BUSINESS ECONOMICS
Sommario
MNE: what are and how are measured? ..................................................................................... 2
The determinants of FDI .............................................................................................................. 4
Host country effects .................................................................................................................. 10
Green innovations and MNEs ....................................................................................................13
Home country effects of FDI ..................................................................................................... 14
Economic policies and FDI ........................................................................................................ 17
MNEs and the geography of GVCs ........................................................................................... 18
Innovation drivers, value chain and the geography of MNE in Europe ................................... 20
Regional strategic assets and the location strategies of emerging countries multinationals
in Europe .....................................................................................................................................22
Size, geography and GVC participation of firms in Nigeria and Rwanda ............................... 24
Does GVC participation and position lead to innovation in an emerging economy? ...........26
GVC and sustainability ...............................................................................................................28
Global value chains and firms environmental performance ................................................... 31
The impact of degree of internationalization of MNEs on green innovation performance . 32
Extending social sustainability to suppliers: The role of GVC governance strategies and
supplier country institutions ...................................................................................................... 34
MNEs, local firms and employee human right violation in the workspace ............................ 36
1
MNE: what are and how are measured?
A MNE is a company with business operations in at least one foreign country other than its
home country; can be factories or facilities: there must be some subsidiaries and an head
quarter in another country that coordinate all these international activities.
A foreign firm is a subsidiary / affiliate of an MNE only if the MNE controls more than 10%
of the shareholder’s voting power of the foreign firm. The aim is to establish a significant
influence on the management of the firm and so a long-term relationship in the country.
MNE make 2 types of investments:
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Purchase existing firms in a foreign country: M&A_FDI: MNE buy an already existing
company, acquisition and merging.
Establish new firms in a foreign country: Greenfield_FDI: MNE creates a new firm,
investing in a new physical plant and productive asset in a foreign country
The activities of MNEs can be measured:
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Data at the firm-level (the best measure): information o the number of employees,
sales and so on (not easily available)
Data on flows and stocks of FDI: there are FDI market database that tracks
Greenfield_FDI covering all sectors and countries worldwide, others data on FDI are
available from the balance of payment statistics.
FDI can be distinguished between:
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Inward FDI: FDI for the receiving country (host country)
Outward FDI: FDI for the sending country (home country)
Horizontal FDI: setting up a foreign plant in addition to an home plant for some part
of the production process / chain; the foreign plant replicate the activity of the
home plant
Vertical FDI: setting up a foreign plant for some part of the production process that
in the home country doesn’t exist
Some facts:
1) In the last 50 years there was an enormous growth of activities by MNEs. As
measured by flows of FDI (growing much faster than international trade or GDP
since 1985
2) FDI originate mainly from advanced countries (about 93%) but developing countries
had increased their share of outward FDI
2
3) FDI goes mainly to advanced countries, even if the share of developing countries
has been raising (developing countries lack sufficient domestic resources and they
need foreign capital to finance their investments
4) M&A_FDI account for a significant share of FDI (especially in industrialized
countries)
5) Most FDI are concentrated in skill and technology intensive industries (for
examples: in manufacturing the largest share are in chemical, electronical
equipment etc.); sectors in which the presence of MNE is greatest are characterized
by: large investment in R&D, skilled workers, production of technically complex or
differentiated goods.
6) MNEs are larger and more productive than national firms; also foreign subsidiaries
are relatively large when size is measured in term of employees, turnover and value
added, the labor productivity of foreign subsidiaries is above average.
7) MNEs are engaged in international production networks (different stages of the
production of a good takes place in different countries)
3
The determinants of FDI
There are 2 categories of FDI determinants:
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At the firm level:
1) Plant scale economies: is related to average production costs (AC) at the plant
level. In presence of scale of economies, an increase in the level of output (Q)
can produce a reduction of average production costs (AC). A company that
decide to transfer some production activities abroad (FDI in a foreign country)
will reduce the level of output in the home country, increasing consequentially
the average production costs.
These additional average cost are a disincentive for a company to maker an FDI.
In the sector where plant scale economies are prevalent we expect that firms
internationalization strategies will not be based on FDI.
2) Firm scale economies: related with firm-specific assets such as brands,
reputation for high quality products, and positive perception; when the company
decide to open a new business unit abroad (FDI) applies an already existing
brand to the goods produced and sold in the foreign country without any
additional cost. For this reason in industries in which firm scale economies are
prevalent we expect that firm internationalization strategy will be based on FDI.
The problem is that some assets could be difficult to measure because they are
intangibles, possible measures are:
Advertising intensity = positive relationship between advertising intensity and share
of affiliate sales on total foreign sales
R&D intensity = positive relationship between R&D intensity and propensity to make
FDI.
So if both economies exists (plant and firm scale), which is more powerful?
3) Firm heterogeneity in production: firms are not homogenous and all the same
as most of the model assume; there are differences in size, productivity etc.
Recent studies introduced firm heterogeneity in models: only the most
productive firms in an industry will do FDI. There is a positive relationship
between the level of productivity of the firm and the internationalization strategy
Plant scale economies = detrimental for FDI
Firm scale economies = promote FDI  more affiliate sales (FDI) than export
Firms with a low level of productivity will remain domestic, firms with a medium level of
productivity will become only exporters, firms with high level of productivity will become
multinationals.
Why? Firms face sunk costs (information on the foreign markets, setting up distribution
networks, adapting products) in supplying foreign markets through affiliate sales (FDI).
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Firms invest abroad when the gains from avoiding trade cost outweigh the cost of
maintaining capacity in foreign markets.
Only the most productive firms engage in foreign activities, of those that serve foreign
markets, only the most productive engage in FDI. FDI sales relative to exports are larger in
sectors with more firm heterogeneity.
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At the country level:
1) Trade costs
2) Market size
3) Geography distance
4) Production costs and factor endowments
5) Regional integration
6) Tax differentials and policies to attract FDI
7) Other factors
8) Agglomeration
Let’s start see each one of these determinants for FDI at country level:
1) Trade costs: transport costs + tariffs + commissions they are both industry and
country specific.
Foreign affiliates are more likely to be set up if and only if the presence in the
foreign market through exports has already been established.
One source of trade costs are trade protection measures such as anti-dumping
duties: taxes imposed on imported goods to compensate for the difference
between their export price and their normal value.
