Multinationals and the Location of Production

Daniel Trefler, Rotman School of Management, Project Link, UN April 22, 20231

Multinationals

and the

Location of Production

Project Link

United NationsApril 22, 2023


World Foreign Direct Investment (FDI)

200

400

600

800

1,000

1,200

1,400

1,600

1,800

1996 1997 1998 1999 2000 2001

$ B

illio

ns

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Dev

elop

ed C

ount

ry S

hare

of

Wor

ld F

DI


World Foreign Direct Investment (FDI)

200

400

600

800

1,000

1,200

1,400

1,600

1,800

1996 1997 1998 1999 2000 2001

$ B

illio

ns

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Dev

elop

ed C

ount

ry S

hare

of

Wor

ld F

DI


Resource Flows to Developing Countries


Netting Out M&A Activity:Developing Country FDI has Grown

Steadily

0

100

200

300

400

500

600

1995 1996 1997 1998 1999 2000 2001

Inw

ard

FDI (

$ B

illio

ns)

Developing Countries

Developed


Winners and Losers from FDI Inflows in 2001


Who Received FDI in 2001?

0% 10% 20% 30% 40% 50% 60%

Central Europe

Africa

South America

Mexico

HongKong

China

Asia

Share of Total Developing Country FDI


Corporate Priorities: FDI in 2002

Most Favoured Destinationsas a Percentage of MNE Responses


Determinants of FDI, Location of Production and Trade

HumanCapital

TechnologyInstitutions

FDI

• Political Expropriation• Contracting Environment


1. Breaking Down the Value Chain

-2

-1

0

1

2

3

4

5

6

1 2 3 4 5

Valu

e Ad

ded

ProductDevelopment

Production

Service:Sales and

Post-Sales


FDI and the Propagation of International Shocks


FDI and Deflation


2. Asset Specificity and Relationship-Specific Investments

Why is FDI so intense

in just a handful of industries?


3. Knowledge Creation and Control

Who creates Knowledge?

Who Controls Knowledge?


Sony’s Flat-Screen Cathode Ray Tube (CRT)


FDI, Trade and IPR RegimesU.S. Multinationals: Parent Purchases from Foreign Affiliates in 1990

R2 = 26%

0

10

20

30

40

50

60

70

80

90

1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5

Index of Intellectual Property Rights

Intr

afir

m I

mpo

rts

as a

Sha

re o

f Tot

al I

mpo

rts


4. Rent-Seeking Institutions

•Political Expropriations

•Legal / Contractual Environment


FDI, Trade and IPR Regimes


Putting a Lid on Rent-Seeking Behaviour

(Skilled Sector Tariffs) – (Unskilled Sector Tariffs)

Long

-Run

Gro

wth

(197

2-20

00)


Determinants of FDI, Location of Production and Trade

HumanCapital

TechnologyInstitutions

FDI

• Political Expropriation• Contracting Environment


Virtually all of international trade in manufactures and services is done via multinationals. 1/3 is done within a firm, 1/3 is done at arm’s length in which both sides are MNCs and 1/3 is done at arm’s length in which one side is an MNC.

In short, the international location of production is determined by FDI.


In the 1990s FDI grew dramatically. The usual explanation is that it was driven by (in order of importance) technological forces related to the ability to direct a firm from a

distance (ICT), the M&A wave which reflected changing managerial views about

economies of scope versus core competence, FDI liberalization in developing countries, falling transportation costs, and trade liberalization.


After growing since 1991, FDI contracted substantially in 2001.

Causes (in order of importance): Bursting of the bubble with its implications for equity

finances, especially M&A activity and the consolidation of core competences.

Slowing of economic activity in the major industrial economies.

Sept. 11, war, deflation, SARS

Documents

Multinationals and the Location of Production