DP4435 | Reversing the Perspective: Multinationals from Middle-Income Countries


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I study the internal organization of production between the parent and the affiliate in the multinational corporation (MNC) and the extent to which it depends on the factor abundance of the destination country of the affiliates relative to the home country. I use a unique South Korean firm-level panel dataset that has affiliates that are almost evenly divided between countries that are more and less capital abundant than South Korea. I find that the capital intensity of South Korean parents drops as a MNC has affiliates in increasingly more capital-abundant countries; it increases as the MNC shifts its activities towards increasingly labour-abundant countries. This result suggests that factor price differences matter for how MNCs organize their internal production, a basic prediction of the factor proportions view of the MNC. At the same time, my results complement market access or tariff-jumping motivations for outward investment decisions. Even when market access and tariff-jumping are important determinants of MNCs shifting (outward) investment decisions, my results suggest that MNCs will relocate more labour-intensive activities to more labour-abundant countries and more capital-intensive activities to capital-abundant countries whenever there are factor price differences, which extends the factor proportions view of the MNC as studied by Helpman (1984,1985) and Helpman and Krugman (1985).