Affiliate production (FDI) tends to increase with the level of transport costs and
barriers faced when supplying a country through exports. Since H_FDI accounts for
the largest share of FDI, the patterns observed most likely characterized decision of
firms to carry out H_FDI.
To understand the effects of trade costs on V_FDI we need to discriminate between
V_FDI and H_FDI, we can do using information on the destination of affiliate sales.
H_FDI serve the local markets, V_FDI for exports.
We expect a negative relationship between V_FDI and trade costs, that emerge.
Summing up:
Evidence shows that trade costs induce firms to make FDI to serve foreign markets
through local production rather than exports.
2) Market size: the size of the market is one of the fundamental factors for attracting
FDI; a larger market attract more FDI: market seeking factor. Investing in a given
5
country implies large fixed costs, firms are willing to afford these costs if and only if
perspective sales are large.
Affiliate production for the local market (H_FDI) is more sensitive to the size of the
local market than affiliate production for exports (V_FDI).
Another thing that matter for FDI is the relative market size of home and host
countries  when countries have similar size, this should have a positive effect on
H_FDI1
3) Geography distance: this also matter for FDI, bilateral trade volumes are relatively
well explained by gravity equation:
𝐹𝐷𝐼 =
𝐴𝑌 𝑌
𝐷
A is a constant, Y is the GDP of country i e j and D is the distance between i e j.
There is a positive relationship between GDP and FDI and a negative relationship
between geographical distance and FDI.
Geographical distance may capture costs of investing abroad but also cultural
costs.
4) Production costs and factor endowments: lower cost generally attract investment,
especially in manufacturing, however the importance of labor cost is debated.
What matter is unit labor cost: LC/LP.
There are contradicting results among studies between FDI and labor cost:
FDI are higher the larger the difference in the relative supply of skilled labor between
home and host country for FDI, other studies show that volume of FDI depends by
how similar is the relative factors endowments between 2 countries.
5) Regional integration: the impact of regional integration on FDI, this mean the
reduction of trade costs (ex: NAFTA or EU).
Increasing the effective market size regional integration should lead to an increase
in FDI into the area
Ex: European Integration, FDI in Europe increased substantially in the 1990s, with
larger European countries that attracted major share of FDI but also some small
countries that experienced large increases in inflow of FDI.
1
According to Carr at al. (2002) elasticity of foreign affiliate sales (FDI) with respect of the sum of GDP of
the home and host country = 5.35. This means that an increase of 1% in combined real income leads to a
5,35% increase in FDI.
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6) Tax differentials and policies to attract FDI: low taxes encourage FDI. A potential
benefit from being a multinational is the ability to shift profits to locations with low
corporate taxes.
How differences in tax rates affect the pattern of FDI?
- Location decision by the firm: investment from foreign firms in countries with low
taxes
- It may affect the allocation of activities within the same firm
According to literature, countries with low taxation attract MNE, but it’s important to
remember that not only taxes matter: the efficiency of the government may matter
more than just the tax levels and the market conditions too.
Tax havens: country with no or only nominal taxes for foreign investments, usually
are small countries that attract FDI because of the tax system and have little else to
offer.
MNEs transfer income from elsewhere in the world to the subsidiary in the tax
haven.
Usually the business units in tax haven are headquarters, R&D activity, financial
activity. The transfer of income could be more or less legal.
There are 4 conditions that should be met to met for a tax haven to be harmful:
- No or very low taxes
- Lack of exchange of information
- Lack of transparency
- No substantial activity in the country
Transfer pricing: MNEs through transfer pricing set on a internal transaction that have an
impact of the distribution of profits between foreign subsidiaries.
A and B are subsidiaries; A produce software and B cars; A sells the software at the
market price to B; in this way affiliate A sales and revenues are lower because of the lower
pricing and B cost of goods sold are lower, increasing its profits. There is no impact on the
overall MNE but there is the transfer of profits from A to B. And since profits are taxed
differently the MNE move the profit and pay less taxes.
7) Other factors: macroeconomic and political stability, quality of institutions,
corruption and criminality are factors that influence FDI.
8) Agglomeration: proximity to other firms and client may play a role for the location
of FDI; this because of agglomeration effect.
Even in the absence of agglomeration economies, investor may exhibit a tendency
to imitate each others location, because of uncurtains firms have strong incentives
to follow previous investors
Several studies found a positive correlation between industry specialization and
inward FDI.
Technology sourcing: when the firms invest abroad in order to get access to foreign
technologies; there are 2 ways a firm could source:
7
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Set-up a foreign affiliate in proximity to foreign firm with advantage technology:
technological district. The foreign affiliate might benefit from knowledge spillovers
Acquire directly a foreign firm with advanced technology: knowledge only had to be
transferred within the firm.
R&D intensity in the host country has a positive impact on FDI, this implicate that
technology sourcing may be an important motive for FDI.
Economy of agglomeration: refers to the benefits that firms obtain when locating near
each others:
There are 3 types of agglomeration externalities:
1) Specialization / localization externalities: They arise from the spatial concentration
of firms belonging to the same industry; external to the firm but internal to the
industry. 3 main sources of specialization externalities:
- Labor market pooling: a local labor market can generate benefits for both firms and
workers: firms reduce the risk of not finding workers with specific skills; workers
have an higher probability of finding a new job when they are unemployed
- Input sharing: the concentration in a geographical area of a large number of final
producers attract specialized suppliers of machinery and services, this has 2 main
implications: capital goods become cheaper because suppliers can exploit
economies of scale; final firms concentrate on their core business by outsourcing
other stages of supply chain.
- Knowledge spillover: spatial proximity increases the frequency of interactions of
people and firms, help the transmission of ideas.
To get knowledge spillover there must be 3 conditions satisfied:
- Firms can not fully appropriate the new knowledge it creates: knowledge spills over
to the other firms without any compensation
- Firms have different pieces of information and knowledge which they are able to
exchange through: movement of skilled workers, face to face contacts
- Firms are near, distance also with ICT is an impediment
2) Jacobs / diversification externalities: Jacobs say that externalities are not industry
– specific and arise from the diversity and variety of the local economic structure;
the more the local industrial structure is diversified, the higher the possibility for
firms to access different technologies, knowledge and information.
But the transmission of knowledge requires a common and complementary base of
knowledge and competencies; it is essential that the cognitive distance is not too
large.
