AIB UKI Seminar Series
Title: Heterogenous Externalities. Evidence from foreign multinationals in the UK
Date and time: Wednesday 17th March, 2021 at 13:00 (GMT)
Zoom Link: https://zoom.us/j/96378078691
Presenter: Nigel Driffield, Professor of International Business, Warwick Business School
Co-authors: D. Castellani (Henley Business School) and K. Lavoratori (Warwick Business School)
Moderator: Mario Kafouros, Professor of International Business and Innovation, University of Manchester
The activity of multinational enterprises (MNEs) and their Foreign Direct Investments (FDIs) have the potential to generate externalities for the host economies. The extensive literature on this has found mixed evidence on the extent of such productivity effects of MNE activity in host countries. There is a certain consensus that these effects are not automatic and are contingent on a number of contextual conditions. This paper explores the links between inward investment and host country productivity at the firm level, allowing for a wide range of moderating circumstances, ranging from sectoral, regional and firm characteristics. In particular, we introduce a novel empirical methodology that allows to flexibly account for many sources of heterogeneity in the effect of MNE activity on host country productivity. In our empirical analysis, based on 11,000 UK firms over the 2012-2018 period, we find that the effect of MNE activity on host country firms is relatively small, but highly heterogenous across firms. Fine grained industry (NACE 2-digits) and regional (NUTS 3) characteristics explain only a small portion of this heterogeneity. Our results are consistent with the idea that, within industries and regions, different firms are able to reap different benefits from the activity of MNEs. Firm productivity - which can be thought as a proxy for firm absorptive capacity – is the single most important factor that enables firms to benefit from MNE-generated externalities. Most notably, once accounted for the importance of firm productivity, we show that small and young firms are bound to benefit the most from the activity of foreign MNEs. We discuss the rationale for these results based on international business and economics literature and the implications for public policy.