SummaryThe adjustment mechanisms of multinational firms are of interest in the context of the relaxation of barriers to inward investment in relatively low-wage economies. This paper provides new empirical evidence on the effects of overseas foreign direct investment on the structure of multinational firms' home-country operations. It also provides micro-level evidence on the home-country effects of outward investment for the UK.The paper focuses on plant exit, since plant closures and cross-border relocation are important adjustment margins for multinational firms. It presents evidence that UK multinationals investing abroad in low-wage economies are acting in line with the predictions of theories of vertical foreign direct investment. More specifically, it examines whether investment abroad in relatively low-wage economies is associated with plant closures in relatively low-skill, labourintensive industries at home; in line with low-skill intensive production being relocated to lowwage economies.The paper makes comparisons across industries and firms akin to a difference-in-differences analysis. It finds that plants in low skill-intensity sectors owned by UK multinationals investing in low-wage economies are significantly more likely to exit than those owned by UK multinationals that are not investing in low-wage economies, and importantly, that this difference is not mirrored for plants in high-skill sectors.The paper also confirms previous findings that multinational firms, either domestic or foreignowned, are more likely to shut down plants than non-multinational firms, and hence exhibit more flexibility in organisational restructuring.
Investment abroad and adjustment at home: evidence from UK multinational firms Helen Simpson
Institute for Fiscal Studies, London and Nuffield College, University of Oxford
March 2007Abstract: I use within-firm, plant-level data combined with geographic information on firms' overseas operations to examine how investment in low-wage economies affects firms' homecountry operations. To remain close to theory I focus on changes in firms' organisational and industrial structure driven by plant closures. As predicted by models of vertical multinationals I find that investment in relatively low-wage economies is associated with plant closures in relatively low-skill, labour-intensive industries in the UK. The findings are of interest in the context of the relaxation of barriers to inward investment in low-wage economies.