3) Urbanization externalities: associated with benefits arising from location in large
urban areas of infrastructures, the importance of urbanization externalities
increases with the density of the local system where economic agent operate
8
Does the size of local firms affect the capacity of a geographical area to attract FDI?
1) Large firms are important in attracting FDI because foreign investors are interested
in M&A with big firms in order to expand their market share
2) Local productive systems based on small enterprises can be more attractive for
FDI, because local competition stimulates firms to innovate and adopt new
technology
Results: localization economies affect FDI inflows, the more a province is specialized in
an industry, the more attract FDI in the industry. Diversification economies have no
impact on inward FDI. Smaller firms deter FDI and the presence of big firms has no
influence on FDI.
Policy implications: favoring the increase in average size of firms and reinforce sectoral
specialization of the geographical areas can encourage inward FDI.
Agglomeration and outward FDI: this paper analyses if and how firms internationalization
choices are influenced by:
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Spatial agglomeration forces: there are 2 types:
Localization economies arising from the spatial concentration of firms in the same
industry
Related variety arising from agglomeration of firms in different but related
industries (results of cross – fertilization of ideas).
Firms learn from the international experience of nearby firms and acquire
information on foreign markets through location in an agglomerated area
Firm heterogeneity: firms different internationalization modes are determined by
firm specific characteristics (productivity levels)
Results:
Total factor productivity is positive related, this means that firms with higher level of
productivity will be engaged in exports and H_FDI, then there are exporters and with lowest
level of productivity the domestic firms.
Localization economies and related variety have a positive and significant impact on
exports
9
Host country effects
What do we know about the effects of FDI on the host economy?
1) Cross country economic growth: countries that get larger FDI flows grow faster?
The effects of FDI on economic growth is quite mixed; there is no empirical support
of a positive correlation between inward FDI and economic growth of a country.
Only under specific conditions:
When host economies are sufficiently developed to interact with foreign activities.
FDI is an important vehicle for transferring technology with a positive effect on
economic growth only if the host country has a minimum level of human capital.
Policymakers in both developing and advanced economies agree that FDI is a key element
of a successful development strategy2.
Many papers tried to study the relationship between FDI and economic growth:
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Early works didn’t found significant link; but that FDI can promote economic growth
when appropriate local conditions are in place: stock of human capital, education
quality, domestic financial sector.
FDI alone is not enough, complementary inputs are required
2) Firm level analysis: we focus on productivity. In an economy 𝜇 is the proportion of
the labor force working in multinationals and 1 − 𝜇 in national firms.
AVERAGE PRODUCTIVITY: 𝑞 = 𝜇𝑞 + (1 − 𝜇)𝑞
Since multinationals have higher productivity; if 𝜇 increases, the average
productivity of the economy will increase. Composition effect.
Do multinationals have actually higher productivity than national firms?
We can use 2 approaches:
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-
2
Unconditional approach: we simply compare averages, results: MNE are more
productive than national firms; there are 2 measures of labor productivity: value
added, output per employee. MNE invest more and use more intermediate inputs
per employee, are concentrated in high-tech industries, have large scale economies
and are larger; all these factors are correlated with labor productivity.
Conditional approach: requires econometric to isolate the effects of the ownership
status; in general foreign firms are systematically more productive than national
firms.
But these results could be driven by other variables.
EU commission: “FDI is a driver of competitiveness and economic development”
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Foreign firms may appear to be more productive because foreign investors acquire the
more productive firms, and not because they become such as a consequence of foreign
take over.
The evidence support an association between foreign ownership and productivity but not a
causal link. Studies will use than TFP instead of labor productivity.
TFP: all those factors affecting output and which are not measurable inputs (quality of
manager for example)
Results: Strong and robust evidence that foreign subsidiaries are more productive than
domestic firms but the evidence of causal relation is more controversial.
3) Effects of MNEs on the wages of the host country’s labor market: foreign firms pay
on average higher wages than local firms, but MNE employ higher skilled labor than
local firms.
Why MNEs pay higher wages?
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If MNEs transfer part of their proprietary knowledge to the foreign activities they
want to minimize the risk that this knowledge can be dissipated through frequent
labor turnover (they don’t want to lose workers who have accumulated firm-specific
skills)
MNEs can be perceived by employees as more volatile employers, and for that they
demand a risk premium
MNE may face government regulations
4) Effects of the MNEs on the demand for skilled workers in the host country’s labor
market: evidence is scant; FDI can account for over 50% of the increase of skilled
labor in 80s in those regions where FDI were concentrated.
In general: skilled workers are more likely to be concentrated in MNEs, MNE induce skill
upgrading in less developed areas, in advanced area almost no difference.
MNEs train their employees more than national firms?
The starting wages between workers in domestic and foreign firms who receive foreign
training is the same, wages growth after.
5) Effects on the domestic firms: MNE affect firms in both factor and product markets,
with four theoretical mechanism:
- Market transactions: transfer of proprietary assets from MNE to national firms
- Technological externalities: transfers taking place through externalities that do not
bring any direct return to MNE (spillovers can happen in various ways: explicit
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contracts or daily life, MNEs employees could move to local firms bringing what
they have learned)
Pecuniary externalities: MNEs may affect domestic economy because of networks
and aggregation effects: their presence could generate investments in activities or
goods (such as public goods)
Pro-competitive effects: MNEs increase competition in domestic markets, forcing
national firms to reduce their profit margins and become more efficient, they also
my force less efficient national firms to leave,
Effects on domestic firms: evidence: theory is ambiguous, difficult to detect a clear
answer; positive effects on domestic firms depends on specific factors:
Technological gap between MNEs and domestic firms: MNEs start being beneficial to
domestic activities at higher steps of the income and technology; spillovers are larger in
industries where MNEs are widely present and when locals are able to interact. Only the
most advanced developing countries are able to benefit from FDI.
Geographical proximity: transfer of technology are smaller the larger the geographical
distance between the transfer and the receiver; spillovers are only significant for national
firms with a low technology gap with respect to MNEs
Vertical linkages: effects on domestic firms occur when there are vertical linkages
between national firms and MNEs; MNEs deliberately support suppliers in different ways:
helping them in setting up production facilities, providing technical assistance to raise
product quality, assisting them in purchasing raw materials, training employees and
managers.
Competition in the product markets: the entry of MNEs in the product market forces
national firms to react and increase efficiency.
