The Role of Multinational Corporations in Shaping Economies

Research Paper (undergraduate), 2018

10 Pages, Grade: 1.4




Multinational Corporations and Technology Transfer

Overview of Spillover Channels

Productivity Improvement through Joint Ventures

Productivity Improvement through Licensing

FDI and Productivity

Welfare Implications of Technology Transfer




It seems most developing countries have realized the immense benefits associated with Multinational Corporations (MNC’s), especially with regard to the productivity of the firms in the host country. In the past decades, there has been an unprecedented debate over whether multinational corporations yield economic benefits to the host countries but, that argument appear to have varnished after a comprehensive evaluation of different elements of multinational corporations. Currently, most countries are attracting multinational corporations to reap the accrued benefits, especially through Foreign Direct Investment, which has proven to boost the host country’s economy through enhancing productivity (Campos 2007).

Some of the principal reasons as to why multinational corporations are considered beneficial to the host countries include technology transfer, creation of new job opportunities and the inflow of capital from the MNC’s parent company to its subsidiaries in the host country. Foreign Direct Investment (FDI) is known to be one of the principal drivers of productivity in the host countries because it enhances technological transfer, which in turn yields enormous benefits to the host country and the parent company (Feenstra 2004). In most cases, host countries access superior technology through technological spillovers and, this enhances the productivity of the local firms. Campos (2007, p. 6) states, “In addition, host country firms may obtain other potential productivity spillovers that the presence of MNC could generate on suppliers and customer.” Concisely, there are different ways in which multinational corporations enhance productivity of the firms. Therefore, this research will give an overview on the impact of multinational corporations on productivity.

Multinational Corporations and Technology Transfer

It is believed that multinational corporations possess enormous potential for transferring new technologies to the domestic firms in the host countries, especially through spillovers. Campos (2007, p. 12) remarks, “Potential domestic firms' technological improvement is perhaps the main reason why countries are interested in attracting MNC; they expect that, technology being transferred from MNC to its subsidiaries spreads to the host economy due to spillover effects.” Technological spillovers seem to have numerous public good characteristics, which benefits domestic firms through increasing their productivity. However, it is worth noting that technological levels of domestic firms record different improvement patterns depending with the concerned channel of technological spillover. Ordinarily, there are two distinct channels of technological spillovers; market access and productivity spillovers, although they contribute significantly to the development of the domestic firms’ financial returns.

Ideally, technological spillovers enhance productivity of the domestic firms through vertical linkages, in which multinational corporations enhance the performance of local suppliers through increasing consumer preferences in the local market. In addition, productivity of domestic firms benefit from imitation of brands and the workers’ mobility, through which highly experienced professionals improves human potential of the domestic firms by introducing new knowledge acquired from the multinational corporation’s subsidiaries in the host country.

A number of theoretical models indicate that, vertical linkages between domestic firms and multinational corporations influence domestic welfare especially with regard to production and financial returns. It has been found that technological spillovers from multinational corporations to domestic firms cause a significant decrease in the subsidiary’s production. In addition, price paths are also believed to decrease over a considerable duration leading to unprecedented decrease in profits of the subsidiary firms. In contrast, domestic firms experience a significant increase of profits owing to the influence of the consumer surplus and, this enhances productivity of domestic firms. However, domestic firms are required to initiate efficient changes on the level of output with the principal aim of maximizing instantaneous profits. Secondly, domestic firms are supposed to increase the amount of resources to enhance their technological level, which is pivotal in increasing the overall productivity through imitation and technological transfers to maximize the ambient value of profits (Gorg & Greenaway 2004). Moreover, domestic firms with efficient policies that enhance the rate of technology transfer from the subsidiaries to the local economy experience remarkable improvement in productivity.

Overview of Spillover Channels

The benefits of technological spillovers can be explained by the interplay of different elements of spillover channels. Ordinarily, there are two principal technological spillover channels through which domestic firms reap enormous productivity benefits; vertical linkages spillovers and workers’ mobility.

In regard to vertical linkages, domestic firms are believed to experience technological advancement owing to their relationship with the multinational corporation’s subsidiaries in the host countries. This aspect is reaffirmed by Campos (2007, p. 23) through his remarks that, “There is a broad agreement that by promoting linkages between MNC's subsidiaries and domestic firms, host countries can enhance benefits received from foreign direct investment.” Vertical linkage spillovers occur in two different ways; they may occur either by forward or backward channels (Baldwin 2005). In forward linkages, domestic firms purchase technological skills and other services from multinational corporation’s subsidiaries in the host countries and this enable them to improve their productivity through increasing human potential (Blalock & Gertler 2004). On the other hand, backward linkages occur when multinational corporation’s subsidiaries purchase goods and services from domestic firms in the host country; thus, increasing their sales.


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The Role of Multinational Corporations in Shaping Economies
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Caroline Mutuku (Author), 2018, The Role of Multinational Corporations in Shaping Economies, Munich, GRIN Verlag,


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