Econ 1535: Lecture 18

29 Pages·2015·0.91 MB·English

Econ 1535: Lecture 18
Multinational Firms (II): Internalization and
the Economic Impact of Multinational Firms
Pol Antràs (Harvard) – Fall 2015 Econ 1535: Lecture 18 1
Plan for Today
Study the internalization decision of MNEs

Study effects that MNEs may have on source

countries and especially on host countries
 Effects on labor markets
 Effects on capital markets (very brief)
 Productivity spillovers

Pol Antràs (Harvard) – Fall 2015 Econ 1535: Lecture 18 2
Internalization
Econ 1535: Lecture 18 3
MNEs and Globalization of Production
Recent spectacular increase in the way firms organize

production on a global scale:
 “slicing of the value chain”, “international outsourcing”,
“fragmentation”, “vertical specialization”, “global
production sharing”
It is clear that MNEs have played a key role in the

disintegration of the production process
But an important share of fragmentation occurs

outside MNE’s firm boundaries
 Examples: Apple, Boeing, Nike,…
Pol Antràs (Harvard) – Fall 2015 Econ 1535: Lecture 18 4
Internalization
In developing their global sourcing strategies, firms

not only decide on
 where to locate the different stages of the value chain,
 but also on the extent of control to exert over them
The issue of internalization or control is crucial for

the existence of MNEs
But theories of location shed little light on the issue

of internalization
 why will fragmentation occur within firm
boundaries?
Pol Antràs (Harvard) – Fall 2015 Econ 1535: Lecture 18 5
Theories of Internalization
Costly technology transfer: transfer of knowledge
1.
or technology may be easier within a single
organization than through a market transaction (e.g.,
licensing)
 Patent or property rights may be weak or non-
existent
 Knowledge may not be easily packaged and sold
Non-excludability

 Helps explain decision of Intel to own all its plants
Pol Antràs (Harvard) – Fall 2015 Econ 1535: Lecture 18 6
Theories of Internalization
Vertical integration: consolidation of different
2.
stages of a production process
 Intrafirm purchases may avoid or attenuate
contractual difficulties
 Integration may affect the relative bargaining
power and incentives of producers and suppliers
in a profit-enhancing way
May explain why Toyota internalizes certain

upstream production stages, while Nike doesn’t
Pol Antràs (Harvard) – Fall 2015 Econ 1535: Lecture 18 7
Empirical Evidence
Tests of the internalization decision are harder to

come by due to data limitations
Some authors have used data on licensing

arrangements to test the costly transfer theory
Others have used intrafirm trade data to test

contractual theories of vertical integration
The latter is easily accessible (at least for the U.S.)

and offers a broad picture of internalization patterns
 As exemplified by the following few graphs
Pol Antràs (Harvard) – Fall 2015 Econ 1535: Lecture 18 8
Variation in Intrafirm Trade
Pol Antràs (Harvard) – Fall 2015 Econ 1535: Lecture 18 9
Variation in Intrafirm Trade
Pol Antràs (Harvard) – Fall 2015 Econ 1535: Lecture 18 10