12
Green innovations and MNEs
Multinationals are more likely to introduce green innovations than domestic firms?
How intra and extra MNE resources are likely to contribute to this effort?
Results suggest that:
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subsidiaries are more likely to introduce green innovation than domestic firms
intra and extra MNE cooperation for innovation increases subsidiaries probability to
introduce green innovations
MNEs have always had the role of innovation leaders in their sector, but it’s true also for
green innovations?
Each country where MNEs are present different pressures for sustainability and
environmental problems.
Green innovations is a peculiar subset of innovations, distinguished from the other
because of their increased complexity.
There are 2 opposite views on environmental performance of MNE subsidiaries:
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MNE might have higher environmental performance than local firms
MNEs could use international subsidiaries to offshore the most polluting activities
and perform all sort of wrongdoing
The question if subsidiaries are more likely than local firms to introduce green
transformation is still an open question.
Subsidiary’s knowledge depends on the knowledge that the MNC has accumulated over
time, but also have knowledge produced locally; these different pieces of knowledge can
be combined locally or at headquarter level to produce new knowledge useful for green
innovation.
After a study the results are:
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MNE subsidiaries are significantly more likely than domestic firms to introduce
green innovations
The bigger the network the subsidiary collaborate with, the highest the likelihood it
will introduce green innovations
Collaboration increase the probability of introduce green innovation
MNE can represent an important engine for a sustainable local development
Policymakers should support the role of cooperation with external partner and cooperative
agreements between local firms and foreign subsidiaries.
13
Home country effects of FDI
We focus on the effects in home countries: what happens in domestic economies when
national firms are or become MNEs
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host and home effects are often jointly determined (if unskilled labor intensive
activities are transferred to a foreign country, average skill intensity at home will
rise)
home effect analysis focus on what happens to the home activities of MNEs3
From studies we have evidence that: domestic activities of MNEs are on average 16%
more productive than national firms with no foreign subsidiaries, but it doesn’t mean that
there is a causal link.
Self-selection: only the most productive domestic firms self select to invest abroad (from
productivity to FDI)
If there is a self selection effect, switching firms should be more productive and larger
than other national firms before investing
Learning effect: or the firms that invest abroad become more productive after the FDI
(from FDI to productivity)
If there is a learning effect, economic performance should improve after the investment
Switching firm invest abroad between 1993
and 1997.
Results of studies:
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3
Switching firms are already doing better than national firms at the beginning of the
period; this support the self-selected effect hypothesis
But their productive trajectory gets steeper when they start investing, supporting
the learning effect hypothesis
Both hypotheses are supported
Now MNE indicate the home activities of multinationals (headquarter, home plant)
14
Effects on output and employment
They may increase or decrease depending if activities are complements or substitutes.
According to empirical literature there is no substitution effects between foreign output
and home output for MNEs; is found complementarity. This means that an increase in
foreign affiliate sales is associated with an increase in exports from home plant.
Some studies classify foreign affiliates according to:
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Type of activity:
a) Production of goods
b) Provision of services
The stage of production they carry out:
a) Production of intermediate inputs
b) Assembly of final goods
It was found a relationship of substitution when foreign subsidiaries assembly final goods
using intermediate inputs not produced at home
But generally a relationship of complementarity between foreign output and export
emerge.
The effects of outward FDI on employment at home follow a similar analysis.
The results of the literature are quite contradictory: some seems positive relationship,
other negative. The analysis made was too crude.
We look at the effects of wages in different countries on employment at home:
How do changes in foreign wages affect labor demand at home?
If we consider the inputs: labor (L) and capital (K), to simplify we consider that K is fixed
and given. The production function depends by labor at home and abroad.
𝑦 = 𝐹(𝐿 , 𝐿 )
Where L is employment at home (h) and in n foreign plants (f).
Domestic and in n locations wages (w).
If wages are complements: foreign wages decrease  increase of Lf  increase of Lh.
Results: substitution effects between home and foreign firms: a foreign wage decrease is
associated with a reduction in employment at home.
Skill intensity: the opening up of foreign plants can affect the way in which things are
produced at home and can also change the skill intensity of the home country activities.
15
If labor is not homogeneous:
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An outward FDI may increase the skill intensity of home activities
Let’s consider 2 cases:
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V_FDI: when a MNE make a vertical FDI, the composition of employment at home is
expect to move to more skill intensive, since the low skill intensive stage of
production are transferred abroad
H_FDI: the composition of employment at home is expect to move to more skillintensive activities since activities at head quarter are generally skill-intensive. The
headquarters provide specialized services to foreign affiliates in non production
area (marketing, R&D, finance), through H_FDI the number of foreign affiliates
increase, the volume of these service activities at the headquarters level increases.
Technological source: the effects of FDI on technological upgrading at home.
Technological knowledge is concentrated geographically, for this reason MNE may locate
their plant where they could easily acquire directly or through spillovers new technology
and skills (FDI is determined also by technological source).
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Economic policies and FDI
Many countries use active economic policies to attract or regulate activities of MNE:
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Fiscal policy: this is the choice of tax principles, there are 2 taxation systems:
If 𝑟 is the profits and 𝑡 the tax rate
a) Source based taxation systems: firms profits are taxed in the country where the
investment is made. Under this principle: tax rates distort the investment
decision.
b) Residence based taxation principle: taxes are levied on the ultimate recipients of
the profit (where the capital owner lives). The resident in a country receives a
post-tax economic return of 𝑟(1 − 𝑡 ) from an investment in a foreign country
and the same from an investment in home country. The same tax rate is paid.
Residence – based system is neutral and if there is perfect capital mobility
achieves world efficiency in the allocation of capital / FDI.
We need to consider that not only taxes matter:
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Efficiency of the government may matter more than taxes
Market conditions (public services, factor price, market size, geographical location)
also determine the choice made by MNEs
- Trade policy:
a) H_FDI: increase with trade barriers protectionism
b) V_FDI: trade liberalization leads to more V_FDI. Is often related to production
fragmentation: location of different parts of the production process in different
region or countries to take advantage of local cost conditions or local expertise.
For production fragmentation to work:
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Technically feasibility: the process can be split in different stages
Economic feasibility: wages differ significantly between regions
Other cases where trade cost matters:
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Export platform FDI
In region free trade areas: MNE could choose to set up production facilities in one
country to serve the other countries of the free trade area (USA producing in Ireland
for the EU market)
MNEs and the geography of GVCs
What are global value chains (GVC)?
