Emerging multinational companies investing in developed countries: at odds with the HOS theorem?

Andreff Wladimir () and Balcet Giovanni ()
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Balcet Giovanni: University of Turin, http://www.est.unito.it/do/docenti.pl/Show?_id=gbalcet;sort=U2;search=;hits=141

Department of Economics and Statistics Cognetti de Martiis. Working Papers from University of Turin

Abstract: The paper takes stake of the new trend of outward foreign direct investment (FDI) by multinational companies from emerging countries into developed countries to criticize the Heckscher-Ohlin-Samuelson theorem. A literature review exhibits that labour costs do not play any relevant role in the first attempts to provide an analytical framework for understanding this new trend. A HOS equation, emended in order to encompass FDI, is used to explain outward FDI (production relocation) from developed to developing and emerging countries based on differences in labour endowment and thus in wage rates. Step by step, the equation takes on board technological gap and government policies. Then it is shown that such equation is absolutely at odds with explaining outward FDI from emerging to developed countries. One has to turn the HOS theory ups and down in order to understand the latter FDI outflows in a sort of “reverse-HOS” equation. Since the paucity of data is a major hindrance to any econometric testing of the reverse equation so far, the last section provides empirical evidence that labour matters and a lower wage rate is a decisive comparative advantage for Indian and Chinese multinationals investing in developed countries. Additional evidence exhibits that technological gaps, catching up and home country’s government policy matter as well

Pages: 28 pages
Date: 2011-10
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