daniel trefler, rotman school of management, project link, un may 25, 2015 1 multinationals and the...
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Daniel Trefler, Rotman School of Management, Project Link, UN April 18, 20231
Multinationals
and the
Location of Production
Project Link
United NationsApril 18, 2023
Daniel Trefler, Rotman School of Management, Project Link, UN April 18, 20232
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
illi
on
s
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Dev
elo
ped
Co
un
try
Sh
are
of
Wo
rld
FD
I
Daniel Trefler, Rotman School of Management, Project Link, UN April 18, 20233
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
illi
on
s
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Dev
elo
ped
Co
un
try
Sh
are
of
Wo
rld
FD
I
Daniel Trefler, Rotman School of Management, Project Link, UN April 18, 20234
Resource Flows to Developing Countries
Daniel Trefler, Rotman School of Management, Project Link, UN April 18, 20235
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
FD
I ($
Bil
lio
ns
)
Developing Countries
Developed
Daniel Trefler, Rotman School of Management, Project Link, UN April 18, 20236
Winners and Losers from FDI Inflows in 2001
Daniel Trefler, Rotman School of Management, Project Link, UN April 18, 20237
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
Daniel Trefler, Rotman School of Management, Project Link, UN April 18, 20238
Corporate Priorities: FDI in 2002
Most Favoured Destinationsas a Percentage of MNE Responses
Daniel Trefler, Rotman School of Management, Project Link, UN April 18, 20239
Determinants of FDI, Location of Production and Trade
HumanCapital
TechnologyInstitutions
FDI
• Political Expropriation• Contracting Environment
Daniel Trefler, Rotman School of Management, Project Link, UN April 18, 202310
1. Breaking Down the Value Chain
-2
-1
0
1
2
3
4
5
6
1 2 3 4 5
Val
ue A
dded
ProductDevelopment
Production
Service:Sales and
Post-Sales
Daniel Trefler, Rotman School of Management, Project Link, UN April 18, 202311
FDI and the Propagation of International Shocks
Daniel Trefler, Rotman School of Management, Project Link, UN April 18, 202312
FDI and Deflation
Daniel Trefler, Rotman School of Management, Project Link, UN April 18, 202313
2. Asset Specificity and Relationship-Specific Investments
Why is FDI so intense
in just a handful of industries?
Why is FDI so intense
in just a handful of industries?
Daniel Trefler, Rotman School of Management, Project Link, UN April 18, 202314
3. Knowledge Creation and Control
Who creates Knowledge?
Who Controls Knowledge?
Who creates Knowledge?
Who Controls Knowledge?
Daniel Trefler, Rotman School of Management, Project Link, UN April 18, 202315
Sony’s Flat-Screen Cathode Ray Tube (CRT)
Daniel Trefler, Rotman School of Management, Project Link, UN April 18, 202316
FDI, Trade and IPR Regimes
U.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
mp
orts
as
a S
har
e of
Tot
al I
mp
orts
Daniel Trefler, Rotman School of Management, Project Link, UN April 18, 202317
4. Rent-Seeking Institutions
•Political Expropriations
•Legal / Contractual Environment
•Political Expropriations
•Legal / Contractual Environment
Daniel Trefler, Rotman School of Management, Project Link, UN April 18, 202318
FDI, Trade and IPR Regimes
Daniel Trefler, Rotman School of Management, Project Link, UN April 18, 202319
Putting a Lid on Rent-Seeking Behaviour
(Skilled Sector Tariffs) – (Unskilled Sector Tariffs)
Long
-Run
Gro
wth
(19
72-2
000)
Daniel Trefler, Rotman School of Management, Project Link, UN April 18, 202320
Determinants of FDI, Location of Production and Trade
HumanCapital
TechnologyInstitutions
FDI
• Political Expropriation• Contracting Environment
Daniel Trefler, Rotman School of Management, Project Link, UN April 18, 202321
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.
Daniel Trefler, Rotman School of Management, Project Link, UN April 18, 202322
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.
Daniel Trefler, Rotman School of Management, Project Link, UN April 18, 202323
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