The full range of activities that firms undertake to bring a product or service from its
conception to its end-use by final consumer. These activities include design, production, and
manufacturing marketing as well as pre-sale and post-sale support.
How did GVCs rise?
GVC expansion is driven by two historical unbundling: steam machine invention, ICT
revolution
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Transport costs enable separation of production and consumption
Communication costs  facilitated fragmentation of production across location by
lowering communication costs
How are economies engaging in GVCs?
Both MNE and small firms are involved. And emerging economies play increasingly
important role.
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Upstream: raw materials, R&D. (the start of the process)
Downstream: production, customer services (near the end consumer)
MNEs from emerging economies are strategically unique:
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MNE seek to maximize productive efficiency but emerging economies MNE follow a
distinct logic, their primary motivation is: strategic asset seeking not available
domestically, they are attracted by regions with high GDP per capita.
Measuring countries GVC participation:
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Upstream: a country that export components for product to be assembled
elsewhere is participating upstream to the GVC
Forward: a country exporting inputs for the production process of another country
further down the VC chain is participating forward in GVC
Downstream: a country assembling a final product from components supplied by
other countries and sell to customers worldwide is participating downstream to
GVC.
Backward: a country using foreign-sourced intermediates in its own export
production is participating backward to GVC
Upstream or backward participation measures the share of foreign value added (VA)
embedded in a country’s total gross exports
Downstream or forward participation measures the share of the domestically produced
VA embedded in a country exports that is further re-exported by the destination country.
Downstream countries with high backward linkages are often assemblers because a large
proportion of their exports consist in foreign VA.
Upstream countries with high forward linkages:
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Commodity exporters (Russia, Africa), because exports from this countries serve as
inputs in other countries production.
High value added services exports (R&D), such exports are used as intermediate
inputs in other countries
Value capture: highest value is captured at the upstream (R&D, design) and downstream
(marketing, sales) ends
Where do countries stand in GVC participation?
We can proxy the scale and location of each country’s GVC through:
-
-
19
Participation index: reflects how much a country take part in a vertically fragmented
production process; if high means that the country take deeper part in VC by trading
many inputs that are from abroad (backward linkages) or are produced
domestically and are exported for another country’s exports (forward linkages)
Distance from final demand: how far a country is situated from the final
downstream industry in the production process that deals with final demand in the
supply chain; the further away the more upstream its GVC activities are
Innovation drivers, value chain and the geography of
MNE in Europe
The paper:
Analysis of the geography of MNE investments in EU; the aim is to assess the different role
played by advantages (agglomeration economies, market access and labor market
conditions, innovations and socio-institutional drivers) in local decision of investments at
different stages of the value chain.
Motivation:
MNE generate value added for a lot of money (in 2010 25% of world GDP); policy makers
make use of incentives to attract FDI however empirical literature doubts on the positive
contribution of MNEs to their host economies.
Background literature:
According to traditional view HQ and strategic activities remain at home, while mature,
standardized and routine functions are relocated abroad
There are main forces that attracts FDI:
-
Agglomeration economies and clustering: agglomeration effects support the
cumulative nature of location decision
Market access and labor market conditions: demand concentration is a significant
factor for MNE, evidence on labor market condition (wages and unemployment) is
inconclusive.
Value chain analysis and functional fragmentation:
Location decisions increasingly involve service functions not just production plant. There
are 2 agglomeration forms: sectoral (same sector different function) and functional (same
function, different sector) we will indicate the functional one also as VC..
Soft location drivers (innovation system characteristics, institutional support) are
expected to play a major role in locating sophisticated functions.
Value chain classification: FDI classified into five stages based on business function:
1. Headquarters
2. Innovative activities
3. Sales and marketing
4. Manufacturing activities
5. Logistic and distribution
20
Main variables:
-
Market size and human capital
Agglomeration indicators (capture the tendency for FDI to cluster)
Innovation dynamism indicators (using patent intensity and R&D expenditure) used
to test the impact of localized knowledge spillovers from indigenous firm
Social filter index: based on education, productive use of resources
Main results:
-
MNEs prefer more developed regions (higher GDP per capita)
Agglomeration proxies have a strong influence
Cumulative number of pre existing investment in one sector attracts further
investment in the same sector
Patent intensity improve regional attractiveness
Higher R&D expenditure increase the probability of attract MNE in the region
High human capital have a positive impact on attracting investment
Location determinants by VC stage:
-
HQ is the only VC stage attracted by high regional GDP per capita
Innovative function location is driven by “local buzz” (functional and sectoral
agglomeration)
R&D investments are responsive to a favorable social filter index4
Manufacturing are attracted by unemployment rate (traditional cost advantage
factors) and same sector agglomeration
Sales function are sensitive to functional and sectoral agglomeration and patent
intensity
Logistic and distribution strongly attracted by same VC stage and same sector
clustering
Concluding remarks:
-
4
Socio – institutional conditions are crucial components (especially for the most
sophisticated VC stages: R&D, innovation). Governments should invest to attract.
Regional drivers are stronger for manufacturing and R&D but not for HQ
Regions attract more sophisticated VC stages if they contribute to MNE value
generation through local knowledge asset and social – institutional environment.
The Social Filter Index represents the socio-institutional capacity of a region to absorb, diffuse, and
transform knowledge into innovation and economic growth. Is a composite indicator of a region's socioinstitutional capacity, based on educational achievements (human capital) and the productive use of
resources (labor market structure), measure soft location drivers
21
Regional strategic assets and the location strategies
of emerging countries multinationals in Europe
The paper:
-
Analysis of the location strategies of MNEs from emerging countries (EMNE) in
search for regional strategic assets.
Comparison between EMNE and AMNE (advanced country MNE)
Focus on investment realized in Europe by AMNE and EMNE
Motivation:
EMNE are increasing and do FDI in most advanced countries to search strategic assets
such as technology, management skills, brands, commercial knowledge.
Are EMNEs attracted by the same “localized assets”5 driving AMNEs?
Asset seeking investments search for location with specialized knowledge – related
assets, often linked with agglomeration economies, technological intensity, soft
innovation factors (socio economic conditions, innovation prone, favorable institutions).
Seems to be motivation for EMNE invest.
