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

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    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

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    File URL: http://www.unito.it/unitoWAR/ShowBinary/FSRepo/D031/Allegati/WP2011Dip/7_WP_Bianco_Andreff.pdf
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    Bibliographic Info

    Paper provided by University of Turin in its series Department of Economics and Statistics Cognetti de Martiis. Working Papers with number 201107.

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    Length: 28 pages
    Date of creation: Oct 2011
    Date of revision:
    Handle: RePEc:uto:dipeco:201107

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    1. John H Dunning, 1995. "Reappraising the Eclectic Paradigm in an Age of Alliance Capitalism," Journal of International Business Studies, Palgrave Macmillan, vol. 26(3), pages 461-491, September.
    2. Yadong Luo & Rosalie L Tung, 2007. "International expansion of emerging market enterprises: A springboard perspective," Journal of International Business Studies, Palgrave Macmillan, vol. 38(4), pages 481-498, July.
    3. Buch, Claudia M. & Kokta, Robert M. & Piazolo, Daniel, 2003. "Foreign direct investment in Europe: Is there redirection from the South to the East?," Journal of Comparative Economics, Elsevier, vol. 31(1), pages 94-109, March.
    4. Lancaster, Kelvin, 1980. "Intra-industry trade under perfect monopolistic competition," Journal of International Economics, Elsevier, vol. 10(2), pages 151-175, May.
    5. Martijn Burger & Bas Karreman, 2010. "Foreign Direct Investment, China and the World Economy," Regional Studies, Taylor & Francis Journals, vol. 44(9), pages 1302-1303.
    6. Nagesh Kumar, 2006. "Emerging Multinationals : Trends, Patterns and Determinants of Outward Investment by Indian Enterprises," Microeconomics Working Papers 22108, East Asian Bureau of Economic Research.
    7. Altomonte, Carlo & Guagliano, Claudia, 2003. "Comparative study of FDI in Central and Eastern Europe and the Mediterranean," Economic Systems, Elsevier, vol. 27(2), pages 223-246, June.
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