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Do Multinational Firms Adapt Factor Proportions to Relative Factor Prices?

In: Trade and Employment in Developing Countries, Volume 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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Suggested Citation

  • Robert E. Lipsey & Irving Kravis, 1982. "Do Multinational Firms Adapt Factor Proportions to Relative Factor Prices?," NBER Chapters, in: Trade and Employment in Developing Countries, Volume 2: Factor Supply and Substitution, pages 215-256, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberch:8270
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    References listed on IDEAS

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    1. 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.
    2. Jagdish N. Bhagwati & T. N. Srinivasan, 1975. "Foreign Trade Regimes and Economic Development: India," NBER Books, National Bureau of Economic Research, Inc, number bhag75-1, March.
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    6. Charles R. Frank Jr. & Kwang Suk Kim & Larry E. Westphal, 1975. "Appendices to "Foreign Trade Regimes and Economic Development: South Korea"," NBER Chapters, in: Foreign Trade Regimes and Economic Development: South Korea, pages 245-257, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Robert E. Lipsey, 1995. "Outward Direct Investment and the U.S. Economy," NBER Chapters, in: The Effects of Taxation on Multinational Corporations, pages 7-42, National Bureau of Economic Research, Inc.
    2. Lois E. Stekler & Guy V. G. Stevens, 1991. "The adequacy of U.S. direct investment data," International Finance Discussion Papers 401, Board of Governors of the Federal Reserve System (U.S.).
    3. Sebastian Claro, 2009. "FDI Liberalization as a Source of Comparative Advantage in China," Review of Development Economics, Wiley Blackwell, vol. 13(4), pages 740-753, November.
    4. Slaughter, Matthew J., 2000. "Production transfer within multinational enterprises and American wages," Journal of International Economics, Elsevier, vol. 50(2), pages 449-472, April.
    5. Luciano Fanti & Luca Gori, 2011. "On economic growth and minimum wages," Journal of Economics, Springer, vol. 103(1), pages 59-82, May.
    6. Riveros, Luis A., 1989. "International differences in wage and nonwage labor costs," Policy Research Working Paper Series 188, The World Bank.
    7. Hatzius, J., 1997. "Domestic jobs and foreign wages: labour demand in Swedish multinationals," LSE Research Online Documents on Economics 20350, London School of Economics and Political Science, LSE Library.
    8. J Hatzius, 1997. "Domestic Jobs and Foreign Wages: Labour Demand in Swedish Multinationals," CEP Discussion Papers dp0337, Centre for Economic Performance, LSE.
    9. Robert E. Lipsey, 1999. "Foreign Production by U.S. Firms and Parent Firm Employment," NBER Working Papers 7357, National Bureau of Economic Research, Inc.
    10. Ksenia Kulchycky & Robert E. Lipsey, 1984. "Host-Country Regulation and Other Determinants of Overseas Operations ofU.S. Motor Vehicle and Parts Companies," NBER Working Papers 1463, National Bureau of Economic Research, Inc.
    11. Lois E. Stekler & Guy V. G. Stevens, 1991. "The Adequacy of U.S. Direct Investment Data," NBER Chapters, in: International Economic Transactions: Issues in Measurement and Empirical Research, pages 321-353, National Bureau of Economic Research, Inc.
    12. Irving B. Kravis & Robert E. Lipsey, 1988. "The Effect of Multinational Firms' Operations on Their Domestic Employment," NBER Working Papers 2760, National Bureau of Economic Research, Inc.
    13. 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.
    14. 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.

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