AMNE are more likely to undertake competence exploitation and creation strategies, while
EMNEs aim to access knowledge which is not available at the headquarter level.
If EMNEs don’t possess adequate experience (absorptive capacity), they are not
particularly attracted towards location characterized by advanced technology assets.
There is heterogeneity among EMNEs:
-
Technological leaders: more likely to become insiders in local knowledge networks
Technological laggards are more likely to be unable to develop connection with
local actors and therefore will have limited capacity of local knowledge
EMNEs have limited knowledge and FDI experience in UE, so they face high uncertainty; for
this agglomeration (benefits such as shared infrastructure, labor market pooling and
specialization of suppliers) and co-location (used to reduce the costs of gathering
information) is expected to play a key role in their location decisions.
5
Local drivers of investments
22
Results:
-
-
Patent intensity is a key driver for AMNE and for EMNE only when locating more
sophisticated activities abroad
EMNEs only value regional innovation performance when pursuing higher value
added activities
Soft innovation driver matter only for intra EU investments (MNEs that are extra UE
found difficult to decodify the importance due to lack of socio-cultural and cognitive
proximity)
EMNEs value co-location when locating non production activities abroad
EMNEs FDI are driven by asset-seeking motives:
1. EMNEs only seek technological competence when investing in non production
activities
2. EMNEs lack absorptive capacity, for this soft regional innovations conditions are
no significant
3. EMNEs rely heavily on functional agglomeration to overcome cultural and
cognitive distance
Policy implications:
-
23
Policymakers should support the development of institutional bridges to facilitate
EMNE in understanding and capture soft innovation drivers
Local embeddedness, facilitating connections with local firms and universities is
key to enabling MNE and reduce the risk of opportunistic acquisition strategies
Coordination among different government is of primary importance
Policymakers should conduct diagnosis of the regional economies to make
functional or sectoral agglomeration benefits apparent to potential EMNE investors
Size, geography and GVC participation of firms in
Nigeria and Rwanda
The paper:
Analysis of firms GVC participation in Africa
Focus on firm size and location as factors affecting GVC participation
Results suggest that:
-
Firms in Africa are predominantly small and sole proprietorship
Size, legal status, access to ICT, managerial experience and geographical location
are crucial drivers of firms’ GVC participation
Motivation:
-
-
GVC has become an essential developmental concept (said to hold greater promise
to growth and development of countries)
Few scholars maintained that GVC put on risk efforts of small firms in developing
countries from growing to bigger firms
Countries that are at lowest level of GVC are unlikely to sustain their entire industry
because they usually lack expertise, strong institutions or consumer markets
OECD evidence suggest:
1. that size firms matter  small firms are less likely to be engaged in GVC
2. Smaller firms seems not to have muscles (finance, market capture, technology…)
to increase their productivity and then engage in GVC
Geographical location improve the firm chances of being integrated in world trade
Firms located in large cities or in industrial zones have a higher likelihood of
becoming GVC firms
Contribution:
-
Does the size of the firm matter in their quest to become a GVC firm in Africa?
Does the geographical location of firms stimulate their GVC participation?
Does firm managerial experience and firm productivity linearly relate with their GVC
effort in Africa?
Background literature:
-
24
Firm efficiency and cost minimizations are an impetus to firm participation in GVC
External economies:
-
Economies which don’t directly depend on the size of individual firms
Depending on the general organization of the trade, the growth of knowledge,
development of subsidiaries industries
Geography and trade are central to understanding how location affects becoming a
GVC firms
Empirical determinants of firms’ GVC participation:
1. Country level drivers: these factors determine what surrounds the business
environment in the country and affect firms’ ability to engage in GVC
2. Firm level drivers: these factors represent the firm’s internal environment and
therefore, affect its GVC drive
Results:
-
Managerial experience, productivity, ICT access and large firm size all positively and
significantly influence GVC participation
Location in an export zone / large city boosts GVC participation
Small firms located in large cities see increases in GVC chances higher than their
larger counterparts located elsewhere
Location advantage can significantly compensate small size disadvantages
Policy implications:
-
25
Short run policies could stimulate GVC participation by prioritizing medium and
large firms
Long run policies could support location in industrial zones to stimulate small firms
Managerial experience is key to firm GVC engagement – policies promoting
educational and the hiring of experienced top managers are central to support firms
GVC participation.
Does GVC participation and position lead to
innovation in an emerging economy?
The paper:
-
Analysis of the relationship between GVC embeddedness (participation and
position) and innovative performance in India
Main findings:
1. GVC participation and position affect positively innovation performance,
2. Participation has a inverted U-shaped impact
3. Only forward GVC participation significantly impacts an emerging country’s
innovative performance
Motivation:
-
-
Innovation is critical to the sustainable development and growth in any economy,
especially in emerging countries
Innovation involves a firm’s ability to create a novelty through product or process
innovation
GVC is key, primary for developing countries
GVC integration allows emerging countries to foster innovation through: technology
transfer, knowledge spillover, managerial expertise, high quality foreign inputs from
technologically developed countries
GVC participation allows firms to specialize and reallocate surplus resources to
R&D, learning by exporting
But GVC doesn’t necessarily result in innovation for developing countries, especially
if the country participate in low innovative production stages
Integration alone is insufficient, developing countries must invest in learning and
technological capabilities
Research hypothesis:
-
26
GVC participation has a significant inverted U-shaped impacts on the innovation
performance of emerging economies
GVC forward and GVC backward participation has a significant inverted U-shaped
impact on innovation performance
Innovation is crucial for functional upgrading: the GVC position significantly impacts
on the innovation performance of emerging economies
Results:
-
-
-
-
Inverted U-shaped impact of GVC is supported
Inverted U-shaped impact of forward GVC is supported
Inverted U-shaped impact of backward GVC is not supported: backward
participation doesn’t affect innovation because often involves low-value-added
activities, limiting the capacity of absorb new technology and trapping the country
in low-value production (assembling)
GVC positive impact innovation is supported
GVC embeddedness significantly impacts India’s innovation performance; but
inverted U shaped relationship: initial participation promotes innovation through
catching up by acquiring advanced technology, excessive leads to a captive effect
where developed countries limit knowledge transfer exploiting emerging nations for
repetitive, low innovation tasks
A higher GVC position is consistently beneficial
Policy implications:
-
-
27
Policymakers in emerging countries should prioritize improving GVC position
through increased R&D expenditure
Since backward participation doesn’t boost innovation, developing countries should
focus increasing domestic production and value added to enhance forward
participation
Strategies to upgrade GVC position: investing in intangible assets (brand), develop
human capital and skills, adopting advanced technology
GVC and sustainability
External forces that push for GVC transformation:
-
Climate change
Intense competition
Social responsibility
Environmental responsibility
MNEs need to reframe traditional GVC to be more efficient in the use of world resources
and be more commitment to sustainable practices
Today in the world there are:
-
Environmental issues such as excessive consumption and poor management of
key resources
Social issues: child labor and lack of access to education remain strong blockers of
economic and human development in many regions
Economic issues: the projected growth in population is likely to accentuate poverty
and famine
Sustainability development:
Meeting the needs of the present generation without compromising the ability of future
generations to meet their needs
There are 3 pillars of sustainability: social, environment and economic
Firms involvement in SD6 appears even more relevant when economic activities take place
at global scale; MNEs and domestic companies involved in GVC can be active in SD:
-
Pro active integration of environment, social and economic dimensions of
sustainability in GVC
Rising issues on labor practices, emission generation, resource consumption
The question is: How to mitigate the negative externalities of economic growth?
