The activities of multinational enterprises (MNEs) have traditionally drawn a lot of policy attention as governments are keen to attract foreign direct investment (FDI). MNEs are believed to promote growth and employment by creating new jobs, realise new investments, bring in new technologies, and allow host economies to integrate and upgrade in global value chains (GVCs). The academic literature has also highlighted that MNEs have important implications on the international transmission of economic shocks (Cravino and Levchenko 2016, Kleinert et al. 2015), countries’ comparative advantages (Alviarez 2019), gains from trade (Ramondo and Rodriguez-Clare 2013, Tintelnot 2017), in benefiting domestic firms (Javorcik 2004, Keller and Yeaple 2009), and in influencing governments trade policy objectives (Baldwin 2014, Blanchard and Matschke 2015).
Despite the extensive policy and academic discussion around MNEs, the empirical evidence on their activities is much more limited to a subset of countries and focused on the manufacturing sector. The Analytical AMNE database, developed by a team of researchers at the OECD, contributes to filling in this gap (Cadestin et al. 2018a). The dataset that was recently released covers 60 countries (including a ‘Rest of the World’) and 34 industries for the years 2005-2016. The database includes data on output, value-added, exports, and imports of intermediate inputs of foreign affiliates in host countries and, for more recent years, similar data on the activities of MNE headquarters (and their domestic affiliates) in home countries. In addition, this information has been linked with the OECD Inter-Country Input-Output tables, providing important insights on the links and interrelationships between MNEs, international trade, and the activities of domestic firms (Andrenelli et al. 2018, Cadestin et al. 2018b, Cadestin et al. 2019).
In this column we document four stylised facts about MNEs and their network of foreign affiliates, highlighting their role in today’s global economy and international trade.
1. MNEs play an important role in today’s global economy
MNEs and their foreign affiliates account for one third of world output and GDP and two-thirds of international trade (Figure 1). MNE’s contribution to world GDP was estimated at 32% in 2016, of which roughly one third was by foreign affiliates abroad and two thirds by MNE headquarters and domestic affiliates in the home country.
MNEs are found to be relatively more important in terms of exports and imports, demonstrating the large trading activities of this group of firms. In 2016, foreign affiliates were responsible for 30 of global exports, as compared to 34% for MNE headquarters. When looking at imports of intermediate inputs (where we can distinguish the category of firms on the importing side), we find smaller shares for MNEs, particularly for foreign affiliates, which only import 13% of all intermediate inputs.
Figure 1 Prevalence of MNEs in the global economy, 2016 (%)
Source: OECD Analytical AMNE database.
2. Foreign affiliates are different from domestic companies
Previous research for individual countries has shown that foreign affiliates differ significantly from domestic companies: foreign affiliates are overall found to be larger, more capital intensive, more productive and invest more in R&D. According to the OECD Analytical AMNE database, foreign affiliates are also more oriented towards international markets (through exports), buy more intermediates (consequently have a lower value-added/output ratio), and source these intermediates more from abroad, hence incorporating larger foreign value added in their output (Figure 2).
These differences between foreign affiliates and domestic companies are due to differences in production technologies but also because of the specific roles of MNE affiliates. Some affiliates are motivated by the desire to place production close to customers and avoid trade costs (i.e. horizontal MNEs) while others produce goods and services that are used as inputs for production activities within the MNE network in other countries (i.e. vertical MNEs).
Figure 2 Differences in output between foreign affiliates and domestic companies, 2016 (% of output)
Source: OECD Analytical AMNE database.
3. Foreign affiliates do interact with local firms
Contrary to traditional wisdom, foreign affiliates have strong backward and forward linkages with domestic companies, including SMEs. Foreign affiliates source more than two thirds of intermediates from their host economy (Figure 3, top panel) and more than 50% of domestic intermediate consumption is supplied by non-MNEs (of which the majority are small and medium-sized enterprises). Further on, foreign affiliates operate not only as customers in host countries, but also as suppliers of intermediates and final products. About two thirds of the production of foreign affiliates feeds into domestic value chains: 29% of affiliates’ production in 2016 was for the final domestic market, while 38% was used locally as an input to other firms in the domestic economy (Figure 3, bottom panel). Once again, the most important domestic clients of foreign affiliates are domestic non-MNEs, buying 56% of foreign affiliate domestic intermediate production.
Differences exist across countries and industries (Cadestin et al. 2019), but the assertion that foreign affiliates operate in an isolated manner in host countries and source all intermediate goods and services from within their MNE network does not seem to be supported by the data.
Figure 3 Sourcing structure (top) and output use (bottom) of foreign affiliates globally, 2016 (%)
Source: OECD Analytical AMNE database.
4. MNEs are involved in different types of activities across GVCs
MNEs are believed to be an important driver of the international fragmentation of production within GVCs (Baldwin 2016), as illustrated by the fact that MNEs are responsible for two thirds of world exports. Thanks to the granularity of the database, we can also see that MNEs use trade and investment for different purposes in the value chain and have complex strategies.
Figure 4 shows that foreign affiliates can be involved in horizontal strategies when producing final products for the domestic market or for exports (export-platform FDI), as well as intermediate inputs used by domestic firms. The exports of inputs by foreign affiliates rather reflect MNEs’ vertical strategies. Figure 4 suggests that these vertical strategies are not as prevalent as sometimes argued. This finding is consistent with recent evidence suggesting that the use of third-party suppliers is more prevalent within MNEs than originally thought. The literature has shown that while MNEs often prefer to source inputs from independent firms through non-equity partnerships like franchising, contractual relationships, strategic partnerships, and so on, they mainly use their foreign affiliates to either transfer capabilities (Atalay et al. 2014, Ramondo et al. 2016) or to produce technologically important inputs (Berlingieri et al. 2018).
More importantly, Figure 4 illustrates differences across industries in the role played by foreign affiliates. For example, foreign affiliates in the computer and electronics industry are more involved in vertical strategies than foreign affiliates in the food sector. Moreover, foreign affiliates in the chemicals industry provide a significant share of inputs to domestic firms that are not part of MNEs, something not observed in the computer and electronics industry, which is another industry where the international fragmentation of production is prevalent.
Figure 4 Decomposition of output of foreign affiliates by type of transaction, selected industries, 2016 (%)
Source: OECD Analytical AMNE database.
These new findings provide a number of insights of direct relevance for current policy discussions. First, there are the traditional concerns on the impact of MNE activities in parent countries (offshoring of employment, etc.), but the data show that actually most of MNE activities are still ‘at home’. Second, the evidence shows that MNE affiliates operate as the linchpin between international and domestic parts of value chains as they cooperate and contract significantly with domestic companies in the host economy. MNEs typically rely on SMEs to become global firms and expand internationally. The evidence thus clearly suggests that policymakers should not choose between supporting SMEs and promoting MNEs in establishing a conducive business environment. Instead, policies aimed at increasing the participation of countries and firms in GVCs need to be inclusive for the different types of firms and to not neglect the domestic part of value chains.
Third, the evidence gathered also highlights that trade and investment are increasingly intertwined in GVCs. However, when it comes to policymaking, trade and investment are still often dealt with in ‘silos’ and the international regime for trade and investment remains fragmented. More coordination and consistency between rules for trade and investment, as well as a broader set of policy issues such as movement of people, intellectual property or competition, might be needed to promote or regulate the activities of MNEs. Finally, issues related to taxation and profit shifting illustrate the challenge in setting rules when companies operate in several countries and combine trade, investment and IP flows to organise production.
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