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Only here for the knowledge? Evidence of productivity spillovers from emerging market MNEs in Germany.

July 8, 2019

Throughout the past decades, a common pattern of international investment has been the foreign direct investment (FDI) activities of multinational enterprises from advanced market economies (AMNEs) in emerging markets. However, there is also a recently increasing trend of multinational enterprises from emerging markets (EMNEs) investing in advanced economies. These firms’ motivations and incentives are significantly different from those of AMNEs (Dunning & Lundan, 2008). An often-heard claim in recent years was that EMNEs enter advanced markets to gain knowledge and technology to boost the economic catch-up process of their home countries, and therefore, add little to the enhancement of productivity levels of companies located in developed host countries.  However, EMNES also bring opportunities for the host economies as the investments from EMNEs bring new capital into stagnating developed economies.

In this context, Chinese FDI in Germany has lately been a heavily debated topic, because dominantly positive experiences of German firms with Chinese investors contradict expectations of an aggressive, state-led takeover strategy of critical technologies bearing the risk of a loss of competitive advantage in the long run. To advance the discussion on this topic, we summarized the findings of a study by Vira Raskaley’s, written at the Chair in International Management and Governance (IMG), in this blog post.

 

Objectives of the study

Based on the discussion above, the study is guided by the question whether EMNEs have a positive influence on the productivity levels of domestic firms located in developed host countries. To tackle this question, the spillover effects of EMNEs’ subsidiaries are compared to AMNEs’ subsidiaries in Germany and their impact on four industrial sectors (manufacturing of chemical products, manufacturing of machinery and equipment, wholesale trade and head office activities) are investigated.

The findings of the study focus on the general position of EMNEs’ subsidiaries in Germany, and the occurrence of direct spillover effects from foreign to local enterprises.

 

EMNEs assert certain productivity advantages in Germany

The results show that EMNE subsidiaries maintain productivity advantages over purely domestic German firms, in the manufacturing and services sector. Furthermore, in the wholesale industry, the acquired companies also enjoy productivity advantages over the German MNEs. This also applies to the machinery and equipment manufacturing sectors, as well as management consultancy activities. Only in one of four analyzed industries – chemicals manufacturing – does their productivity lag behind indigenous firms. Noteworthy is that AMNEs’ subsidiaries in Germany reveal a similar picture, with productive advantages in some divisions and disadvantages in others, when compared to German domestic companies.

Thus, the expectation of an overall weak position of EMNEs’ subsidiaries compared to a presumably strong position of AMNEs’ subsidiaries in advanced markets is not supported, with the study on the selected German industries.

 

Spillovers remain limited to only one industrial sector

Concerning direct spillover effects, the study has revealed statistically significant effects only in one of four considered industries, namely wholesale trade. German local companies enjoy positive externalities from both EMNEs’ and AMNEs’ subsidiaries, whereas in the case of AMNEs the magnitude of the effect is stronger.

In line with the expectations regarding EMNEs, no significant positive externalities were found in other industries. In sum, the study reveals that advantages in productivity of foreign companies do not automatically mean the existence of a positive influence on the productivity of domestic firms.

 

Investments of EMNEs play an ambiguous role in advanced markets

Considering the overall results, the influence of EMNEs’ FDI in advanced host countries can be interpreted as ambiguous. EMNEs’ subsidiaries located in Germany are no productivity laggards but reveal heterogeneity, as similarly found for AMNEs’ subsidiaries in Germany. While in some sectors, EMNEs’ subsidiairies can influence the domestic firms positively, in others, they do not. It seems reasonable to ask whether the domestic firms that enjoy positive productivity externalities belong to priority sectors of the host economy, or if a negative influence in other sectors is potentially more harmful to the FDI receiving economy.

The results may provide additional justification for carefully considered policy regulation with the sectoral approach toward incoming FDI, bearing in mind domestic social interests and developmental priorities. However, investigating the outcomes of EMNE operations in advanced countries is still in its initial phase and more thorough research in this field is absolutely essential to provide sound recommendations.

Note: This blog post, written by Thomas Otto, summarizes the Master Thesis of Vira Raskaley.For further details of the study, click here.