Ari Kokko

Multinational Corporations and Spillovers

This paper examines spillover effects of the activities of multinational firms. Such effects are most likely to be found in host countries, where the operations of foreign multinationals may influence local firms in the MNCs own industry as well as firms in other industries. However, there is no comprehensive evidence on the exact nature or magnitude of these effects, although it is suggested that host country spillovers vary systematically between countries and industries. In particular, the positive effects of foreign investment are likely to increase with the level of local capability and competition. The spillovers to the home countries of MNCs are often more difficult to identify, for various reasons. Earlier studies suggest that the effects are generally positive, but the increasing international division of labor within multinationals complicates the analysis. The impact on the home country is likely to depend on what activities these firms concentrate at home.

Technology, market characteristics, and spillovers

There are numerous case studies to suggest that technology spillovers from foreign direct investment may provide important benefits for the host countries of multinational corporations (MNCs) (see Chapter 8). The technology and productivity of local firms may improve as foreign firms enter the market and demonstrate new technologies, provide technical assistance to their local suppliers and customers, and train workers and managers who may later be employed by local firms. The competitive pressure exerted by the foreign affiliates may also force the local firms to operate more efficiently and introduce new technologies earlier than would otherwise have been the case.

The Economics of Foreign Direct Investment Incentives

This paper suggests that the use of investment incentives focusing exclusively on foreign firms, although motivated in some cases from a theoretical point of view, is generally not an efficient way to raise national welfare. The main reason is that the strongest theoretical motive for financial subsidies to inward FDI spillovers of foreign technology and skills to local industry is not an automatic consequence of foreign investment. The potential spillover benefits are realized only if local firms have the ability and motivation to invest in absorbing foreign technologies and skills. To motivate subsidization of foreign investment, it is therefore necessary, at the same time, to support learning and investment in local firms as well.

Productivity Spillovers from Competition between Local Firms and Foreign Affiliates

In the debate on the role of multinational corporations in international technology transfer, it has often been suggested that a large share of the host countries’ benefits from foreign direct investment may come in the form of external effects or ‘spillovers’. MNCs may, for example, introduce new technologies that are imitated by local producers, or train workers whose specific skills spill over when they set up their own firms or are hired by existing local firms. These benefits can be characterized as effects of contagion and demonstration. Other effects are related to competition, and occur when local firms are forced to become more productive — by introducing new technologies or increasing X-efficiency — in order to survive in markets where foreign affiliates are present.

Trade regimes and spillover effects of FDI: Evidence from Uruguay

Trade Regimes and Spillover Effects of FDI: Evidence from Uruguay. — This paper examines differences in the character and impact of FDI entering Uruguay during import substitution, pursued until 1973, and the subsequent more outwardoriented trade regime. Regression analysis shows that the labor productivity of local firms is positively related to the presence of older import-substituting MNCs in their industry. The presence of foreign affiliates established after 1973 has no apparent impact on local productivity, but seems to raise the likelihood that local firms engage in exporting. This may be a sign of export spillovers, indicating that local firms may pick up some exportrelated skills from the operations of outward-oriented foreign MNCs.

Host country competition, labor skills, and technology transfer by multinationals

Host Country Competition, Labor Skills, and Technology Transfer by Multinationals. — This paper examines the impact of local competition and the availability of skilled labor on the technology imports of foreign MNC affiliates in Mexican manufacturing industries. The authors find that proxies for local competition and labor skills are positively related to the recorded technology imports of foreign owned affiliates. The effects of competition appear to be particularly strong in intermediate and consumer goods industries, while the availability of skilled labor seems to be particularly important in durable and capital goods industries. Thus, government policies aiming to create a competitive climate and improve labor quality may also promote inflows of modern technology.ZusammenfassungWettbewerb im Gastland, Qualifikation der Arbeitskräfte und Technologietransfer durch multinationale Firmen. — Die Verfasser untersuchen, wie sich die Konkurrenz im Inland und die Verfügbarkeit ausgebildeter Arbeitskräfte auf den Technologietransfer ausländischer multinationaler Firmen in mexikanischen Industriezweigen auswirken. Sie zeigen, daß Näherungswerte für die Konkurrenz im Inland und die Qualifikation der Arbeitskräfte mit den Technologieimporten der Filialen in ausländischem Eigentum positiv korreliert sind. Der Einfluß des Wettbewerbs scheint besonders stark zu sein bei Erzeugern von Zwischenprodukten und Konsumgütern, während die Verfügbarkeit ausgebildeter Arbeitskräfte bei Erzeugern von dauerhaften Konsumgütern und Investitionsgütern besonders wichtig zu sein scheint. Daraus folgt, daß eine Regierungspolitik, die sich bemüht, ein Wettbewerbsklima zu schaffen und die Qualifikation der Arbeitskräfte zu erhöhen, auch den Import moderner Technologie begünstigt.

