When Multinationals Leave: A CGE Analysis of the Impact of Divestments

Abstract

Most studies on Multinational Enterprises (MNEs) focus on the impact of their expansion through inward or outward foreign direct investment (FDI) flows. However, divestments are quite common among the operations of MNEs. In order to derive their effects, we build a computable general equilibrium (CGE) model that includes two non-standard characteristics: the presence of MNEs and unemployment. The model is applied to the Spanish economy, where FDI inflows have surpassed divestments at the aggregate level in the period [2005][2006][2007][2008][2009], although divestments have been sizeable in ten sectors. We analyse two different scenarios: 1) divestments that involve the closure of plants of foreign affiliates and 2) divestments where national firms buy the plant of foreign affiliates. The model allows estimating the overall impact of the divestments occurring simultaneously in ten sectors and in particular sectors.Results not only show that national acquisitions are less harmful than closures, but quantify those effects, and provide information on the role of the divesting sector. Some adjustment costs arise in all scenarios. JEL C68 F21 F23Keywords FDI, disinvestments, closures, national acquisitions, Spain Authors Antonio G. Gómez-Plana, Department of Economics, Universidad Pública de Navarra, Pamplona, Spain María C. Latorre, Department of Applied Economics II, Universidad Complutense de Madrid, Spain, mmunozla@ucm.es Citation Antonio G. Gómez-Plana and María C. Latorre (2014). When Multinationals Leave: A CGE Analysis of the Impact of Divestments. Economics: The Open-Access, Open-Assessment E-Journal, Vol. 8, 2014-6. http:// dx.doi.org/10.5018/economics-ejournal.ja. www.economics-ejournal.org 1 IntroductionMost studies on Multinational Enterprises (MNEs) focus on the impact of their expansion through inward or outward foreign direct investment (FDI) flows, and foreign outsourcing or offshoring. Barba Navaretti and Venables (2004) and Feenstra (2010) present a review of their theoretical and empirical effects on host and home countries. However, MNE divestments are common operations: " [They] affect between one quarter and four fifths of all FDI projects" (UNCTAD 2009: 8 Boddewyn (1983) suggests that divestment can be treated as the reverse process of FDI under certain circumstances. When the advantages of internalisation or location cease for MNEs, the absence of barriers to exit may favour divestments. This transitory nature of FDI in advanced economies could well explain divestments as long as the emerging and transition economies become more attractive for MNEs (e.g. because of lower labour costs and EU membership). In 2010, developing and transition economies attracted half of worldwide FDI inflows (UNCTAD 2011). UNCTAD itself regards this as a record figure, since these countries used to receive around one third of the world's FDI inflows. China explains most of this trend because it is the top destination of FDI flows. However, in 2010 there were already ten developing and transition econom...

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