The answer could be: sustainable (global) supply chain management:
The management of environmental, social and economic impacts, and the encouragement
of good governance practices with the goal of creating and protect and grow long term
value for all the stakeholders involved.
6
Sustainability development
28
MNEs can and must play a central role in sustainable development through their GVC:
-
Improving work conditions
Reducing packaging
Using fuel efficient transportation
Reducing waste and emissions
Encouraging suppliers to undertake environmental and social programs
The “Protect, Respect and Remedy” is a framework established by the United Nations in
2011 to bridge the governance gaps in global markets, providing a tripartite structure to
address the human rights responsibilities of both States and Multinational Corporations:
1. State’s duty to protect: duty to protect individuals against non human rights abuses,
government should stimulate, sanction and regulate company behavior, punishing
abusing and establish appropriate policies and regulations.
2. Corporate’s responsibility to respect: corporate are responsible to respect human
rights, acting with due diligence (required to identify, prevent and address human
right impacts), respects all human rights.
3. Access to remedy: access by victims to remedy judicial and not, judicial
mechanism to investigate, punish and redress, non – judicial: company level, state
based, multi stakeholder initiatives
But does sustainability in GVC pay off?
Sustainability represent an additional source of complexity: GVC get more vulnerable:
-
Scrutiny from non traditional GVC stakeholders
Changing customer demands
Changing regulations
Rising social and environmental awareness
But firms that effectively manage these complexities are likely to gain a competitive
advantage, for this integrate sustainability in (G)VC could be a source of competitive
advantage.
Benefits for integrating sustainability into GVC:
-
29
Innovation and new capabilities
Market positioning and firm customer bonding
Increase of sales, revenue and profit
Good reputation
Employee commitment
Challenges:
-
Insufficient dedication to sustainable development
Lack of top managers commitment
Lack of internal resources
Inadequate experience
Cost, complexity and insufficient communication
Green washing and poor supplier commitment
The number of companies reporting continues to expand, with increased SME and
emerging markets participation
30
Global value chains and firms environmental
performance
The paper:
-
analysis of the link between GVC and firms environmental performance
Motivation:
-
the production of goods and services has become increasingly globalized since the
turn of the century
concern with environmental degradation and sustainability gain attention
fragmented GVC nature may lead to excess in waste and higher emissions
(shipping routes and over exploitation of natural resources)
engaging in GVC may facilitate the transfer of cleaner technologies
link between GVC participation and pollution monitoring, the adoption of more
climate friendly production technologies and the external constraints that firms
face
Background literature:
-
inverted U shaped relationship between a country’s per capita income and its
environmental quality
some macro level evidence shows a net positive effect of trade liberalization on
environmental quality
Pollution Haven Hypothesis: countries with relatively weak environmental
regulations will attract and specialize in highly polluting industries
Environmental Porter hypothesis: stricter environmental regulation will push some
firms to become more competitive and to increase exports
Results:
-
31
If country specific environmental regulations and customers with preference are
strong forces, the firm will have more incentives to improve their environmental
record
Non – EU firms face less scrutiny domestically, GVC participation being significantly
associated with environmental forces
Firms that join GVCs perform better across several environmental indicators
Firms starting producing within GVC are more likely to adopt cleaner production
practices
To ensure that GVC contribute to firm become more responsive, internationalization
of supply chain is accompanied by proper environmental regulation
The impact of degree of internationalization of MNEs
on green innovation performance
The paper:
-
role of the breadth (geographical range) and depth (intensity) of
internationalization on Chinese MNEs green innovation performance
the breadth of internationalization could enhance MNEs green innovation
performance, while the depth could inhibit it
Managerial and absorptive capacity enhance the positive effect of breadth and
weaken the negative of depth
Motivation:
-
-
China has experienced substantial economic growth in the past decades but
environmental and energy issues are also becoming more threatening to human
health
Firms have realized that traditional environmental efforts are inadequate to keep up
with today’s environmental standards
MNE have an urgency to prioritize sustainable development (pressure from home
country and scrutiny from foreign media and host market)
Background literature:
-
-
-
MNEs face 2 options when expanding:
1. Expand in as many foreign market as possible (breadth) expect to have a
positive impact on green innovation performance
2. Pull together efforts and resources to expand into few selected countries
(depth)  expect to have a negative impact on green innovation performance
Role of global dynamic managerial capacity: high skill managers can better identify
and foresee the evolution of international markets (managerial capability is
expected to alleviate the negative effect of internationalization depth)
Absorptive capacity: ability of a firm to recognize, acquire, integrate, assimilate,
transform and apply information to exploit external knowledge is expecting to have
a positive moderate role on breadth and alleviate the negative effect of depth
Results:
-
32
Managerial capacity amplify the positive role of internationalization breadth on
green innovation performance and reduces the negative effect on
internationalization depth on green innovation performance
-
33
High absorptive capacity strengthen the positive role played by breadth and doesn’t
affect the negative impact of depth
High international diversification can enhance the awareness and ethical standards
of MNEs, driving them to conduct more green sustainable practices
Internationalization may not always have a positive impact on the green innovation
performance of MNEs (depth)
Host government can use policy tools to encourage firms to broaden their scope of
internationalization and thus promote green innovation
Extending social sustainability to suppliers:
The role of GVC governance strategies and supplier
country institutions
The paper:
-
Analysis of lead firms’ GVC governance strategies on the social sustainability of
emerging countries’ suppliers
Analysis of the role played by the local institutional context of the suppliers
Evidence that the GVC governance strategies are particularly effective for supplier
social sustainability implementation when there is a contextual fit with local
institutional pressures for social sustainability in the supplier country
Motivation:
-
International buyers are considered responsible for labor right violations that occur
in their GVC
Expectations for lead firms to demonstrate social sustainability (especially if
suppliers are located in developing countries)
Social sustainability practices: those concerned with workers health and safety, are
commonly stipulated in global policies
Synergistic governance: brings together global (buyer) and local (public and civil society)
actors to stimulate suppliers compliance with social sustainability standards.