FDI and the Structure of Home Country Production

This paper provides a selective survey of the literature on home country effects of FDI, and points to some new questions regarding the impact of outward FDI on economic structure in the home country. Much of the existing literature on production interactions between the domestic and foreign operations of MNCs has examined what happens to home country exports and employment as a result of outward FDI. Although the results of earlier studies vary somewhat, there appears to be a consensus that the quantitative effects are not dramatic. The reduced exports of finished products from the home country to independent foreign customers are balanced by increases in exports of intermediate products to the foreign affiliates. However, the structural changes ? the transformation that occurs when the parent company becomes increasingly specialised in the production of intermediate goods ? have not been discussed in great detail. Drawing heavily on the example of Sweden, we outline some of the changes that have occurred as a result of the increasing globalisation of Swedish industry, and discuss some possible consequences for the Swedish economy. Our discussion suggests that the home country operations of Swedish MNCs focused increasingly on activities with relatively high raw material content and low value added during the period between the early 1980s and mid-1990s. In addition, much of R&D was concentrated to Sweden. While the high investments in R&D are probably beneficial for the home country, it is possible that the specialisation in raw material intensive operations may have some negative effects. In particular, we discuss the possible growth effects of a more concentrated industry structure. However, due to the lack of detailed data on production structure, factor intensities and other production characteristics, the discussion is largely speculative, and the paper points to the need for more data and more research in this area.

VIETNAM - Ready for Doi Moi II?

Compared with its ASEAN neighbors, Vietnam appears to have weathered the Asian crisis quite well. Official statistics indicate a GDP growth rate of 6.6 per cent for the first half of 1998; export growth remains positive, and the dong has depreciated by only 20 per cent against the USD. But the relatively favorable picture has more to do with controls than with sound economic fundamentals. In the absence of comprehensive reforms, the Vietnamese economy will gradually slide into a deeper recession. Influential interest groups, such as SOEs and their employees, hanker after return to central planning. What is needed instead is a Doi Moi II, including measures to liberalize trade, strengthen the financial system and promote transparency throughout the economy.

Foreign Investment as a Vehicle for International Technology Transfer

Economic theory provides two approaches to studying the effects of foreign direct investment (FDI) on host countries. One is rooted in the standard theory of international trade and dates back to MacDougall (1960).This is a partial equilibrium comparative-static approach intended to examine how marginal increments in investment from abroad are distributed. The main prediction of the model is that inflows of foreign capital — whether in the form of FDI or portfolio capital — will raise the marginal product of labor and reduce the marginal product of capital in the host country. In addition, MacDougall suggests that FDI may be connected to other potentially important benefits:

Innovative capability in MNC subsidiaries: evidence from four European transition economies

This article explores the determinants of innovative capability in a sample of MNC subsidiaries operating in the European transition economies. It finds that innovative capability and autonomy in product and process technology appear to be determined by a different set of variables than capability and autonomy in marketing and management. The most independent affiliates have high innovative capability in product and process technology, but are less prominent in marketing and management technology. Affiliates that are closely integrated with their parent company exhibit the opposite pattern. These differences may have some impact on the kinds of spillovers generated by different kinds of foreign direct investment projects.