes in prices. They are impacts on third parties caused by changes in
relative prices of goods, factors, or assets in response to an economic transaction.
Non-pecuniary = relates to anything but prices. Channels:
- Foreign firms bringing in production, managerial, and management practices
, - Introduction of a new technology
- Labor turnover = employees of MNEs bringing knowledge to another company
- Competition effects
- Demonstration effects = changes in consumer behavior of the people after observing the
behavior and actions of others. These effects rely on the benefits coming from the exposure
to the superior technology of MNE subsidiaries.
Factors of foreign firms that favor spillovers:
- Technology rich (rather than poor)
- M&A (rather than Greenfield)
- Minority of foreignness
- Greater autonomy and broad functional mandate
- Horizontal (rather than vertical)
- Manufacturing until late 1990s, services now
Factors of domestic firms that favor spillovers:
- Medium absorptive capacity
- Small firm size
- Private-owned (rather than state-owned)
Factors of the local context that favor spillovers:
- High level of development (rather than low)
- Well-developed financial market
- Export-oriented (rather than import)
- High institutional quality
- Large physical distance between sending and receiving countries because of local sourcing
- Small institutional distance
- Medium technological distance
- Small socio-cultural distance
Institutional entrepreneurship from MNEs historically occurred in three ways:
- Avoidance: MNEs keeping out from areas with low-quality institutions
- Adaptation: changes internal to MNEs to better fit the context
- Co-evolution: direct actions of MNEs to affect the institutional context
Horizontal FDI (NOTE: DIFFERENT FROM EXTERNALITIES) = when the MNE duplicates the same set of
production activities in multiple countries in order to save on transport and trade costs
- Foreign production of goods and services roughly similar to those produced at home. Seen as
a substitute for exports.
- Most common reason -> market-seeking
Vertical FDI = when the MNE fragments the production process internationally, locating each stage
of production in the location where it can be done at the lowest cost in order to improve efficiency.
