Multinationals and growth in developing countries

Recent work has highlighted the incredible dispersion of productivity in developing countries and how this contributes to their lower aggregate productivity levels. Low productivity in developing countries leads to lower wages and ultimately much lower consumption. Why is there such a large spread of productivity and what policies can address this? One strand of the literature has examined how productivity dispersion is linked to dispersion in management practices, particularly in developing countries. Looking at these distributions there is clearly a huge left tail of extremely badly managed low productivity firms in developing countries which hampers productivity. But interestingly there is also a large right tail of well-managed/high productivity firms, many of whom are subsidiaries of multinationals, which raises several questions. How are some firms managing to be so productive in challenging business conditions? Do factors like corruption, education, transport infrastructure, rule of law or the business culture play a role in inducing foreign investment? What types of firms (and from which countries) are choosing to locate in developing countries? Are only firms from low-tech sectors choosing to locate in developing countries, and are these firms “escaping” tougher regulations (such as environmental or labour standards) in developed countries? And crucially, what are the benefits to the host country of multinational presence? This project aims to address these and other questions. We have started by building an international dataset of foreign direct investment (FDI) by country and industry, and examining the factors that explain this, the productivity of this FDI and in comparison the extent of international trade across the same countries.

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