Transcript NEOCLASSICAL EXPLANATIONS OF MULTINATIONAL

ARE NEOCLASSICAL ECONOMISTS
FUDGING THE LOGIC OF
MULTINATIONAL-DRIVEN
SPILLOVERS?
Rajah Rasiah
University of Malaya
Draft only. Presentation prepared for the Second International
Business Conference, Reading, 30-31 March 2009
1. Introduction
• Neoclassical explanations on multinational-driven development spillovers
provide little epistemological support – by way of theorizing as well as
methodology.
• Neoclassical theory argues that once left to market forces endowmentright multinationals will relocate from a relatively capital-rich and
technologically advanced nation to a relatively capital-poor and
technologically backward nation, and that the spontaneous interaction of
institutions will engender spillover responses.
• This presentation discusses some evidence on why I think the framework
is fudging the concept of spillover especially when dealing with the
‘emerging economies’. Emerging economies are considered to have some
threshold of institutional development to support spillovers. It is here that
I found Dunning’s eclectic paradigm useful in conducting investigations of
spillovers – with a balance of inductive and deductive theorizing. The
specificity of economies can also be addressed.
2. Broad-brush explanations
•
Early neoclassical work on FDI relaxed the immobile factor conditions imposed in the Hecksher-Ohlin (see
Leamer, 1995) model to allow international capital movements (Bhagwati, 1979). However, this framework
simply assumes that the outflow of capital from a capital surplus and labour scarce economy (United States)
to a capital scarce and labour surplus economy (Mexico) will eventually lead to the equalization of interests
and wages and with that convergence of development between these economies (see Figure 1). Markets are
deemed to automatically drive equalization of factor prices across borders.
•
The underlying neoclassical assumptions that markets are efficient and economic agents enjoy equal access,
and processing and decision making abilities are wrong. Instead of assuming that proactive and stable
governments attempt to create or use market instruments to drive allocation and coordination, it assumes
that the unleashing of market forces will resolve government failures. By arguing that all governments had to
do was to leave markets to coordinate resource and factor allocation, neoclassical theory continues to
discourage the institutional upgrading essential to quicken technical change.
•
I argue that international business (IB) theorists have provided a more cogent explication of multinational
relocation and in doing so also argued that the motives behind relocation to a large extent help explain the
extent to which they will participate actively in spillover activities. The basis for this framework comes
originally from Dunning’s (1958) inductive work using empirical evidence to explain the reasons for relocation
of American firms in the United Kingdom and what benefits can UK generate from it. Dunning’s ownership,
location and internalization (OLI) framework provided the theory explaining these developments. The work of
Rugman in distinguishing and integrating firm- and country specific assets help advance this further. Narula
and Dunning (2000) and Cantwell and Mudambi (2005) evolved this to a broader framework led by motives.
•
One clear area where the IB framework can easily absorb reverse flows of FDI to absorb knowledge is the
motives driving multinationals off-shoring of knowledge-intensive activities in the emerging economies of
India, Israel and Taiwan. This epistemological approach using evidence also provides for the specificity of all
countries. Knowledge flows from multinationals to local firms – ala Japan, Korea and Taiwan differs from
Singapore, Malaysia, Thailand and Philippines.
Figure 1: Neoclassical Trade and Foreign Direct Investment Thesis on Convergence
High Income
Economies(HIE)
CapitalIntensive
Surplus K Scarce L
1. Scarce capital
2. Demonstration effect
(technology)
3. Competition
4. Scale from export
markets
5. Learning through trade
Middle Income
Economies
Investment Flows
Lower Middle Income
Economies
Trade Flows
LDEs
Labourintensive
Surplus L Scarce K
Labour-intensive
Before Free Capital (K) and Trade Flows
After Free Capital (K) and Trade Flows
HIEs
r1 , W1 , Y1
X1/M1
LDEs
r2 , W2 , Y2
X2/M2
HIEs
r , W,Y
X/M
LDEs
r , W,Y
X/M
3. Specific Spillover Explanations
• Driven by the notion that relative prices will attract FDI, the implicit assumptions
of neoclassical production function models assume that the changing structure of
prices as capital flows from rich to poor countries will offer optimal conditions for
spillover to take place at host-sites. Caves (1974) adapted Solow’s (1956)
production function model to first estimate spillovers from foreign presence.
• However, the neoclassical evidence on spillovers is mixed. On the one hand, Caves
(1974), Blomstrom and Persson (1983) and Blomstrom and Sjoholm (1999)
produced evidence of positive spillovers from the presence of foreign firms in
Australia, Mexico and Indonesia respectively. On the other hand, Haddad and
Harrison (1993), Kokko, Tansini and Zejan (1996) and Aitkin and Harrison (1999)
show a lack of spillovers to domestic firms from foreign presence in Morocco,
Uruguay and Venezuela respectively. These contradictory findings not only show
problems with neoclassical estimation methods but also a disjuncture between
theory and reality.
• Importance of multinationals’ motives for relocation is critical for understanding
spillover potential (see Dunning, 1958, 1979; Narula and Dunning, 2000; Cantwell
and Mudambi, 2005). This inductive microeconomic approach is vital.
•
The contradictory findings on spillovers are also a result of methodological weaknesses. The
use of the production function is undermined by at least three problems. Firstly, the residue
in the production function used to measure total factor productivity, as Romer (1994),
Nelson (1994) and Vaitsos (2003) have argued, does not capture technology or technical
change. Secondly, spillover is a dynamic concept that refers to systemic effects captured by
economic agents (including workers) external to the firms studied and hence often do not
appear in pecuniary measures (see Marshall, 1890; Rosenstein-Rodan, 1944; Scitovsky, 1962;
Rasiah, 1992). Thirdly, spillovers enjoy differences in intensity – including positive and
negative elements making its aggregation impossible.
•
While it is important to identify the most dynamic sectors that can generate the greatest
synergies once that is addressed the larger the technological ap between foreign and local
firms the more will the potential of diffusion provided the requisite initiatives and
supporting instruments are in place (Hirschman, 1970).
In addition, production function models analyzing technological gap either estimate it
wrongly using the value of machinery and equipment of firms, capital expenditure or
productivity differences between foreign and local firms. Differences in the stock of
knowledge – embodied in humans, machinery and equipment and relationships – cannot be
estimated this way. Besides, efforts to draw policy conclusions from mere differences in
productivity and technological levels do not take cognizance of structural interdependence
between industries and complementarities (see Kaldor, 1979).
•
•
IB theory has much to contribute here as a snowballing methodology tracing the sources of
spillover will offer the best netting to capture it, though it cannot be estimated exhaustively
(as it is external to firms) (see Rasiah, 1994). The use of case and tracer studies is good here.