Recent decades have seen large structural transformations, with many agricultural economies moving towards more productive manufacturing activities and manufacturing-based economies evolving to more productive service-based ones. At the same time, global integration has grown in importance due to an extraordinary increase in the cross-border movement of goods, services, and investment. Indeed, since 1950, world trade values have increased by roughly 347 times, and foreign direct investment (FDI) has soared, much of it directed towards developing nations.
Multinational corporations and their foreign affiliates have played a key role in thisglobalization process. They now account for half of worldwide exports, almost a third of global GDP, and about a fourth of global employment. They have significantly increased technology transfers to emerging countries and contributed to great efficiencies in production.
They have also led the fragmentation of the production process among countries. Through their network of foreign affiliates, they have separated the production of knowledge, the manufacturing of goods and the provision of services to many distinct parts of the world.
Multinationals and Employment
But how have multinationals driven structural transformation?
In a recent paper, my co-authors and I explore this question. We show that multinationals play an outsized role in accounting for a marked decrease in the share of manufacturing employment, along with an increase in the share of employment in services, in advanced economies. And they contribute to a significant increase in the share of manufacturing employment in emerging ones.
We examined confidential microdata on Japanese multinationals operating in China before and after China lowered its barriers to multinational production in 2002 following its entry into the World Trade Organization. We were able to link the data from the two countries to see how manufacturing employment changed in both the Japanese companies’ production facilities in China and in the parent headquarters in Japan as a result of China’s policy change.
Changes in Parent and Host Countries
Japanese multinationals were drawn to China largely by the lower labor costs and market access to the immense Chinese population. However, strong restrictions on the establishment of foreign affiliates in the country acted as an obstacle to expanding their presence in this market. Our results show how the reduction of barriers to foreign direct investment in China made Japanese affiliates in the country increase their manufacturing employment by about 20% and sales by 17%, helping to accelerate the pace of China’s structural transformation towards manufacturing in the 2000s. At the same time, manufacturing employment at the Japanese companies’ home operations fell by 11.5%, whereas jobs in their research and development divisions rose. This was part of a structural transformation towards services in Japan.
Many economists believe that such transformations – from agriculture to manufacturing in emerging economies, and from manufacturing to high-end services in advanced ones – are engines of development and growth. Our results show just how fundamental multinationals, and the expansion of their cross-border operations, are in transforming the sectoral employment distribution of the countries in which they operate.
To see if these results could carry over to other settings, we also examined different types of data for several advanced and middle-income countries—the United States, France, Hungary, Japan, and China. We didn’t look at employment changes within a multinational across countries for this exercise, as we did in the previous one. Rather, we decomposed employment statistics to see how much changes in manufacturing employment in the countries over the last two decades could be attributed to multinationals and how much to non-multinationals.
Consistent with our previous results, we found that in all five countries, multinationals have been responsible for a substantial fraction of the overall change in the share of manufacturing employment, in line with their respective stages of development.
Towards the Structural Transformations of the Future
The size of multinationals and the flows of foreign direct investment are rapidly increasing with globalization. The effect of these firms in the process of structural transformation could be even greater in the future. Key to attracting them are a reduction in trade restrictions, as well as strong intellectual property rights, good educational systems, and economic and political stability. For those countries looking to attract more foreign investment and higher-level technology, our paper shows how important multinationals can be in generating more productive economies.