There is the idea of glocal: GVC governance strategy in which lead firms transfer global
norms to their emerging countries suppliers, so they can understand and interpret their
social responsibility requests.
1. GVC governance strategies for social sustainability
- Transfer of sustainability practices and policies is challenging in the presence of
institutional differences between home and host country, these difficulties are
amplified in GVC where suppliers are embedded in their local institutional context
- Lead firms can adopt an audit-based governance strategy, which imposes unilateral
top-down pressures on suppliers to implement social sustainability policies through
factory audits. AUDIT BASED
- Lead firms can train suppliers to increase their knowledge and awareness of labor
issues. COOPERATION BASED
2. GVC governance strategies for social sustainability and contextual fit
- Both Audit and cooperation based governance strategies can support suppliers
implementation of social sustainability policies, however GVCs typically span
across multiple countries characterized by different enforcement of local labor laws
and social sustainability norms
34
-
Social sustainability policies are more likely to be implemented at a supplier site if
there is a match between GVC governance strategies and local institutional
pressures for social sustainability.
An audit – based GVC governance strategy work better with suppliers located in a country
characterized by top-down pressures from legal institutions
Cooperation – based GVC governance strategy work better with suppliers located in
countries characterized by bottom – up pressures from civil society institutions.
Research hypothesis:
-
-
Audit - based and cooperation – based GVC governance strategy for social
sustainability positively affects suppliers’ social sustainability policy
implementations
Strong legal pressures for sustainability positively moderate the relationship
between audit – based GVC governance and suppliers’ social sustainability policy
implementations. The same is for cooperation – based for the relationship between
GVC governance strategy and supplier’s policy.
Results:
-
-
-
35
Growing pressures from global stakeholders are pushing lead firms to take more
responsibilities in governing GVCs
Audit based GVC governance contributes to suppliers implementation of social
sustainability policies especially when suppliers are located in countries with strong
legal institutional pressures
Cooperation based GVC governance is only effective for suppliers implementation
of social sustainability policies when suppliers are located in countries where civil
society institutions are strong
Managerial implications: international buyers can extend social sustainability to
their emerging country suppliers by employing audit based or cooperation based
GVC governance for social sustainability but through glocal approach (think global
but act local). MNEs should promote global sustainability standards but allow
adaptation to those guidelines according to specific local requirements and
conditions.
MNEs, local firms and employee human right violation
in the workspace
Paper:
-
Analysis of the link between firms MNE status and employees human right
violation in Mexico (MNE are less likely to violate human rights than local firms).
Analysis of the role played by regional institutional pressures (regional institutions
doesn’t influence MNE but affect local firms)
Analysis of the link between density of MNE and employees human right violation
by local firms
Motivation:
-
-
All firms have a moral obligation to respect and protect human rights
MNE are powerful and influential, so they have the ability to negotiate with local
governments and influence politicians. For this the attitude of MNE towards human
rights has attracted considerable attention
MNEs behavior is particularly controversial when operating in countries with weak
local government and institutional voids (MNEs could be tempted to abuse their
power and influence mainly for costs and benefit reasons, MNEs could take
advantages of low wages, long working hours, insufficient workplace health, and be
complicit in human rights violation).
Contributions:
-
-
Analysis if MNE behave differently from local firms with regard to employee human
rights in an emerging economy (neo-institutional theory suggests that MNE are
unlikely to align with weak local institutions and tend to apply superior standards,
but their own employees human right protection doesn’t prevent them from indirect
human rights violation)
Firms behavior depend not only on national institutions but also on formal and
informal regional / local ones
Social impacts of MNEs (does the density of MNE in a region affect the likelihood of
employee human rights violation by local firms?)
Background:
-
36
Neo-institutional theory and MNE:
Firms need to comply with the institutions in their environment to gain external
social approval or legitimacy.
Firms adopt behaviors, practices and procedures through coercive (authority
imposes choices), mimetic (firms mimic other successful firms by adopting the
same practices) and normative (firms adapt their behavior to comply with
professional norms) processes.
-
Human rights, MNE and local firms in emerging countries:
MNEs operating in environments characterized by a lack of respect for employee
human rights do not conform to these conditions.
MNEs are guided by international standards
-
The moderating role of regional institutions:
MNEs are hypothesized to align primary with international human rights norms and
not to comply with weak institutions of the host economy.
By contrast, local firms are hypothesized to adapt their social behavior to the quality
of regional institutions, that are more likely to violate employees human rights when
institutions are weaker.
-
The mimetic impact of MNE density on local firms:
MNEs are likely to influence their environment, including local firms, which looks
upon MNE as examples of successful firms and mimic them.
Research hypothesis:
-
MNEs are less likely to violate employee human rights than local firms
Only local firms adapt their behavior to the quality of regional institutions
Local firms are less likely to violate employee human rights in regions with greater
density of multinational enterprises.
Results:
The first two hypothesis are confirmed, the third one is not confirmed: local firms seems to
be strongly influenced by regional institutions, and do not conform to MNEs’ higher
standards.
MNE do not conform to weak institutional conditions when their employees human rights
are involved
Strong MNE presence in a region has a negative influence on local firms attitude toward
employee human rights violation, two possible explanations:
-
37
Strong MNE presence may induce competition among local firms for cost-related
competitive advantages
When there are many MNE, these firms employ the most skilled workers, leaving for
local firms low skilled labor force on whom they can impose poor working
conditions