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Do Multinational Firms Adapt Factor Proportions to Relative Factor Prices?

In: Trade and Employment in Developing Countries, vol. 2: Factor Supply and Substitution

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  • Robert E. Lipsey
  • Irving Kravis

Abstract

It has been alleged that multinational firms fail to adapt their methods of production to take advantage of the abundance and low price of labor in less developed countries and therefore contribute to the unemployment problems of these countries. This paper asks two questions: do multi-national firms adapt to labor cost differences by using more labor-intensive methods of production in LDC's than in developed countries and do multinational firms' affiliates in LDC's use more capital-intensive methods than locally-owned firms? We concluded that both U.S.-based and Swedish-based firms do adapt to differences in labor cost, using the most capital-intensive methods of production at home and the least capital-intensive methods in low-wage countries. Among host countries, the higher the labor cost, the higher the capital intensity of production for manufacturing as a whole, within individual industries, and within individual companies. When we attempted to separate the capital-intensity differences into choice of technology and method of operation within a technology we found that firms appeared to choose capital-intensive technologies in LDC's but then responded to low wage levels there by substituting labor for capital within the technology. Similarly, U.S. affiliates appeared to use technologies similar to those of locally-owned firms but to operate in a more capital-intensive manner mainly because they faced higher labor costs.

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This chapter was published in:

  • Anne O. Krueger, 1982. "Trade and Employment in Developing Countries, vol. 2: Factor Supply and Substitution," NBER Books, National Bureau of Economic Research, Inc, number krue82-1.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 8270.

    Handle: RePEc:nbr:nberch:8270

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    References

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    1. Leipziger, Danny M., 1976. "Production characteristics in foreign enclave and domestic manufacturing: The case of India," World Development, Elsevier, Elsevier, vol. 4(4), pages 321-325, April.
    2. Hal B. Lary, 1968. "Imports of Manufactures from Less Developed Countries," NBER Books, National Bureau of Economic Research, Inc, number lary68-1.
    3. Courtney, William H & Leipziger, Danny M, 1975. "Multinational Corporations in LDCs: The Choice of Technology," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 37(4), pages 297-304, November.
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    Cited by:
    1. Fanti, Luciano & Gori, Luca, 2010. "On economic growth and minimum wages," MPRA Paper 25842, University Library of Munich, Germany.
    2. Lois E. Stekler & Guy V. G. Stevens, 1991. "The adequacy of U.S. direct investment data," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 401, Board of Governors of the Federal Reserve System (U.S.).
    3. David A. Riker & S. Lael Brainard, 1997. "U.S. Multinationals and Competition from Low Wage Countries," NBER Working Papers 5959, National Bureau of Economic Research, Inc.
    4. J Hatzius, 1997. "Domestic Jobs and Foreign Wages: Labour Demand in Swedish Multinationals," CEP Discussion Papers dp0337, Centre for Economic Performance, LSE.
    5. Claro, Sebastian, 2008. "FDI Liberalization as a Source of Comparative Advantage in China," Working Paper Series, World Institute for Development Economic Research (UNU-WIDER) RP2008/91, World Institute for Development Economic Research (UNU-WIDER).
    6. Maria Borga & Robert E. Lipsey, 2004. "Factor Prices and Factor Substitution in U.S. Firms' Manufacturing Affiliates Abroad," NBER Working Papers 10442, National Bureau of Economic Research, Inc.
    7. Slaughter, Matthew J., 2000. "Production transfer within multinational enterprises and American wages," Journal of International Economics, Elsevier, Elsevier, vol. 50(2), pages 449-472, April.
    8. Riveros, Luis A., 1989. "International differences in wage and nonwage labor costs," Policy Research Working Paper Series 188, The World Bank.

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