Multinational Firms, Competition, and Productivity in Host-Country Markets

TLDR

Evidence on multinational corporations’ effects is scarce amid rising restrictions, yet theory suggests foreign investment can yield diverse intramarginal gains and potentially large productivity benefits for host economies. The study examines the benefits of foreign direct investment in manufacturing in Canada and Australia. The study finds that host governments benefit from corporate income taxes, while private sector gains arise only through productivity spill‑overs from multinationals, which can be categorized into three classes.

Abstract

This paper tests for certain benefits of foreign direct investment in the manufacturing sectors of two leading host countries-Canada and Australia. A quest for evidence on the effects of the multinational corporation needs little defence at a time when host and source countries alike incline towards restricting its activities. Economic theory tells us that intramarginal2 gains from foreign investment take diverse forms. An evident and tangible gain to the host government stems from the corporate income tax collected from subsidiaries (net of the incremental cost of public services supplied to them). Other benefits, conjectural and elusive but possibly large, lie in the effects of direct investment on the value productivity of resources owned by the host economy (Macdougall, 1960; Corden, 1967; Caves, 1971). The host nation's private sector does not benefit directly because the foreign subsidiary is efficient, or brings to its shores skilled entrepreneurship or productive knowledge. Rather its gains depend on spill-overs of productivity that occur when the multinational corporation cannot capture all quasi-rents due to its productive activities, or to the removal of distortions by the subsidiary's competitive pressure. These potential benefits can be divided into three classes.