Tuesday, July 24, 2012

On the benefits of multinational firms

Multinational companies are the scorn of the anti-globalization movement, and some of it is well deserved. Often, their size allows them to push governments around, especially poorer ones, and they can exploit tax loopholes in ways domestic firms cannot. But multinational firms can also bring benefits to economies. After all, they are just one manifestation of largely free trade, which is in general welfare-enhancing. The benefit mentioned the most often is that multinationals enhance the transfer of new technology between countries. A second benefit is that they shake up local competition and thus encourage Schumpeterian creative destruction. Of course, the fact that inefficient firms get hurt is not Pareto dominant, hence the grief from protectionists.

Using a big panel of firms across 60 countries (over a million firms!), Laura Alfaro and Maggie Chen find that the second impact of multinationals is significant. They are in particular interested in the domestic distribution of productivity and revenue. In theory, knowledge transfer shifts both distributions to the right. Market reallocation, though, shifts the distribution of revenue to the left and truncates the left of the productivity distribution. Looking at the data, it is not clear which effect dominates. The experience differs from country to country, with developing ones benefiting more from knowledge transfer and developed ones from increased competition. And about two-thirds of the average productivity increase can be attributed to knowledge transfer.

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