Scale of operations of MNCs and heterogeneity: a multi-country analysis

ABSTRACT

This paper examines the relationship between the productivity of parent firms and the scale of their subsidiaries in foreign markets. The empirical exam is based on a large sample of firms from 32 different countries. The average elasticity estimated for the baseline sample is 0.34; i.e. a 1% increase in labour productivity increases the scale of subsidiaries by 0.34%. For TFP, the elasticity is slightly lower, 0.23. The relationship is much stronger for manufacturing firms than for firms in the service sector. The paper also analyzes the degree of heterogeneity of elasticities estimated across countries. We find differences in the magnitude of elasticities but confirm the positive relationship between scale and parent firm productivities for a large fraction of countries. It also addresses the issue of potential endogeneity of productivity. The positive relationship between scale and productivity is confirmed when controlling for this.

KEYWORDS:

• Foreign Direct Investment
• scale elasticity
• multinational corporations
• productivity

JEL:

• F23
• L25
• M21

Acknowledgments

This research has been partially funded by the Spanish Ministry of Science, Innovation and Universities (project ECO2017-82445-R). The authors declare that they have no conflict of interest. Special thanks to two anonymous referees and to the Editor for very useful comments and suggestions.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ These 22 geographic regions are Northern Africa, Eastern Africa, Southern Africa, Western Africa, Caribbean, Central America, South America, Northern America, Central Asia, Eastern Asia, Southeastern Asia, Southern Asia, Western Asia, Eastern Europe, Northern Europe, Southern Europe, Western Europe, Australia and New Zealand, Melanesia, Micronesia and Polynesia.

² The employee size classes definition is as follows: microfirms (1 to 9 employees), small firms (10 to 49 employees), medium-sized firms (50 to 249 employees), and large firms (250 or more employees).

Additional information

Funding

This work was supported by the Ministerio de Ciencia e Innovación [ECO2017-82445-R].