Multinational Firms, Technology and Location

University dissertation from Stockholm : Stockholm University

Abstract: This thesis consists of four essays. Its main theme is the location of production in multinational firms.Subsidizing away exports? -- A note on strategic trade policy}% , investigates how strategic trade policy arguments for R&D subsidies are altered when firms are multinational rather than national. Using a standard model, where a home firm and a foreign firm compete in exports on an international market, it is shown that cost-reducing R&D subsidies by the home government to the home firm indeed increase this firm's market share. However, the subsidy can also eliminate export production in the home country, as production is shifted abroad.Strategic R&D policy, domestic unionization and multinational firms}, extends the model in the first essay to include labor market effects. Labor is unionized in the home firm and wage and employment are derived using the efficient Nash-Bargaining solution. In this environment, R&D subsidies will also improve the firm's bargaining position against the union, as the improved technology can be used abroad in the case of a break-down of negotiations, when production is shifted abroad. Whether this effect increases the firm's market share and domestic welfare depends on union preferences.Multinational firms, technology and location} generalizes the above model into a full three-stage game where both firms choose (i) their respective technology, by deciding on a level of R&D, (ii) whether this technology is to be used in a domestic or a in local plant and (iii) the quantity produced and sold on the market. If technology transfer costs are fixed, ``high-tech'' firms tend to produce abroad, but if such costs are associated with the level of R&D, high-tech firms tend to export. An empirical analysis using a data set of Swedish multinational firms, confirms the latter prediction.Cumulative effects of labor market distortions in a developing country} considers a small open economy where an input-output industrial structure, scale economies and imperfect competition, create vertical linkages and multiple equilibria. In this environment, an imperfect labor market is introduced by assuming unionized labor. It is shown that if the vertical linkages are sufficiently strong, a deregulation of the labor market may trigger a large, discontinuous expansion of industrial output, as reduced wage-costs start a circular, cumulative process in which the expansions of the up-and downstream industries promote each other.

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