Table of Contents

Governance, Multinationals and Growth

Governance, Multinationals and Growth

New Horizons in International Business series

Edited by Lorraine Eden and Wendy Dobson

In Governance, Multinationals and Growth, leading scholars celebrate and build upon the pioneering work of Edward Safarian on multinational enterprises and foreign direct investment. The book explores the linkages among multinationals and foreign direct investment, corporate and public governance, and economic growth. The contributors pay particular attention to emerging policy issues that include the behavior of individual governments, intergovernmental organizations and civil society. In addition, they address linkages among MNEs, their governance and economic growth, and generic policy realities (and innovations) in a small-to-medium-sized economy.

Chapter 7: Factor Price Differences and Multinational Activity

Ignatius J. Horstmann and Daniel R. Vincent

Subjects: business and management, international business, economics and finance, international economics


7. Factor price differences and multinational activity Ignatius J. Horstmann and Daniel R. Vincent INTRODUCTION In recent years there has been a growing trend among North American manufacturers toward outsourcing various parts of the production process either to independent domestic producers or foreign producers and subsidiaries. The presumption is that such outsourcing reflects the manufacturer’s taking advantage of lower cost production alternatives, often resulting from lower labor costs. Industries such as footwear, textiles, automobiles, electronics and computer software are often-cited examples of cases in which lower cost labor in developing countries is substituted for more expensive developed country labor. This somewhat casual empiricism is supported by Brainard (1997), who reports that the cross-country pattern of sales by foreign multinational affiliates back to the parent country is consistent with an explanation based on cross-country differences in relative factor endowments/factor prices. Brainard also points out, however, that in 1989 affiliate sales back to the parent country accounted for only 13 per cent of foreign affiliate production in the United States and between 2 per cent and 8 per cent of US affiliate production in other countries. For the remainder of multinational activity in Brainard’s study, a factor endowment/factor price differences explanation receives little support. There are two reasons. First, models of multinational activity based on factor differences (models of vertical multinationals, as Helpman, 1984, 1985) predict that multinational activity occurs between countries with large differences in relative factor endowments. The data reveal...

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