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Multinational Firms, Exclusivity, and the Degree of Backward Linkages

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  • Ping Lin
  • Kamal Saggi

Abstract

This paper develops a two-tier oligopoly model in which the entry of a multinational firm results in technology transfer to its local suppliers and also impacts the degree of backward linkages in the local industry. The model endogenizes the multinational’s choice between anonymous market interaction with its suppliers and contractual relationships with them under which the multinational transfer technology to its suppliers who in turn agree to serve the multinational exclusively. The multinational’s entry under an exclusive contract has a de-linking e.ect that can reduce the degree of competition among suppliers thereby leading to a decline in the level of backward linkages and local welfare. With its emphasis on the supply-side e.ects of the multinational’s entry on local industry, this paper complements existing studies of backward linkages that focus more on demand-side e.ects.

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1250.

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Length: 32 pages
Date of creation: May 2005
Date of revision:
Handle: RePEc:kie:kieliw:1250

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Keywords: Multinational Firms; Backward Linkages; Vertical Technology Transfer; Exclusivity;

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References

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  1. Blomström, Magnus & Kokko, Ari, 1996. "Multinational Corporations and Spillovers," Working Paper Series in Economics and Finance 99, Stockholm School of Economics.
  2. Rodriguez-Clare, Andres, 1996. "Multinationals, Linkages, and Economic Development," American Economic Review, American Economic Association, American Economic Association, vol. 86(4), pages 852-73, September.
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  4. Theodore H. Moran, 1998. "Foreign Direct Investment and Development: The New Policy Agenda for Developing Countries and Economies in Transition," Peterson Institute Press: All Books, Peterson Institute for International Economics, Peterson Institute for International Economics, number 53, July.
  5. Qiu, Larry D. & Tao, Zhigang, 2001. "Export, foreign direct investment, and local content requirement," Journal of Development Economics, Elsevier, Elsevier, vol. 66(1), pages 101-125, October.
  6. Saggi, Kamal, 2000. "Trade, foreign direct investment, and international technology transfer : a survey," Policy Research Working Paper Series 2349, The World Bank.
  7. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS), University of Warwick, Department of Economics 64, University of Warwick, Department of Economics.
  8. James R. Markusen, 1995. "The Boundaries of Multinational Enterprises and the Theory of International Trade," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 9(2), pages 169-189, Spring.
  9. Salop, Steven C & Scheffman, David T, 1987. "Cost-Raising Strategies," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 36(1), pages 19-34, September.
  10. Beata K. Smarzynska, 2003. "Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers through Backward Linkages," William Davidson Institute Working Papers Series 548, William Davidson Institute at the University of Michigan.
  11. Lall, Sanjaya, 1980. "Vertical Inter-Firm Linkages in LDCs: An Empirical Study," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 42(3), pages 203-26, August.
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  14. Pack, Howard & Saggi, Kamal, 2001. "Vertical technology transfer via international outsourcing," Journal of Development Economics, Elsevier, Elsevier, vol. 65(2), pages 389-415, August.
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Cited by:
  1. Yuko Kinoshita & Nauro F. Campos, 2008. "Foreign Direct Investment and Structural Reforms," IMF Working Papers 08/26, International Monetary Fund.
  2. Hoffmann, Johannes & Kurz-Kim, Jeong-Ryeol, 2006. "Consumer price adjustment under the microscope: Germany in a period of low inflation," Working Paper Series, European Central Bank 0652, European Central Bank.
  3. Campos, Nauro F & Kinoshita, Yuko, 2008. "Foreign Direct Investment and Structural Reforms: Evidence from Eastern Europe and Latin America," IZA Discussion Papers 3332, Institute for the Study of Labor (IZA).
  4. Wei Jin, 2012. "International Knowledge Spillover and Technology Externality: Why Multilateral R&D Coordination Matters for Global Climate Governance," CAMA Working Papers 2012-53, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  5. Wei Jin, 2012. "Can China Harness Globalization to Reap Carbon Savings? Modeling International Technology Diffusion in a Multi-region Framework," CAMA Working Papers 2012-52, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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